Issues Facing Company Directors During COVID-19

Issues Facing Company Directors During COVID-19

COVID-19 continues to disrupt the operation of businesses globally, presenting new challenges to company directors on how to continue to carry out their duties and obligations. While many directors are focused on the immediate practical implications of operating in these challenging times, directors must ensure they keep in mind their broader obligations to stakeholders under the Corporations Act 2001 (Cth). In this article, we address the potential issues facing directors in the context of the current pandemic.

Directors’ Duties

There are numerous statutory obligations directors must adhere to. Directors must continue their duty to act in good faith and in the best interests of the corporation. Given the uncertainties surrounding the COVID-19 pandemic it may be challenging for directors to determine how their immediate actions may impact the long-term success of the company and its various stakeholders.

While directors must of course focus on the immediate implications of operating in these uncertain times, they must ensure that they continue to act in good faith and in a reasonable manner and make decisions based on the most reliable and up-to-date information in front of them. Continue to place priority on protecting the health and welfare of staff, and consider enacting contingency plans to avoid exposing the company to outside risks.

Financial Reporting and Annual General Meetings

The coronavirus has temporarily impacted companies’ abilities to hold annual general meetings (AGMs). For listed and unlisted public companies required to hold an AGM by 31st May 2020, ASIC has confirmed that it would take no action if AGMs are postponed up to the end of July or if AGMs are held virtually in compliance with s 249S of the Corporations Act. The holding of virtual AGMs is permitted under the Corporations Act, however entities must check whether their constitution restricts meetings being held in this way and seek legal advice on section 1322 of the Corporations Act.

Insolvency and ‘COVID-19 safe harbour’ provisions

The Coronavirus Economic Response Package Omnibus Act 2020 included, among other measures, a new section 588GAAA into the Corporations Act granting temporary relief for financially distressed businesses. The amendments provide a ‘safe harbour’ to grant relief for directors from potential personal liability for insolvent trading.

In order to be able to rely on these measure, the debt leading to insolvency must have been incurred in the ordinary course of the company’s business, during the six month period commencing from the 25 March 2020 (or longer as prescribed in another regulation), and before any appointment of an administrator or liquidator during that period.

In relation to insolvent trading, directors should seek advice early from a qualified and independent advisor about the company’s financial affairs and the options available to manage the disruption caused by COVID-19.

Check out our blog here for further more information and analysis on the restrictions and rules in place during COVID-19.

Further Information

It is important to be fully aware of your duties and obligations as a director during this rapidly evolving and challenging environment during COVID-19. If you would like more information on how we can assist you, do not hesitate to contact us on 9963 9800 or at law@etheringtons.com.au.

COVID-19: Temporary Changes to Insolvency Laws

COVID-19: Temporary Changes to Insolvency Laws

Businesses are facing major challenges amid COVID-19 pandemic leading to massive job cuts. In light of the challenges, the Australian Government has announced temporary changes to insolvency laws to help businesses and individuals manage the current economic crisis.

Companies: Insolvent trading

Directors will be relieved of any personal liability from their duty to prevent insolvent trading for a period of 6 months. This applies to debts incurred in the ordinary course of business and companies will still be liable for debts. Dishonesty and fraud cases will still be prosecuted.

Companies: Statutory demands

The threshold at which creditors can issue a statutory demand will be increased from $2,000 to $20,000 for a period of 6 months. Further, the time limit to respond to a statutory demand will be increased from 21 days to 6 months.

Individuals: Bankruptcy

The threshold amount for issuing a bankruptcy notice against an individual will be increased from $5,000 to $20,000. The time limit to respond to a bankruptcy notice will be increased from 21 days to 6 months. These will last for a period of 6 months.

Further information

If you would like further information, please do not hesitate to contact one of our experienced litigation solicitors on 9963 9800 or via email at law@etheringtons.com.au.

COVID-19 and your business contracts – force majeure and frustration

COVID-19 and your business contracts – force majeure and frustration

COVID-19 has already had a monumental impact on the economy, businesses and the everyday lives of people around the world. Operation of some businesses have been put on hold, business arrangements have been affected and there is a real ambiguity in the community about how we recover and respond to these unprecedented events.

In such uncertain times, people are unsure how to navigate existing business contracts so we all stay afloat during challenging times. Many will try to exercise certain contractual rights and we explain some of those below.

Force majeure clauses and COVID-19

A force majeure clause is a clause that must be expressly stated in a contract and it relieves a party from performing its obligations under the contract in circumstances such as natural disasters.

The effect of this clause essentially allows a non-performing party to avoid liability for not performing their obligations under the contract as a result of an event out of their control.

There are three essential elements to satisfy a force majeure clause:

  • it occurred by forces either natural or human
  • it cannot have been foreseeable by the parties to the contract
  • the event was beyond the control of the parties to the contract and the consequences could not have been prevented.

The key question in our situation is, would COVID-19 fall within our classification of a force majeure event? The answer depends on the how the clause has been drafted in your specific contract.

You should always define what is meant by a force majeure event in your contract as imprecise wording only generates ambiguity and dispute. Specific events should be listed and clearly defined. Instead of simply stating “natural disaster” it should say “natural disaster such as bushfires, floods and earthquakes”.

It is important not to make any expectations about whether a force majeure clause is effective simply because COVID-19 is upon us.

Frustration of Contracts

If a party freely and voluntarily enters into a contract, that party is obliged to perform all of its agreed duties under the contract. This is often called ‘absolute liability’ or “strict liability”. A breach of contract will require the offending party to compensate the other party for their losses.

It appears somewhat harsh for absolute liability to be enforced where a breach is beyond a party’s control. Therefore, courts have implemented “frustration of contracts” to mitigate this hardship. This allows for an automatic discharge of the contract where performance is simply impossible. There are two circumstances which must be met for an automatic discharge to apply:

1) neither party is at fault, and

2) performing the obligations under the contract becomes ‘radically different’ from those originally set out in the contract.

If both elements are established, the contract is then immediately terminated from the time that both elements occur, or “the point of frustration”. It is important to note that this does not mean that your contract is completely void from the outset. Obligations are only discharged from the point of frustration.

However, a contract will not always be frustrated in circumstances such as shortages of supplies, construction delays, self-induced frustration or inconvenience.

Again, each situation needs to be examined on the facts and contract in order to determine how COVID-19 disrupts the business activity.

Further information

It is important to be fully aware of your obligations and options in your contractual arrangement during difficult times such as COVID-19. If you would like further information regarding the impact on your business or simply corporate and contract law advice, please do not hesitate to contact one of our experienced solicitors on 9963 9800 or via email at law@etheringtons.com.au.

Business Structures: Companies

Business Structures: Companies

This article looks at companies – how to set one up and the pros and cons of a company structure. When commencing a business venture, it is necessary to consider the most appropriate type of business structure to put in place. Different business structures have different benefits and disadvantages.

Key Features of Companies

A company is a separate legal entity capable of holding assets in its own name and liable for its own obligations. A company is owned by shareholders. The liability of shareholders is usually limited to the amount of their shareholding guarantee. This means that shareholders can limit their personal liability and are not generally liable for the debts of the company.

Directors manage the day to day business affairs of the company. There are a number of duties and obligations for company directors including an obligation that a director must act in the best interests of the company.

In Australia, the most common forms of companies are:

  • Private company (or a proprietary limited company): this is a company which does not sell its shares to the public and cannot raise money from the general public through share issue.
  • Public company: is a company whose shares are owned by the public at large, with the company’s shares usually listed for trade on a stock exchange.

Companies are regulated by the Australian Securities Investment Commission (ASIC) and governed by Corporations Law.

How to set up a company

An Australian company must be registered with ASIC. When ASIC registers a company, the company will be given an Australian Company Number (ACN). An applicant must nominate a principal place of business and registered office for the company.

Prior to lodging an application for registration, consideration should be given to:

  • the proposed company name. A check should be undertaken to confirm the availability of the proposed name. If no name is specified in the application, the company will be referred to by its ACN.
  • what rules will apply to govern the company. This can generally be the replaceable rules from the Corporations Act (which means that the company does not require its own written constitution), a constitution or a combination of the two.
  • who will be the shareholders and directors of the company.

A company needs its own Tax File Number, which can be obtained online from the Australian Taxation Office (ATO) and an annual tax return must be filed.

A company must be registered for GST if its annual turnover is $75,000 or more. An Australian Business Number (ABN) is required to register for GST and can be obtained online through the Australian Business Register.

Pros and Cons

The advantages of forming a company include:

  • liability for shareholders is limited
  • easier to raise finance for expansion
  • ownership can be easily transferred
  • taxation rates can be favourable

The disadvantages include:

  • expensive to form, maintain and wind up
  • reporting requirements can be complex
  • must publicly disclose key information
  • owners cannot offset losses against other income

Conclusion

A company might be a suitable business structure for unrelated parties who want to commence a business venture together, where there is a degree of risk and limited liability is wanted or where there is a desire to list the company on the stock exchange.

Establishment of a company and ongoing administrative and compliance costs associated with Corporations Law can be high. An accountant or lawyer can help you understand the cost and risks of a company and explain whether a company structure would be suitable for your business going forward.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au.

Starting a business: An overview of common business structures

Starting a business: An overview of common business structures

Are you considering starting a business?

There are four main types of business structures for conducting business in Australia, each with their own advantages and disadvantages. A person can carry on business as a sole trader, partnership, trust and/or company.

The choice of business structure is an important decision to make at the start of a business venture, as the structure can have an impact on tax implications and reporting requirements during the lifetime of the business. When setting up a business structure, consideration should be given to factors such as how many people will be involved in the business, what the business will do, your potential risk or personal liability, how much income is likely to be earned from the business and the intended growth of the business.

Sole Trader

A person can carry on a business on his or her own behalf as a sole trader. A sole trader can trade under his or her own name or a registered business name. The business income, net of business expenses, earned as a sole trader is taxed at the same rate as individual tax payers.

This is the simplest form of business structure, with low establishment costs and with minimal legal and compliance requirements.

The disadvantages of this type of business structure include being personally liable for all obligations incurred in the course of the business, your personal assets may be at risk and there is no opportunity to split profits to others.

Partnership

Two or more individuals can carry on business in partnership, where the income from the business is received jointly. Partnerships are relatively inexpensive to form and operate. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partners. A partnership itself is not taxable, rather each partner pays tax on their share of the net income of the partnership.

The downside to this type of business structure is that partners are severally and jointly liable for the obligations of the partnership. There is also potential for dispute and loss of trust between the partners.

Trust

Under a trust, a trustee owns the property or assets of the trust and carries on the business on behalf of the beneficiaries of the trust. A trustee can be an individual or a company. A formal Deed is required to set up a trust and there are annual tasks for a trustee to undertake.

The advantages of a trust are that there is flexibility in income distribution and income can be streamed to low income tax beneficiaries to take advantage of their lower marginal tax rate. Furthermore, assets can be protected through a properly drafted Deed.

The disadvantages are that trusts can be costly to set up and there are more compliance and legal requirements.

Company

A company is a separate legal entity capable of holding assets in its own name. The words “Pty Ltd” after a business name show that the business is a registered legal entity trading in its own right. A company is owned by shareholders and directors manage the company’s day to day business and affairs. The shareholders of a company receive any company profits in the form of dividends. Shareholders can limit their personal liability and are not generally liable for the company debts. Instead, the financial liability of the company is limited to the assets owned by the company.

Companies are governed by Corporations Law and there are a number of duties and obligations for company directors. Primarily, directors have an obligation to act in the best interests of the company.

Establishment of a company and ongoing administrative and compliance costs associated with Corporations Law can be high. There is also a requirement to publicly disclose key information.

Conclusion

Each business will vary and no business owner’s circumstances will be the same. It is advisable to talk to an accountant or solicitor about the costs and risks of each business structure to make sure that the business structure used is the right one for the business and its needs going forward. In the following newsletter, we will discuss these structures in more detail.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au.

Trade Marks in Australia

The advantage of registering a trade mark is that it confers far more benefits than registering a business name, company name or domain name. Marketing is an important business tool, and a registered trade mark is crucial in allowing you to protect any value or credibility which you have built on your brand. 

What is a trade mark?

A trade mark identifies a product or service, distinguishing it from the goods or services of other traders. A registered trade mark protects any branding element within a business including letters, numbers, words, phrases, sounds, smells, shapes, logos, pictures and aspects of packaging. Registration of a business name, company name or domain name does not give you that kind of protection.

Registering a trade mark allows the owner of the trade mark to commence legal action to stop others using it. Trade marks can be used to help build market position and stop others from imitating your brand.

The registration of a trade mark is effective for 10 years and can be renewed for further 10 year periods provided renewal fees are paid. 

Registration of a trade mark covers the entire Commonwealth of Australia. For worldwide protection, an application can be filed with each country in which the trade mark will be used, or a single international application can be filed through IP Australia nominating the countries in which protection is required.

Applying for a trade mark 

Trade marks are registered in specific classes relevant to the description of the goods or services for which the mark will protect. The application for registration must nominate one or more classes of goods or services for which the mark is intended to be used and associated. The more classes selected, the wider the protection that will be given once the trade mark is registered.

Before making an application to register your trade mark, the following should be considered:

  • Identify the relevant class of goods or services for which the mark will apply. Schedule 1 of the Trade Marks Regulations 1995 prescribes the available classes and describes the types of goods of services specific to each class.A search should be carried out before applying to register a trade mark to check that a similar trade mark is not already registered in that class.  An application to register your trade mark could be rejected if there is an identical or similar trade mark already registered which covers similar goods or services. 
  • Only minor changes can be made to a trade mark once an application has been filed and published.
  • A trade mark registration is for the goods and services you actually trade in or intend to trade in in the near future. Once an application is filed and registered, goods and services cannot be added. Therefore, you should clearly define the marketplace you trade in to ensure the best possible protection.
  • Your trade mark must be something that is capable of distinguishing your goods and services. Exclusive rights are difficult to register over everyday language, names and descriptions of products and services 

Once you are happy with your trade mark, you can apply to register it through the IP Australia website. You can also request an assessment of the likelihood of your trade mark achieving registration through TM Headstart.

The cost of applying for a trade mark will vary depending on the scope of the application. Generally, the minimum cost to apply is $120 for each class of goods and services. In Australia there are 45 different classes of goods and services and each additional class costs an extra $300. 

The application process

Once your trade mark is accepted, it will be advertised in the Australian Official Journal of Trade Marks and the application is open to opposition for a period of 3 months (which can be extended for a further 3 month period).

If your application is not challenged, your trade mark will be registered once the registration fee is paid (you must pay within 6 months from the date acceptance is advertised or your application will lapse).

The registration of a trade mark in Australia takes a minimum of 7 ½ months after an application is filed.

Conclusion

Applying for an Australian trade mark is a straight forward process. By investing in protecting your brand today, you can avoid the costly and uncertain exercise of preventing unauthorised use of your unregistered trade mark. We are experienced in intellectual property matters and can work with you to ensure your trade mark is registered in the appropriate class or classes, and to respond to any opposition to the proposed registration. We are also able to assist with trade mark and copyright disputes.   

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email law@etheringtons.com.au.