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Fraud and Insolvency Case Studies

Landlords entitled to disclaim leases in insolvency cases

05-May-2014

In December 2013, the High Court confirmed that a liquidator of a corporate landlord may disclaim a lease that the company had granted to a tenant, leaving the tenant to prove they have suffered loss in the winding up.

Broadly speaking, it is common for the liquidator of an insolvent lesee to repudiate the lessee’s tenancy obligations. It is now clear that a corporate landlord may similarly avoid unfavourable leases to which it is committed, simply by renouncing those leases in liquidation.

Streeterlaw Fraud and Insolvency Group solicitor Evatt Styles, explained the implications of the decision: “Tenants and investors beware! This decision effectively terminates a landlord’s obligations to his tenants in the event of his company being liquidated. As a result of this case, tenants and any financiers should start requesting special conditions in their lease arrangements to minimise the risk of possession.”

The Wilmott case clarifies the scope of the liquidators' statutory power of disclaimer. Tenants, along with financiers, have a clear risk in taking security over tenants' interests in leasehold property.

The facts of the case

Willmott Forests Limited (Willmott) managed a number of forestry investment schemes. Under these schemes, Willmott leased portions of land to scheme participants who were growing and harvesting trees. The arrangement involved an agribusiness investment scheme, with a number of 25-year leases which required payment of the rent in advance. In short, the terms of these leases made these properties unmarketable and difficult to sell.

Willmott was placed into administration and then liquidation. The liquidators attempted to sell the properties and included a condition that title to the assets was to pass to the purchaser free from encumbrances and that title to the trees on the land was to pass to the purchaser at settlement. This effectively would mean that the tenants lost the right to maintain and harvest the trees that they had planted on the leased property.

At that stage, the liquidators applied to the Supreme Court of Victoria for directions about the state of the negotiation in relation to the sale. Justice Davies directed that the liquidators could not disclaim the growers' leases.

On appeal, the Victorian Court of Appeal set aside that decision and decided that the liquidators could disclaim the growers' leases. The growers then appealed to the High Court.

The High Court decision

On 4 December 2013, the majority of the High Court upheld the decision of the Victorian Court of Appeal.

The High Court focused on two key issues:

  1. Whether section 568(1) of the Corporations Act 2001 (Cth) (the Act) gives the liquidator of a company power to disclaim a lease that the company granted to a tenant; and
  2. If the liquidator has the power to disclaim such a lease, what is the effect of the disclaimer and can the liquidator of a landlord disclaim a lease.

Section 568(1) of the Act provides that a liquidator may disclaim certain property of a company, including property that consists of a contract. However, s568(1A) of the Act provides that “a liquidator cannot disclaim a contract (other than an unprofitable contract or a lease of land) except with the leave of the Court”.

In the Willmott case, the significant issue was whether the reference to ‘a lease of land' in s568(1A) extended to any lease to which the company was a party or was restricted to leases where the company was a tenant.

The majority of the High Court found that each lease between Willmott and the growers was the property of the company, consisting of a contract under s568(1)(f) of the Act which could be disclaimed.

Impact of the Willmott decision on tenants’ interests

The Willmott decision highlights:

  • Risks both for tenants and for financiers with security over tenants' interests in leasehold property, where the landlord has the potential to enter liquidation during the term of the lease.
  • Broader questions about the possible implications of a liquidator's power of disclaimer on other types of proprietary rights held by third parties in relation to the property of companies in liquidation.
  • Broader implications for more common types of leasehold arrangements, particularly in situations where the liquidator of a landlord forms the view that a property may be more readily saleable, or sell for a higher price, without the existing leasehold arrangements in place.

Case appraisal conference

If you are facing a dispute, Streeterlaw’s Fraud and Insolvency Group can advise you on:

  • Your legal rights and obligations in relation to Insolvency generally and the mechanisms available to creditors to enforce debts;
  • How to resolve these disputes efficiently and cost-effectively; and
  • Any alternative dispute resolution methods open to you to deal with the dispute.

Please contact Mr Evatt Styles at the Streeterlaw Sydney office to arrange a Case Appraisal Conference. Enquiries can be made by email to Evatt.Styles@streeterlaw.com.au or by calling (02) 8488 9645.



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Blackmail cases on rise

30-Jan-2014

The Streeterlaw Fraud Department had a surge of extortion/blackmail cases in 2013. One of these cases involved a victim receiving threats from an anonymous source, whereby private and intimate information was to be “withheld” by an anonymous blackmailer, providing the victim made regular cash payments to an undisclosed location.

The case advanced to the Supreme Court of NSW on 4 June 2013 where Justice Ball found in favour of the victim of the blackmail threats.

The Court made the following orders:

  1. the Defendant must restrain from communicating to any person in any representation in relation to the plaintiff; 
  2. the Defendant must restrain from communicating in any form with the Plaintiff other than by communicating with the Plaintiff’s solicitors; 
  3. Judgment for the Plaintiff against the Defendant plus interest; 
  4. Judgement for the Plaintiff against the Defendant for exemplary damages; 
  5. The Defendant to pay the Plaintiff’s costs on an indemnity basis.

Streeterlaw Principal Mark Streeter, together with solicitor Evatt Styles, were delighted with the outcome of what was a complex case.

“This was a technical and complicated case; our success is a testimony to our passionate and tenacious pursuit of the target. We are pleased that we were able to achieve an excellent outcome for our client,” Mr Streeter said.

He said he believes the increase in fraud is mostly attributable to the ability of people to remain anonymous online: “Fake IDs can be used on the Internet and it is not always easy to verify an identity that is found online.”

Mr Styles added: “Fraud is increasingly prevalent in society, so it is important to educate the public and to create awareness about fraud – but there is a fine line between educating the public and educating fraudsters, so we have not detailed here how we obtained the evidence to achieve this result.”

If you believe that you are the victim of fraud, please contact Streeterlaw Principal Mark Streeter who can advise you on the best way forward. Contact him by email at advice@streeterlaw.com.au or by phone on 8197 0105.



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Illegally taped conversation can be used in evidence

28-Jun-2013

As most people may be aware, taped conversations are generally not permitted into evidence if the person was not aware that they were being recorded. However, a recent case has shown that taped conversations, where the person has given permission to be recorded, can be admissible in court proceedings.

In the recent case of Badger & Ors [2013] FMCAfam 124 (14 February 2013), the Court had to determine whether it should allow into evidence the transcript of a taped telephone conversation that took place between two of the parties in the proceedings. It was required to consider whether the telephone call was tapped without the permission of the recorded party and secondly, whether the evidence in the form of a transcribed recording ought to be allowed or excluded.

Section 138 of the Evidence Act 1995 (CTH) provides that the Court has a discretion to exclude improperly or illegally obtained evidence.

It was alleged that the person stated to the recorder “you can tape what we say”; however the recorder could not recall if this was said prior to the conversation that was recorded. As a result, the evidence failed to establish that permission was granted at the time of the conversation or at a time earlier than when the conversation took place and the Court found that the conversation was taped without the permission of the person being recorded. As a result, it was held that the evidence had been improperly and illegally obtained.

The second issue that the Court had to determine was whether this illegally obtained evidence should be admitted. Under Section 138, such evidence is not to be admitted unless the “desirability of admitting the evidence outweighs the undesirability of admitting such evidence”. When considering this provision, several issues need to be considered:

  • whether the evidence is useful in proving something important or is key evidence in the proceedings
  • the nature of the subject matter and the relevant offence
  • the seriousness of the impropriety and whether it was deliberate
  • Whether any other proceeding has been or is likely to be taken in relation to the recording
  • The difficulty of obtaining the evidence without impropriety or contravention of an Australian law.
After considering the above factors, the Court found that the evidence in this case, in the form of a transcript of the conversation between the two parties, was not to be admitted in circumstances where the desirability of admitting the evidence did not, in the mind of the Court, outweigh the undesirability of admitting it.




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Company creditor managers wrestle with PPS Register

07-May-2013

The Personal Property and Securities Act is causing many sleepless nights for credit managers wondering if they have acquired sufficient security in exchange for extending credit.

The introduction of the Personal Properties Security Register more than a year ago has caused some confusion in the business world, with many companies uncertain about whether their credit is secured.

One of the major issues when companies enter external administration is determining the priority rights attached to assets held by the company. Under Pre-PPS laws, priority rights attached to assets held by the company were determined by whichever party held superior title.

“Gone are the days where credit managers could sleep at night knowing they had an executed agreement with a retention of title clause (also known as a ‘rompala’ clause),” said Streeterlaw solicitor Evatt Styles.

“We strongly recommend companies review their company’s supply agreement and terms of trade to ensure they have the right to possess goods supplied under a valid retention of title contract, based on ownership and repossession rights under the Agreement.” 

But this retention of title provision is no longer enough. You need an express term in a written agreement that entitles the creditor to register their interest on the PPS Register.

Property is frequently sold or leased on the basis that the buyer takes possession of the item concerned without acquiring legal title to it until full payment is made. Under the PPS Act, such arrangements create a security interest in the property leased or sold.

If such security interests are not registered on the PPS Register, the vendor/lessor’s rights in that property may be lost in the event that the buyer/hirer becomes insolvent. 

“If an administrator has been appointed, assets of the company are generally considered to be available to reimburse secured creditors unless the true holder of the title registers ‘security’ over them,” Mr Styles explained. “Title itself does not equate to rights over property in these circumstances and failure to register an interest may result in your business having no claim to the asset in this external administration scenario.”

Mr Styles said it’s so important companies ensure they have registered their security interests with the PPS Register.

The Solution

Contact Streeterlaw immediately to arrange for a Case Appraisal Conference to discuss and advise you on:

1. Identifying assets affected and transactions that need to be registered on the PPSR

2. Reviewing the Terms and Conditions and Contract Documentation in relation to:

a. Retention of Title Clauses;

b. Personal Guarantees;

c. Charging clauses; and

d. Registration on the PPSR.

3. Developing new internal policies and procedures for registering transactions and the 

associated documentation processes.


Please begin compiling the following information now:

1. Security agreements that may have been registered; and

2. Full details of stock that is still in the debtor company’s possession.


Contact Streeterlaw solicitor Evatt Styles for further information on (02) 8197 0105 or by email at Evatt.Styles@streeterlaw.com.au

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* For more information on the Personal Properties Security Register, see our article published in November 2012: http://streeterlaw.cimarketing.biz/blog/secure-your-stock-with-PPSR




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Debt recovery: What are Instalment Orders?

06-Mar-2013

Following your attempts to recover a debt, firstly through a Letter of Demand and subsequently after the debtor has been “served” the Statement of Claim papers, the court’s jurisdiction will come into play.

The Statement of Claim gives the defendant 28 days after service of the document to pay the debt, come to an arrangement with the plaintiff for payment of the debt by way of instalments, or file a defence to the claim.

Instalment orders ­– Stay of Execution

At any time following the entering of judgment, a debtor may apply to the Court to pay the judgment debt by instalments.

The debtor will indicate to the court an amount they can pay either weekly, fortnightly or monthly to the creditor but the creditor has the option to object to the instalment orders by making an application to the Court.

If there is an objection, each party must make submissions before a Registrar as to the appropriateness of the order.

While an instalment order is in place, the judgment to pay the debt in full will be stayed and cannot be enforced. But if a debtor fails to make payments in accordance with the instalment order, the creditor can file an Affidavit of Non-Compliance in the Court registry, which will lift the stay and allow enforcement of the judgment debt.

Generally the Local Court will only allow an instalment arrangement if the debt is to be paid within a couple of years.





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Debt recovery: What is an Examination Notice?

07-Mar-2013

Although this is not a method to enforce payment of a debt, an Examination Notice can be a useful tool if you know little or nothing about your debtor. It will allow you to obtain information about a debtor’s financial position, including assets and liabilities, income and expenditure.

An Examination Notice is served on a judgment debtor. It asks the debtor to provide answers to specific questions and to forward certain documents to the creditor. The debtor has 28 days to respond with answers and supply the requested documents.

You may wish to ask the debtor questions about:

  • Current employment;
  • Current income;
  • Property owned in the debtor's name, including real estate, shares, motor vehicles, art and jewellery;
  • Details of funds held in bank accounts and credit union accounts;
  • Current liabilities including mortgage repayments per month;
  • Number of dependants;
  • Weekly expenses such as petrol, food, fares, school fees, motor vehicle expenses, gas, electricity, water.

Documents you may wish to request as part of an Examination Notice are:

  • Recent bank statements evidencing bank balances for the last six months;
  • Cheque books;
  • Mortgage or charge documents;
  • Wage slips or group certificates for the 12 months prior;
  • Income tax returns for the past two years;
  • All partnership agreements;
  • Deeds or other documents evidencing the ownership of motor vehicles, real estate, shares, or any other property such as jewellery or art;
  • Registration papers for motor vehicles or boats;
  • Insurance policy over goods or land;
  • Loan agreements and repayments books;
  • Lease agreements.

If the debtor fails to respond to the Examination Notice within 28 days, you can apply to the Court for the issue of an Examination Order, which requires the person served with the Examination Notice to attend Court to answer your solicitor’s questions.

Examination Hearing

The Examination Order is required to be filed in the Local Court and attracts a filing fee of $152.

The debtor, if he/she shows up, is examined as to their financial position and an offer to pay by instalments is usually made.

  

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Debt recovery: What is a Garnishee Order?

06-Mar-2013


If someone else owes money to the debtor, you, as the creditor, can apply for a Garnishee Order from the Court that enables that debt to be paid to you rather than the Debtor.

A Garnishee Order is most commonly served on a financial institution to recover funds held in the debtor’s account. This is why it is important to obtain bank account details of the debtor on any Credit Application, and also to keep copies of payments made by the customer by cheque.

Another form of Garnishee Order is the wage garnishee, which can be served on the employer of the debtor.

What happens if a financial institution or employer fails to comply with the order?   

If the Garnishee Order is not complied with, a Garnishee Summons may be issued to the third party to show cause why the payment has not been made. The Court may decide to make the garnisheed party (the financial institution or employer) responsible for the debt owed to you, the creditor.



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Debt recovery: What is a Writ of Execution?

09-Mar-2013

The most common mode of enforcing the judgment debt against an individual judgment debtor or a company judgment debtor is to issue a Writ of Execution. This is a direction to the Sheriff or Bailiff to attend a given address (usually the home address for an individual or the principal place of business for a company) and take items belonging to the debtor, to be sold at public auction for the benefit of the creditor.

The Sheriff has the power to seize a wide range of goods, including furniture, motor vehicles, boats, household appliances, art, jewellery, stock on hand, office equipment and other goods found at the address belonging to the judgment debtor.

After the Sheriff has tagged the debtor’s goods, he or she will notify the creditor of the goods found and request payment of further fees which may be required to continue with the execution.

Once any fees are paid, the Sheriff will send a final notice to the debtor advising that if the debt is not paid by a certain date, the goods will be taken and sold at public auction. Such notification will include the original judgment debt, interest and the costs of the Writ of Execution.

After the goods have been taken away from the debtor’s premises, the Sheriff will proceed to sell the goods and any proceeds will be forwarded to the creditor, after the deduction of the Sheriff’s fees.

Writ on land

All Courts now permit land to be taken under a Writ of Execution. It can be lodged at the NSW Government’s Land and Property Information office and can be issued once the writ is issued to the Sheriff.

The Writ on land is not the same as a Caveat. It does not give an interest in the land, as the creditor is unsecured, not secured. The writ can be stayed if an application is made by the debtor to pay by instalments.




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Debt recovery: the steps to winding up a corporation

09-Mar-2013

Similar to bankruptcy proceedings against individuals, winding up proceedings are those brought against debtors that are companies. Winding up proceedings will generally only be brought against a company where the debt is in excess of $10,000, however the statutory minimum debt is only $2,000 (s459E Corporations Act).

The process of corporate insolvency, where a judgment debt exists, is usually by the issue and service of a Statutory Demand for payment. It will set out details of the judgment including the amount, additional interest, the date of the judgment and the jurisdiction. The Statutory Demand is issued pursuant to Section 459E of the Corporations Act 2001 (Cth).

The Statutory Demand requires:

  • Payment within 21 days OR
  • The filing and service of an application under 459G, 459H of the Corporations Act disputing the debt.

The Statutory Demand is not considered to be a means of enforcing a debt by the Court, however, on many occasions, a company will tend to comply with the requirements of a Statutory Demand as the consequences of not complying is presumed insolvency.

The Statutory Demand must be served on the registered office of the company and the company has 21 days to comply with the Demand by either paying the debt, entering into an arrangement that is satisfactory to the creditor or by making an application to the Court to set aside the Demand on the basis that there is a genuine dispute as to the existence of the debt.

If the debtor fails to comply with the Statutory Demand, the creditor can proceed to issue an Originating Process in the Supreme Court or the Federal Court seeking to wind up the company and appoint a liquidator.

The Originating Process must state that the debtor owes in excess of $2000 and must comply with prescribed Court rules. An affidavit by the creditor must accompany the Originating Process, verifying that the debt remains outstanding. Once filed, a hearing date is allocated.

All the relevant documents – the Originating Process, Affidavit of Service of Statutory Demand, Consent of Liquidator and Affidavit in Support of the Originating Process – must be served on the debtor within seven days of filing in Court.

The hearing must be advertised in a local newspaper.

A liquidator must fill out the Consent To Act As Liquidator paperwork, confirming there is no conflict, and attach a fee schedule.

At the hearing, the creditor must prove certain facts, including that the debt still remains outstanding and the service of the Statutory Demand and Originating Process. If the Court is satisfied with the creditor’s evidence, the Court will make orders for the winding up of the company and appoint a liquidator to manage the affairs of the judgment debtor.

After a winding up order is made, notice must be given to ASIC and a copy of the order lodged with ASIC and the liquidator.

Once an order is made to appoint a liquidator, the creditor has no entitlement to pursue the debt against the debtor. A Proof of Debt is lodged with the liquidator and the creditor will be paid a dividend if the liquidator is able to realise assets for the benefit of all creditors.



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ASIC releases Insolvent Trading Act

30-Nov-2010

Insolvent Trading is a serious issue. As a director of a business you have a responsibility to not let your organisation engage in insolvent trading. This occurs when debts are incurred but at the time it is know they will not be able to be paid as and when they are due.

ASIC has released a booklet to help directors better understand their responsibilities with Insolvent Trading. The Insolvent Trading report is a result of ASIC's visits to over 1,530 Australian companies displaying solvency concerns during the period from 2005–06 to 2009–10. Interestingly 15% of these companies reviewed by ASIC were subsequently placed into external administration. This was mostly by the directors.

They found a director is less likely to breach their duties if they:
1: Maintain appropriate books and records
2: Identify insolvency concerns and assess available options
3: Seek professional advice
4: Act in a timely manner

For the full 24 page report go to > ASIC National Insolvent Trading Program Report

Comment from Mark Streeter Sydney Lawyer

What is interesting in this report on Insolvent Trading is that 85% of these companies displaying insolvency concerns therefore were not placed into external administration. The majority of business worked their way through it. Asking for legal advice about insolvent trading is not saying it is all over. Acting in a timely manner rather than leaving it too late is a very good reminder for all business directors. As the report says "Directors seeking advice at an early stage may achieve a better outcome for external stakeholders, including employees and creditors."

If you are facing insolvency or trying to recover debts from an insolvent company give us a call to arrange an appointment to discuss your options.

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ASIC sues North Sydney Solicitor for Phoenix companies

30-Nov-2010

The Australian Securities and Investments Commission (ASIC) has found a North Sydney Solicitor guilty of advising eight of his clients engage in activity which breached the Corporations Act. This significant case sends a warning to all business advisors. These two judgments of Acting Justice Windeyer are very important decisions of the Court in considering Section 79 of the Corporations Act 2001 (CTH).

The Facts - ASIC v Somerville & Ors (No 2) [2009] NSWSC 998 & ASIC v Somerville & Ors [2009] NSWSC 934 

The First Defendant was a solicitor practising in North Sydney. He was sued, together with eight of his clients, for alleged “phoenix” activity.  The solicitor had provided similar advice to each of the eight businesses (which were facing insolvency) on separate occasions. 

The effect of the advice and the transactions taken by the companies and directors in reliance on this advice was that the company would sell its “business” to a new entity in consideration for being issued “V Class” shares in the new entity which will be paid by dividends. The debts and liabilities of the previous company stayed in the old company. No dividends were ever paid by the new entity back to the old company.

The result of the implementation of this advice was that the purchaser acquired all the assets of the old company free of any of the liabilities of the old company leaving trade creditors, taxation debts and debts for insurance premiums to sue an asset-less company.  

The Decision

The solicitor was found to be involved in the Directors’ misconduct. The Company Directors were found to have breached Sections 181, 182 and 183 Corporations Act 2001 (CTH). In the second judgment the directors unsuccessfully sought to make an application for exoneration under section 1318 on the basis that they relied on their solicitor’s advice and should not be personally liable. The solicitor was disqualified from managing corporations for a period of six years and the other directors (of the subject corporations) were disqualified from managing corporations for a period of 2 years.  

Comment from Mark Streeter Sydney Lawyer

This case stands as a solitary warning to all participants involved in advising debtors in respect of their statutory obligations under the Corporations Act.


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Bank told to compensate for selling shares in low market

30-Nov-2010

Macquarie Bank's sale of loan book creates problems for clients

The facts behind the case

Mr Goodridge (the Borrower) entered into a margin lending loan arrangement with Macquarie Bank in May 2003.  On 8 January 2009 Macquarie Bank sold their “loan book” (which included Mr Goodridge’s margin lending account) to a subsidiary of Bendigo and Adelaide Banks – Leveraged Equities Ltd (the Second Defendant in these proceedings).  Notices were issued on 19 January 2009 purporting to notify all customers of the Bank of the transfer and the new “ownership” of the Banking arrangements.

The Bank (either Macquarie Bank or Leveraged Equities) made a “calls and demands” under the loan on 5 February 2009 and 23 February 2009.
The evidence was accepted (form the Bank’s recording of a telephone conversation) that there was a negotiated arrangement between the Bank and the Borrower and the 5 February 2009 margin call was fully satisfied by the Borrower.

The enquiry then focused on whether or not a “call” under the margin loan by the Bank on 23 February 2009 expired unsatisfied which justifying the Bank selling the securities to pay down the margin loan.

The Borrower had purchased units in a listed units in Macquarie Country Wide Trust (MCW Trust).  The market price of these units on 11 November 2008 was 31 cents.  The discounted cashflow valuation that Macquarie Equities Ltd had placed on these Units was $1.15.  The price of these Units came under a degree of stress and by 23 February 2009 the price had fallen to 14.5 cents per Unit and during the day had dropped to 13 cents.  On the afternoon of 23 February 2009 an email was despatched from Leveraged Equities to the Borrower requiring payment of the margin call of $190,000.  The Borrower was given 24 hours to pay this amount to maintain the Loan Valuation Ratio (LVR) at 70%.  The “margin call” was not met within this timeframe and the Bank sold the Units for prices that went down to 10.5 cents per Unit.  All 5.6 million units were sold and because of the depressed price (in part caused by the fact that the market could not absorb the sale of 5.6 million units in a 24 hour period!)  There was still an amount outstanding to the Bank.  It remained in debit of over $58,000.00.

What's the Story?

The relationship between a Lender and the Borrower under a margin loan facility is one of substantial interdependence.  Unlike real estate which could take somewhere between three and six months for the Bank to take possession and sell, listed securities can be sold quite quickly.
The relevant clause of the margin lending loan required the Bank to give three business days notice for compliance with a margin call.  Other clauses in the agreement provided for the ability, at the discretion of the Bank, to modify the terms of the agreement.  However, His Honour Justice Rares found that this three days notice as an expressed term offered the Borrower a substantial contractual right and any alternative construction would lead to a very unreasonable and uncommercial result!

His Honour Justice Rares noted that the liability to meet a margin call remained contingent up until the time of the compliance and only matures into an actual liability if at the time of the application of the formula (to ascertain the LVR) the loan balance and the valuation of the securities is in breach of the required ratio.  His Honour Justice Rares delivered a lengthy 57 page judgement which dealt with many legal and factual complexities in a rational and well reasoned judgment.  The judgment will provide essential reading in construing any contracts relating to margin lending accounts.

His Honour found that the margin call was in breach of the terms of the margin loan agreement and accordingly invalid. There was no right on the part of the Bank (either of the two defendants) entitling them to sell.  Accordingly the sale of the units was unlawful and damages were payable.

If that was not enough, the judge also found that in the event that it was validly assigned that the “shortening” of the time for meeting the margin call from 3 to 1 days was a breach of section 12CB of the ASIC Act.  His Honour found that in all the factual circumstances, there had been a misuse of the power of sale and that the second defendant had required the Borrower to comply with conditions that were not reasonably necessary to protect his legitimate interest in breach of section 12CB(2)(b) ASIC Act in that it required him to pay money in accordance with a timetable and a series of demands that were not valid and secondly threatened, and then proceeded to, sell his property without a legitimate interest that it was entitled to protect. 

Accordingly this misuse of the power of sale was unconscionable.

The Borrower sought relief and an order that 5,603,562 in the MCW Trust be restored to him.

Since 23 February 2009 these units have increased in price substantially.  Additionally the units paid dividend (which also part of his damages claim) together with interest on the dividends.  As at 26 February 2010 they are 56.5 cents / Unit.  (That is his units would be worth over $3,000,000 plus dividend, plus interest on the lost dividend).

Another important issue - Invalid Assignment

Another significant legal issue to be determined was the question of whether or not a Bank can assign and “sell” a loan portfolio.  In the second paragraph of the judgement His Honour notes that:
“It was common ground that contractual obligations are generally incapable of assignment and that these can only be transferred by novation of the original contract.” 

His Honour found against the Banks on multiple counts. He found that they had not been a valid assignment of the entitlement under the loan to the second defendant which entitled them to make the call on the margin loan.

Comment from Mark Streeter - Sydney Lawyer

Inevitably this court decision will be appealed. Macquarie Bank sold a $1.5 billion loan portfolio to Leveraged Equities Ltd. They certainly would not want to see some sort of class action by other Borrowers seeking compensation for margin calls that were unlawfully made!

The saga will continue in the meantime - Happy investing!

The first margin loan in this particular case also involved the use of a phone recording as evidence. Read the full story on the blogsite

David beats Goliath using a recorded phone call

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Contempt involving Luna Park and Daily Telegraph

30-Nov-2010

Luna Park Sydney has had a long and sometimes turbulent history in Sydney. The Amusement park is located on the north side of Sydney Harbour at Milsons Point. It's smiling face has been part of Sydney landscape for much of the park's life since it opened in 1935. When information gathered for a court case was released to Sydney's The Daily Telegraph for an article it was considered to be "contempt" - a misuse of the information.

The Facts - Hearne v Street [2008] HCA 36 (6 August 2008)

After being closed for a period of time Luna Park recommenced operations in April 2004.  Local residents objected to the noise which was alleged to have included music, loud speaker announcements and mechanical noises from the rides. Proceedings were commenced in the Supreme Court of New South Wales relying on the Tort of nuisance.

In the course of the preparation for hearing the Plaintiffs served affidavits and expert reports.  It was alleged that some of this material was then distributed by the Defendants to the Daily Telegraph and used as a basis for an article published on 18 April 2005 and also used in communication to the State Government as part of a lobbying campaign for legislation that was introduced Luna Park Site Amendment (Noise Control) Act 2005 to protect the operators of the Park from complaints of noise and claims for nuisance.  

The Decision

An application was made by the Plaintiffs that the Defendants had improperly used affidavits and expert reports in whole or in part (with all the information contained within them) for a purpose not directly connected with the conduct of the proceedings.  It was alleged that this was in breach of an express or alternatively an implied undertaking to the Court.

An application before the primary judge was unsuccessful. The Applicants then appealed to the Court of Appeal who upheld the finding of Contempt.  An appeal was then made to the High Court who handed down judgment on 6 August 2008.

The majority judgment in the High Court comprising  HAYNE, HEYDON AND CRENNAN JJ found that;
"The Court should not allow any party – whether a party to the proceedings or not, to use documents for any ulterior or alien purpose.  Used with knowledge of the circumstances of, and the source of the documentation would be an improper use."

Comment from Mark Streeter 

This case serves as a very useful restatement of the law of contempt.  The prosecutor of the contempt were the parties in the litigation.  It was a charge of “civil contempt”.   In this case the Applicant (one the Plaintiffs in the action) became the “prosecutor”. The burden of proof is the civil burden.

It is necessary to specifically particularise the allegations against each of the Defendants.  The Court Rules require the filing and service of a “statement of charge” setting out these details.

Parties, lawyers, their clients, experts and any other person who is provided access to documents obtained in the course of litigation should be very, very careful about how this information and documents are used and be mindful of the constraints imposed upon the parties. 

The documents produced in the course of legal proceedings were subject to the rule against their use for any other purposes apart from the proceedings. Once an affidavit is “read” in open court or evidence otherwise is provided through a witness, the evidence becomes “public” and accordingly the constraints described dissolve.


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Corporate fraud is stealing from the workplace

30-Nov-2010

Business fraud costs everyone in a company. Policies and procedures for businesses help prevent and identify fraud. This American news report gives some insight into the problem.

The video includes a case of a former trusted book keeper of a restaurant who defrauded their employer of thousands of dollars.



Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it

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Decriminalising Insider Trading Proposal

30-Nov-2010


Insider trading only became illegal in 1960s when it was felt some individuals had an unfair advantage over others with the buying and selling of stocks. In 2009 an article was published supporting a fairly radical idea for insider trading to be decriminalised again. It is a very controversial idea.

Since the 1960s insider trading regulations have continued to be expanded. The video includes a discussion that fraud and insider trading are often linked. The article's author believes that allowing markets to drive stock prices to realistic values is fairer. The counter argument is that it still gives an unfair advantage to some.

For the author insider trading is not fraud but rather is more likely to expose corporate fraud. The video also highlights the relative lack of resources being used to examine and prevent insider trading. 

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Desperate employees can do desperate things

30-Nov-2010


The Association of Certified Fraud Examiners (ACFE) have a free report Occupational Fraud: A Study of the Impact of an Economic Recession available from their website.

ACFE President James D. Ratley, CFE says "Desperate people do desperate things. Loyal employees have bills to pay and families to feed. In a good economy, they would never think of committing fraud against their employers. But especially now, organizations must be vigilant during these turbulent times by ensuring proper fraud prevention procedures are in place."

The survey behind the report also found that:
  • Employees pose the greatest fraud threat in the current economy. When asked which, if any, of several categories of fraud increased during the previous 12 months, the largest number of survey respondents (48 percent) indicated that embezzlement was on the rise.
  • Layoffs are affecting organisations' internal control systems. Nearly 60 percent of CFEs who work as in-house fraud examiners reported that their companies had experienced layoffs during the past year. Among those who had experienced layoffs, almost 35 percent said their company had eliminated some controls, while 44.2 percent said the layoffs had no effect on controls and only 3.2 percent said their company had increased controls.

The survey was conducted in the USA in February and March 2009. The findings are still of interest now in Australia.

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Financial Fraud in Non-Profit Organisations

30-Nov-2010


Fraud can happen in any business. However non-profit organisations sometimes have looser controls so may be more susceptible to fraud. The statistics about fraud are also interesting. More men commit corporate fraud than women.

It can be relatively easy for employees to take advantage of a lack of business controls. Simple things like no double signing of cheques, not checking bank statements - or simply having too much control by only a few staff members.

Comment from Mark Streeter - Sydney fraud lawyer

Fraud is not always premeditated. Rather fraud can be opportunistic. Yet if fraud is not caught early, employers can continue to abuse the situation and cause more damage to the business. If you suspect fraud give us a call. 

 
Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it



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Initiating Workplace Fraud Investigations

30-Nov-2010


Preventing or dealing with workplace fraud or theft takes work. Preparation is a big part of this. Even just saying you will be doing background checks during an interview process may help weed out some people from ever being hired.

Business owners should consider the level of risk their business is exposed to. Always presume innocence of staff. However ensure you have policies in place. Breach of these policies may allow you to dismiss staff much easier than simply suspecting them of theft or fraud. The American video below includes some practical tips if you want to initiate an investigation. Be very careful before making accusations of staff who may have been involved in workplace fraud.

Comment from Mark Streeter - Fraud Lawyer

While this video suggests a do-it-yourself approach to fraud investigation is possible to do in-house, it is pretty easy to see how it could get complicated. Streeterlaw are experienced in investigating workplace fraud. Acting quickly is important before evidence can be tampered with. Unfortunately taking the untrained approach, or relying on HR staff as  promoted in the video, can give the suspect too much time and power in the situation to cover tracks. If you suspect workplace fraud or theft give Streeterlaw a call.



Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it



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Insider Trading Stock Tips at Family Reunion

30-Nov-2010


Insider trading laws in Australia have become far more relevant to the majority of the population. Traditionally insider trading was considered a white collar crime of a select few wealthy individuals with "inside" knowledge of businesses.

Australia now has one of the highest ownership of investment shares in the world. Therefore many Australians take an active interest in stock prices and follow the Australian share market closely. Good trading tips always seem welcome but be warned.

Insider trading is illegal in Australia. It is considered a white collar crime but it is also quite easy to overstep the mark as this cartoon video demonstrates. Click on the YouTube graphic below to watch a scenario of a not-too-ridiculous event. Seemingly innocent stock tips can land yourself and others in trouble. The 'best shares to buy' tips are not worth it if you end up with a criminal conviction.


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Insider trading suspected in company mergers in the US

30-Nov-2010


Insider trading is difficult to prove without a paper trail but sometimes the signs are obvious. Studying the stock prices of major corporations over a one-year period helped highlight that insider trading was taking place in 2010. In this insider trading video below, it states that 40 percent of stock prices leading up to mergers worth over $US 1 billion experienced spikes BEFORE the announcement was made. 
 
The continued policing and prosecuting of insider trading is seen as improving the credibility of the market and creating a more level playing field for investors.



Other Insider Trading articles

Insider trading stock tips at family reunion
What is insider trading?
Decriminalising insider trading proposal
Legal and illegal insider trad


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Legal and illegal insider trading

30-Nov-2010


The reason insider trading is illegal is that one person, or group of people have an unfair advantage over others. In the perfect world no one would know more than anyone else. Obviously the world is not perfect.

Naturally some people must know information before it is made public. Businesses are continually evaluating opportunities and discussing strategies behind closed doors. This is not illegal. The reason insider trading laws have been created is to help ensure that those who are part of these discussions cannot unfairly profit from that prior or 'inside' knowledge.

The dramatic increase in online trading and buying shares has meant insider trading is no longer restricted to an elite group of business owners and their close friends. While a criminal insider trading case may be difficult to prove the financial services industry in Australia has gone through many changes over recent years. The restrictions on giving financial advice are complex. The need for clear documentation and explanations around advice given has increased dramatically. Simply asking your friends "what's the best shares to buy" is no longer so simple.

In this video below it gives advice on what to do if you suspect insider trading. It also suggests you walk away rather than be tempted to make use of inside information you may have received.



Other Insider Trading articles

Insider trading suspected in major USA mergers
Insider trading stock tips at family reunion
What is insider trading?
Decriminalising insider trading propo

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Most common business fraud schemes

30-Nov-2010


Business fraud is an increasing problem not only in Australia. In this American video, forensic accountant and anti-fraud director, Lance Randolph of CBIZ MHM, discusses the two most common fraud schemes facing corporate America today. The situation in Australia is similar with corporate fraud conducted by a company's own staff a serious issue. 

Protecting your business from fraud can be a matter of having simple procedures in place. It is amazing that simply "writing a cheque" is the easiest way for businesses to be de-frauded by their own employee(s). The second one is the use of counterfeit cheques.




Do you suspect Corporate Fraud? Ask for a free White Paper: Workplace Fraud Investigation. How to uncover it, prevent it, stop it



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Motorola dealer causes loss of goodwill in business

30-Nov-2010

Breach of employment contract turns into an expensive lesson for employee

When you hire someone to do a job it is natural to expect the employee to do their job and to be loyal to their employer and not help a direct competitor. Failure to do this proved to be an expensive error on the part of the employee.

The Facts of Dinte v. Hales & Anor [2009] QSC 63 (25 March 2009)

Dinte, the plaintiff in this action, hired Hales and Campbell to provide services to his business trading as Skycomm.  Hales held the position of “Service Manager” which included responsibilities for selling and servicing mobile communications equipment as a “premier dealer” for Motorola. In the course of, and after his engagement with Skycomm, the Defendants entered into a partnership trading under the name of Dapcomm. Dapcomm operated in common areas of business as Skycomm; the two business were competing.

The claim was brought by Dinte alleging that Hales had breached his implied term of Contract of Employment and his equitable duties owed to the Plaintiff as his employer.  Furthermore it was alleged that upon termination of employment, Hales retained copies of confidential information including lists of clients and customers together with commercially sensitive information which was used for the purposes of Dapcomm. It was alleged that Cambpell knew and approved of and assisted Hales in the impugned conduct and benefitted from it.

Recovery of damages more than loss of sales

The plaintiff sued for damages. The Judge found that Hales was in breach of his obligations to Dinte and dishonestly diverted custom to the Dapcomm partnership through opportunities that were made available to him by virtue of his employment with Dinte. This case is interesting because not only did the Court, having found liability, make an award of damages in the sum of $67,533.19 for loss of the diverted business but the Court also considered, as a consequence of the business diverted away from the Plaintiff’s business, that he should be compensated for loss of value of the business.  The loss of value of the business was calculated by using the amount of diverted business in the last financial year ($38,000) and taking the multiplier of 3.8 x EBIT which equated to $144,400.

Comment from Mark Streeter - Sydney fraud lawyer

There are some important lessons to be learned from this case. This is an important decision in assessing and quantifying damages for recovery of Fraud in businesses.  Employees may divert business opportunities to themselves or other parties or merely destroy business opportunities. This may result in damages in excess of just the lost revenue for that financial year.

In this case the business was sold within a year after the Defendants had diverted the business but before the case went to hearing.  Accordingly the “loss” of goodwill was realised by the lower sale price obtained as a consequence of the reduced earnings because of the diverted business.

This case is consistent with the principles set down in Robinson v Harman (1848) where Baron Parker said:
Where a party sustains loss by breach of a contract, he is, as far as money can do it to be placed in the same position, with respect to damages, as if the contract had been performed.

In this case the plaintiff had lost the business but had also lost value in his business by way of goodwill (calculated as a multiple of EBIT) and suffered a reduced price in the sale of the business as a consequence.


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No Right of Silence with ASIC Notice of Examination

30-Nov-2010


When ASIC investigators give you a notice of examination it means they believe you have information which will help them in an investigation. You do not have the "right of silence".

The Situation

A businessman who had had dealings with a particular Company and had purchased a substantial amount of goods and services from it and was then issued a notice under Section 19 of the Australian Securities and Investments Commission Act 2001 (the ‘ASIC Act’) requiring the businessman to appear for examination on oath and answer questions put to him by ASIC investigators.

ASIC Power

ASIC has the power to require a person to attend to be examined if it believes, on reasonably grounds, or suspects or believes that a particular person can give information relevant to a matter that it is investigating under Division 1 of Part 3 of the ASIC Act.

The notice to the proposed person to be examined may require them  to give ASIC all reasonably assistance in connection with their investigation; including answering questions put to them by the ASIC investigators or deliver up documents.

What Protections do you have?

There are limited protections afforded to the examinee.  Unlike the police, you do not have an unqualified “right” to silence.  If you refuse to answer or provide this responsible assistance you may be liable for contempt of ASIC or contempt of the ASIC Act and liable for substantial penalties.  You are permitted to take a lawyer with you to attend the examination and you are permitted to claim the protection under Section 128 of the Evidence Act 1995 (Cth) in respect of privilege against self-incrimination.

Section 68(3) of the ASIC Act limits the scope of the protection against self-incrimination and excludes the proceedings specified in Section 1349 of the Corporations Act 2001.

You may maintain the protection in respect of Solicitor Client Legal Professional Privilege. 

How does The Examination work?

Section 22 provides that the examination is to be in private and often the ASIC investigator will provide a direction that no question, information, document or anything related thereto can be discussed to any other person for a period of in access of a year.  

Evidence will be required to be provided under oath or affirmation and failure to comply without reasonable excuse will expose the person to a penalty of $11,000.00 or 2 years in prison or both. Often there is a record of the examination and Section 24 provides that there may be a transcript and if this transcript is reduced to writing a copy will be provided to the examinee who may be required to read it and sign it.

In some cases you will not even be able to tell your business colleagues why you were required to be out of the office for the day!

Comments from Mark Streeter - Sydney fraud lawyer

There are important lessons to be learnt. Treat this examination process very seriously. If you are in receipt of a notice of examination you should immediately seek independent legal advice
You should not rely this information memorandum as anything but general information.



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Norco uses freezing order against employee in fraud case

30-Nov-2010

The Facts of Norco Co-Operative Limited v Kelly [2010] NSWSC 719

Employee HK worked for Norco from 26 March 2001 to 10 February 2009.  In the course of her employment she fraudulently and dishonourably misappropriated amounts totalling at least $316,657.98. These funds were used to pay off mortgages on properties she owned and also mortgages on properties she jointly owned with her life partner.

Upon discovery of the misappropriation, Norco made an urgent application for a “freezing order” which was granted on 19 March 2009.  This order prevented HK from removing from Australia or in any way disposing of or dealing with or diminishing the value of any of her assets in Australia up to the unencumbered value of $375,000.. Shortly before the “discovery”, HK transferred to her life partner title in one of the properties for nil consideration. His Honour Justice Lindgren found that Norco had an “equitable charge” over these properties but found the amount of the charge was limited to the amount of the misappropriated funds that had paid off the mortgage over the particular property.  It did not amount to a charge over each property for the full amount of the misappropriated funds.

Comment from Mark Streeter - Sydney fraud lawyer

This case uses the principle of constructive trust to “trace” the proceeds of the fraud.  As her life partner had not taken the property as a “bona fide” purchaser without knowledge and for fair value, the life partner did not have a basis for resisting a claim by Norco.

This case teaches an important lesson. Act quickly to firstly freeze and then recover misappropriated monies or property or assets.  It may be possible to “trace” monies and obtain a secured position under an equitable charge (as illustrated by the Norco decision).




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Protect your business from staff who may steal intellectual property

30-Nov-2010

How to protect your business from departing staff set on stealing from you

The Australian Financial Review, on 15 October 2010, published a very helpful and insightful article called “Bosses’ Byte Back to Protect Secrets”. The article noted that the increased availability of USB memory sticks and mobile electronic storage devices (including IPODS, smart phones and portable hard drives) made it easier for employees to “steal” intellectual property, data and information and this is particularly more prevalent at or about the time that the worker resigns their employment.

One of the leading authorities quoted in the course of this article was Mr Warren Mallard, Managing Director of Lyonswood Investigations and Forensics. His firm, which provides Fraud investigation services through the clever use of IT “data mining”, can forensically acquire the data from a computer hard disk and conclusively prove whether or not an employee has downloaded data from a computer or server.

The article also noted the use of Anton Piller and Mareva Orders now known as “Search” and “Freezing” orders where helpful in the process of finding and freezing the proceeds of these thefts.

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What is insider trading?

30-Nov-2010

Insider trading is illegal in Australia … but what is the definition of insider trading?

The simplest definition of insider trading is taking advantage of information that is not public.

This 'inside' information is most often seen as being used to give someone an unfair advantage in the buying or selling of shares or stocks.

Australians are now more likely to personally own shares in companies in which we work or where a member of our family or close friends work. When you include superannuation even more Australians own stocks and shares. Everyone would appreciate knowing ahead of time if a stock is likely to rise, or if it is about to fall.

It is considered natural to ask friends or family who work for companies on the Australian stock exchange for insider information on trading tips of shares. However, could your innocent question over a barbecue of "what's happening at work?" land you, and your friend, in court facing insider trading penalties? It depends on whether the information being shared is already 'public' knowledge. If your friend’s answer convinced you something significant was about to happen and that you should be selling, or buying, shares, then a court may consider it insider trading.


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Bankruptcy minimum raised from $2,000 to $5,000

29-Nov-2010

Higher minimum debt for bankrupt individuals will reduce bankrupcty notices

On 24 June 2010 the Federal Parliament passed amendments to the Bankruptcy Act 1966.

There were a number of technical “restructuring” type changes to the Bankruptcy Act which included a restructure of the organisation of the “Districts” for Bankruptcy, a streamlined process for remuneration of trustees and increase in penalties for non-complying individuals. 

One of the changes was an increase of the minimum debt amount a creditor may issue a bankruptcy notice from $2,000.00 up to $5,000.00. Although the initial Bill proposed the amount to be increased to $10,000.00, following the Senate Legal and Constitutional Affairs Legislation Committee report in February 2010 it was agreed to amend the proposed amount to $5,000.00.

The amended provisions took effect from 11 August 2010.

Comment from Mark Streeter Sydney Lawyer

Bankruptcy Notices are often used as an enforcement mechanism by debt collection and debt recovery firms. Many more Bankruptcy Notices are issued than proceedings actually commenced (or sequestration orders made).

In the financial year 2008/2009 there were 1,953 sequestration (Bankruptcy) orders made across Australia. Many of these were for an amount less than $5,000.00. This means many orders would not have been made under the new proposed minimum of $5,000.00.



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Family business fraud in marriage separation

29-Nov-2010

Attempt to reduce family business profit backfires

Fraud may occur in any jurisdiction and unfortunately the area of Family Law is no exception.

The situation

A family company was controlled by one party in a marriage separation.

The company engaged in a complicated arrangement with a foreign company in Asia. The company bought services from this foreign company at inflated prices, with the aim of decreasing the profitability of the domestic company. This consequentially reduced the value for the purposes of the Family Law proceeding and removed 'profits' offshore.

The solution and result

Streeterlaw made an application for a freezing order (also called a Mareva Order) which prevented further transactions and obtained orders for an investigative accountant to audit the true value of the company.

Note

The Family Law Act provides stiff penalties to any person who discloses the names or identities of parties in family court proceedings or who publishes sufficient information to allow for the identification of these individuals. Accordingly many of the case studies and profiles are of a very general nature as a number of the distinguishing facts have been removed to preserve the anonymity of the parties.

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Husband's fraud undermines Binding Financial Agreement

29-Nov-2010

New wife wins case against forceful husband

Imagine being pregnant, facing deportation and being given a Binding Financial Agreement by your fiance five days before your wedding and told to sign or the wedding is off.

The situation

In Blackmore and Webber [2009] FMCA FAM 154, the couple entered into a Binding Financial Agreement (under Section 90G of the Family Law Act 1975) on 11 November 2004 just days before being married on 14 November 2004. This judgment arose following an application by the wife to set aside a binding financial agreement on the following grounds:
  • There was a failure to comply with the formal requirements of section 90G
  • That the agreement was obtained by fraud under 90K (1)(a) including non-disclosure of a material matter
  • That pursuant section 90K(1)(b) the agreement was voidable or unenforceable in that it was obtained under duress
  • That pursuant to 90K(1)(e) the husband engaged in conduct that was in all the circumstances unconscionable

The decision about the binding financial agreement

The Court agreed with the wife that the agreement should be set aside on the basis of the husband’s “fraud” due to the non-disclosure (in circumstances where he had a positive obligation to disclose) of the value of the husband’s pension.  Although not required to determine the ultimate question the court also would have found that there was duress where:
  • The binding agreement was first produced to the wife five days before their wedding
  • The husband told the wife the wedding would be off if she did not sign the agreement
  • The wife was four to five months pregnant with the husband’s child
  • The wife’s visa was due to expire had the wedding not proceeded and the wife would have to leave Australia

Comment from Mark Streeter - Sydney Family Law LawyerMark Streeter Family Law Lawyer Sydney

The Court also concluded that it would have been satisfied that the husband engaged in conduct that put the wife at a special disability.

The Court found that at the time of signing the Binding Financial Agreement the wife’s command of the English language was limited, that she was pregnant, that she lacked close family support and faced possible expulsion for the country if she did not marry.
 
Call me for an appointment to discuss any Binding Financial Agreements you may have, or wish to create.


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Who are Streeterlaw Sydney Lawyers?

Streeterlaw Sydney Lawyers is a Sydney Law Firm located in the CBD 4 minutes from Town Hall Station.

Streeterlaw's team of lawyers and solicitors can advise you on legal matters. As an Accredited Specialist in Commercial Litigation Law, Principal Sydney lawyer Mark Streeter's experience and training can make the difference you need. Streeterlaw Sydney Lawyers' unique combination of commercial knowledge with fraud and insolvencies means they can handle complex family law cases involving businesses, property and complex matters. More about Streeterlaw…

Explore the site and the International and Australian legal case studies in the Real Stories and Cases section.

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