Insights

28/05/14

Corporate Advisory Update May 2014

Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team

Legislation and proposed legislation

Government consults on proposed dividend changes and red tape reduction measures

The Federal Government has issued an Exposure Draft Bill which seeks to clarify some of the confusion arising out of the 2010 reforms to the dividend payment test, imposes some additional remuneration reporting requirements, abolishes the ‘100 members’ rule for requisitioning company meetings and proposes other measures designed to cut red tape and reduce compliance costs for businesses. We will continue to monitor the progress of the Bill.

On 10 April 2014, the Federal Government issued its exposure draft Corporations Legislation Amendment (Deregulatory and Other Measures) Bill (Bill) and some accompanying Explanatory Material.

One of the key features of the Bill is the proposed clarification of the dividend payment test by:

  • replacing the current 3 limb balance sheet test in section 254T of the Corporations Act 2001 (Cth) with a pure solvency test;
  • confirming that for companies which resolve to pay dividends rather than declaring them, the relevant time at which the test must be applied is immediately before payment of the dividend; 
  • making clear that share capital can be reduced by dividend payments (without shareholder approval) by exempting them from the capital maintenance provisions in Part 2J to the extent that they are “equal reductions”; and. 
  • imposing additional reporting obligations for dividends paid other than out of profits.

Other reforms proposed in the Bill include:

  • removing the obligation to hold a general meeting on the request of 100 shareholders;
  • requiring a company to include a general description of their remuneration governance framework (to the extent it is not included elsewhere in the company’s annual report) and replacing the requirement to disclose the value of options granted to key management personnel with a requirement to disclose the number of lapsed options and the year in which they were granted;
  • relieving certain disclosing entities from the obligation to prepare a remuneration report and exempting certain companies limited by guarantee from the need to appoint or maintain an auditor;  
  • transferring the remuneration setting responsibility for the offices of the Financial Reporting Council, Australian Accounting Standards Board and the Auditing and Assurance Standards Board to the Remuneration Tribunal;
  • improving the efficiency of the Takeovers Panel by allowing the Panel to perform its functions while overseas; and
  • clarifying that directors may vary their financial year by up to 7 days, regardless of the length of the previous years (a minor technical amendment). 

Submission on the Bill were due by 16 May 2014, with the Bill expected to be introduced in the 2014 Autumn/Winter Sittings of Parliament.

See the media release dated 10 April 2014.


ASX

ASX releases independent report measuring adoption of Corporate Governance Council's gender diversity recommendations

The ASX-commissioned report prepared by KPMG is encouraging, showing an increase in the adoption of the Corporate Governance Council’s gender diversity recommendations in the second full reporting year and increasing numbers of entities articulating the business benefits of diversity. However, the results in relation to the setting and reporting of measurable objectives are not quite so positive.  Listed entities should review their own practices and consider whether any improvements should be made to improve compliance with the gender diversity recommendations.

On 10 April 2014, ASX released an independent report conducted by KPMG ASX Corporate Governance Council Principles and Recommendations on Diversity (Report). The Report measures the adoption of the ASX Corporate Governance Council’s recommendations on gender diversity which are part of its Corporate Governance Principles and Recommendations (Diversity Recommendations) by 600 listed entities across 3 separate categories for financial years ended between 31 December 2012 and 31 December 2013 (the second full year of reporting on diversity). While the Diversity Recommendations are not mandatory, listed entities must disclose in their annual reports the extent to which they have followed them and if they have not followed all of them, must explain why.

In summary, the Report makes a number of findings, including that:

  • there has been increased adoption of the Diversity Recommendations and increasing numbers of entities articulated the business benefits of diversity;
  • an entity’s size measured by market capitalisation (and not entity sector) is a key indicator for establishing a diversity policy. Adoption of a policy increased in top and bottom sample groups and remained stable in the middle sample group; 
  • setting of measurable objectives did not increase significantly across the sample group (with size being a key indicator of whether measurable objectives have been established) and the quality of measurable objectives (where set) was variable;
  • the reporting of diversity metrics remained largely stable across the sample group, with women on the board being the least reported;
  • increased numbers of entities provided a definition of “senior executive” and many entities gave highly detailed breakdowns of women in leadership roles but many entities disclosed little detail on the categories of management reported; and
  • size and stage development was still the main reason given in ‘if not why not reporting’, followed by entities being in the process of rolling out diversity measures. 

The Council’s third edition of the Corporate Governance Principles and Recommendations released on 27 March 2014 provide further guidance on the meaning of measurable objectives, require listed entities to define “senior executive” and allow those entities required to report under the Workplace Gender Equality Act 2012 to report their Gender Equality Indicators in place of the statistics set out in the Diversity Recommendations. Reporting against the third edition commences for financial years ended on or after 1 July 2014.

See the media release dated 10 April 2014.
 


New ASX rights issue and dividend and distribution re-investment plan timetables now in effect

The reduction in the ASX timetable for rights issues (and introduction of new timetables for accelerated entitlement offers) is intended to facilitate flexibility in capital raising and ensure that rights issues remain a viable capital raising mechanism. The change to the last election date for a dividend or distribution re-investment plan reflects the reduction in the ex-period from 5 business days to 3 business days across most corporate actions with an ex-period and the practice of a large number of listed entities of setting the last election date on the same day as the record date. Listed entities considering undertaking a rights issue or accelerated entitlement offer or implementing a dividend or distribution re-investment plan should familiarise themselves with the new timetables. 

ASX’s changes to timetables for rights issues and dividends and distribution re-investment plans came into effect on 14 April 2014.

The changes reduce the standard timetable for traditional rights issues from 26 business days to 19 business days by:

  • reducing the period from the ex date to and including the record date from 5 business days to 3 business days;
  • reducing the period from the day after the record date to and including the date that documents are sent to shareholders from a maximum of 4 business days to a maximum of 3 business days; 
  • reducing the period from the day after the date that documents are sent to shareholders to and including the closing date from a minimum of 10 business days to a minimum of 7 business days; and
  • reducing the period from the day after the closing date to and including the issue date from 6 business days to 5 business days. 

In addition, ASX has implemented standard timetables for

  • accelerated non-renounceable entitlement offers (18 business days);
  • accelerated renounceable entitlement offers and simultaneous accelerated renounceable entitlement offers (21 business days); and
  • accelerated renounceable entitlement offers with retail trading rights (22 business days).

The timetable for dividends and distributions in Appendix 6A now requires that the last election date for a dividend or distribution re-investment plan is no earlier than the business day following the record date for the dividend or distribution.

Finally, ASX has shortened the ex-period from 5 business days to 3 business days across most corporate actions with an ex-date (including dividends and distributions, interest payments, rights issues, bonus issues, return of capital, buy-backs and reconstructions). The reduction in the ex period does not apply to calls, conversions and expiries.

See Timetables for Rights Issues and the Timetable for Dividends: Amendment to the ASX Listing and Operating Rules which shows the changes in mark up.
 


ASX releases guidance note on performance shares

ASX’s new Guidance Note 19 provides some useful guidance on the issue of performance shares by listed entities. The new guidance covers a range of issues including compliance with the Listing Rules, appropriate rights attaching to performance shares, appropriate and equitable performance milestones, acceptable capital structures and security holder approval. Listed entities should familiarise themselves with the new guidance prior to issuing any performance shares. 

ASX has issued Guidance Note 19 Performance Shares which is designed to assist listed entities in structuring the terms of performance shares (ie shares with limited rights until a nominated performance milestone is achieved, at which point they will convert into ordinary shares) to comply with the Listing Rules.

Key issues discussed in the Guidance Note include:

  • a listed entity may (and ASX recommend that it does) apply for in-principle advice that the performance shares will satisfy the Listing Rules before it issues them (or enters into any legally binding agreement to do so);
  • there are a number of Listing Rules that need to be complied with (including Listing Rules 6.1, 12.1 and 1.1 condition 1) to ensure the issue of the performance shares is appropriate and equitable;
  • for performance shares to be appropriate and equitable, they should have very limited rights (specifically, they should not be transferable, carry any voting rights or rights to dividends or capital returns or any participation rights in surplus profits or assets on winding up in new issues such as bonus issues or entitlement issues);
  • if the number of ordinary shares into which the performance shares will convert is greater than the number of ordinary shares on the date of issue of the performance shares, this will not be an acceptable capital structure for Listing Rule 12.1;
  • performance milestones must be articulated by reference to objective criteria and an appropriate link between the milestone and the transaction or purpose of issue (not tied only to market price), as well as a fixed number or formula for calculating the number of ordinary shares on conversion and an expiry date (usually a maximum of 5 years from the date of issue); 
  • ASX will generally consider it appropriate and equitable for security holder approval to be required, with a voting exclusion statement for anyone participating in the issue (even if approval under Listing Rule 7.1 is not required); and
  • listed entities with performance shares on issue must make announcements on the occurrence of certain events in relation to the performance shares.

Other bodies

Takeovers Panel releases revised guidance on reviewing decisions

The revised version of Guidance Note 2: Reviewing Decisions published by the Takeovers Panel reflects recent changes to the Australian Securities and Investments Commission Regulations 2001 (Cth) to remove the obligation on the Panel to provide reasons at the time the Panel advises parties that it will not conduct proceedings in relation to the review of a decision.

The Takeovers Panel has released a revised version of its Guidance Note 2: Reviewing Decisions which deals with the review of decisions by the Panel - either on review of an initial Panel decision or of an ASIC decision regarding modification of chapters 6 or 6C of the Corporations Act 2001 (Cth). The amendments relate principally to a recent amendment to Regulation 21(2)(c) of the Australian Securities and Investments Commission Regulations 2001 (Cth), which removes the obligation on the Panel to provide reasons at the time the Panel advises parties that it will not conduct proceedings. The new Guidance Note also reflects some minor corrections to inconsistencies and errors that were made in the original Guidance Note 2.

See the media release dated 2 April 2014 and a marked up version of Guidance Note 2.


ATO announces new voluntary offshore income disclosure initiative

Project DO IT: Disclose Offshore Income Today is an initiative to encourage taxpayers who have omitted to declare foreign income or capital gains, or previously over-claimed tax deductions in relation to foreign income to advise the Australian Taxation Office (ATO) ahead of a global crackdown on international tax havens. Eligible taxpayers who may be concerned about their past taxation return should consider taking advantage of the initiative so as to minimise their penalties and avoid further investigation by the ATO. 

On 27 March 2014, the Australian Taxation Office announced Project DO IT: Disclose Offshore Income Today which is an initiative to allow eligible taxpayers to voluntarily come forward and make disclosures about unreported foreign income and assets, ahead of a global crackdown on international tax havens.

Project DO IT covers amounts not, or incorrectly, reported in tax returns, including:

  • foreign income or a transaction with an offshore structure;
  • deductions relating to foreign income that have been claimed incorrectly;
  • capital gains in respect of foreign assets or Australian assets transferred offshore; and
  • income from an offshore entity that is taxable in the taxpayer’s hands.

The ATO has indicated that taxpayers who disclose under Project DO IT will:

  • generally only be assessed for the last 4 years and be liable for a maximum shortfall penalty of just 10%, as well as full shortfall interest charges; and
  • not be investigated by the ATO or referred for criminal investigation on the basis of their disclosures.

Eligible taxpayers should lodge their disclosure statement with the ATO before 19 December 2014.

See the media release dated 27 March 2014 and further information released by the ATO.


KPMG reports on the application of ASIC guidance in operating and financial reviews

While KPMG’s report on the application of ASIC’s guidance in Regulatory Guide 247 on disclosure in an operating and financial review (OFR) shows significant improvement in disclosures by ASX 51-100 companies in the first year since the introduction of RG 247, 10 key areas for improvement were identified. While there is no legal requirement to comply with RG 247, it represents ASIC’s interpretation of the Corporations Act 2001 (Cth) and as such, reporting entities should familiarise themselves with the areas for improvement identified by KPMG and consider whether any changes to their current OFR disclosure are required. 

KPMG has published a study, Operating and Financial Reviews - Application of ASIC’s regulatory guide April 2014, which aims to help boards and management address the gaps in current reporting and includes observations on the application of ASIC’s Regulatory Guide 247 Effective disclosure in a an operating and financial reviews (RG 247) in the most recent reporting season.

The study shows a significant improvement of ASX 51-100 listed companies’ disclosures of operations, financial positions, business strategies and future prospects in the first year since the introduction of RG 247. Specifically, more than 30% of companies studied included enhanced information on strategies and prospects, almost 50% included enhanced business risk information and 30% either included a discussion of their financial position for the first time, or gave more in-depth analysis than previously.

However, the study highlights 10 key areas where entities should continue to focus their attention in preparing their OFRs (using over 30 pages of good disclosure examples drawn from recent practice within the ASX51-100) including:

  • including in the OFR all key information in investor presentations and market announcements, especially in relation to strategies, prospects and risks;
  • analysing key expense items, rather than just focussing on revenue and income items as well as discussing the undervalued or unrecognised assets and liabilities relevant to the company’s financial position; 
  • clearly identifying non-IFRS measures and explaining why they are useful;
  • including all significant assets and liabilities in the financial position discussion and ensuring the discussion enhances the reader’s understanding of the company’s financial position;
  • including a more long-term discussion of strategy and prospect (including risk information) beyond the next financial year and including tailored material risk disclosures;
  • discussing the company’s business model; and
  • locating all OFR information in a single section in the annual report and cross referencing from the directors’ report to the relevant pages of the annual report where OFR information is found outside of the directors’ report.

Cases

When will a right of rescission be lost?: Tony Saab v Earlwood Animal Pharm Pty Limited [2014] NSWSC 436

This case serves as a useful reminder that a contractual right of rescission can be lost if the party seeking to rescind caused or materially contributed to the event triggering the right of rescission or where such party waives that right. Prior to exercising a right of rescission, a contracting party should be confident that their hands are clean and that their subsequent conduct does not amount to a waiver of that right, to avoid a claim for wrongful termination by the counterparty.

Mr Saab entered into a contract for the purchase of a pharmacy from Earlwood Animal Pharm Pty Limited (Earlwood) (Contract) which included the following provisions:

  • a condition precedent that Mr Saab obtain the approval of the Pharmacy Council of NSW and Medicare Australia to conduct the business (Clause 33);
  • both parties must diligently process all necessary applications and satisfy the requirements of any party whose consent/approval is required (Clause 34); and 
  • either party is entitled to rescind the Contract if all approvals and/or consents have not been obtained within 90 days (Clause 41).

Mr Saab failed to obtain the approval of Medicare before the expiry of the 90 day period in Clause 41 due to a delay in the landlord consenting to the assignment of the lease (which Medicare required in order to give its approval). Mr Saab then sought a declaration that the Contract had been rescinded and Earlwood filed a cross-claim seeking a declaration that the Contract be terminated and for damages for wrongful termination.

In dismissing Earlwood’s cross claim, Young AJA in the Supreme Court of New South Wales found that:

  • the fair reading of Clause 41 was that time was of the essence (it would be meaningless if that was not so);
  • Mr Saab had a right of rescission under Clause 41 provided that he had not waived this right and had not caused or materially contributed to (or had brought about by his own act or omission) the failure to obtain the approval of Medicare in time;
  • there was no evidence that Mr Saab waived his right to rescind and on the facts, Mr Saab did not prevent or materially inhibit the fulfilment of the condition in Clause 33.

See the case.


Federal Court gives broad scope to the prohibited termination benefits regime in Part 2D.2 of the Corporations Act 2001 (Cth): Queensland Mining Corporation Ltd v Renshaw [2014] FCA 365

This case provides some useful guidance on Part 2D.2 of the Corporations Act 2001 (Cth) in relation to termination benefits. Importantly, the Court held that section 200B casts a very wide net to catch all payments or other benefits given in connection with the retirement from a managerial or executive office, and that section 200B cannot be trumped by any provisions in a contract. Executives should ensure that where their termination payments may not fall squarely within a statutory exception to section 200B, shareholder approval has been obtained (ideally promptly after their appointment) to reduce the risk of subsequently being required to repay them.

Mr Renshaw was managing director of Queensland Mining Corporation Limited (QMCL) and both he and his controlled entity, Butmall Pty Ltd (Butmall) were parties to a Services Agreement with QMCL (Services Agreement). Prior to the expiry of the Services Agreement, Mr Renshaw resigned in accordance with a Settlement Deed (Deed) between Mr Renshaw, Butmall and QMCL which provided for payments in connection with termination of Mr Renshaw’s employment to be made by QMCL to Mr Renshaw, Butmall and DFK Richard Hill Pty Ltd (DFK) (an accounting firm engaged by QMCL and also by Mr Renshaw personally) (Termination Payments).

Perry J in the Federal Court of Australia:

  • found that the Termination Payments contravened section 200B of Part 2D.2 of the Corporations Act 2001 (Cth) (Act) which precludes the giving of a benefit in connection with retirement from a managerial or executive office without shareholder approval (subject to certain exceptions); and
  • ordered repayment of the Termination Payments to QMCL pursuant to section 200J of the Act which deems payments made in contravention of section 200B to have been received by the recipient on trust for the giver.

In delivering her judgment, Perry J found that:

  • the term ‘benefit’ and the circumstances in which ‘a benefit is given in connection with a person’s retirement’ are defined broadly, with a priority for substance over form, no need for a direct causal connection and an express recognition that a person gives a benefit even if already obliged by contract to do so;
  • even if it could be said that the Termination Payments were no more than compensation for the relinquishment of rights under the Services Agreement, this did not mean that they were not ‘benefits’;
  • a payment to DFK purportedly in respect of superannuation contributions (for a period of more than 2 years after Mr Renshaw’s resignation) did not comprise an exempted “genuine superannuation contribution” under Regulation 2D.2.02(c) as there was no evidence that the amount had been paid to a super fund and in any event, the exemption did not extend to compensation for loss of future but as yet un-accrued superannuation entitlements; and
  • payments to DFK purportedly to be remitted to the ATO in payment of withholding tax in connection with the Termination Payments and purportedly representing a ‘grossing up’ payment for GST were benefits and were not caught by a statutory exception.

Perry J also found that the Termination Payments:

  • were not ‘a genuine payment by way of damages for breach of contract’ under section 200F(2)(a) - QMCL had not repudiated the Services Agreement, rather the Settlement Deed was negotiated between the parties; and
  • exceeded the value of the average annual base salary of Mr Renshaw over the relevant period prior to his resignation calculated under section 200F(2)(b) – For this calculation, Perry J excluded fees paid to Butmall, long service leave, bonus payments contingent on performance conditions, allowances, payments for share options and reimbursement of annual leave.

Perry J also found that:

  • QMCL was not estopped from seeking repayment on the basis that the Settlement Deed included a release clause and a clause requiring each party to obtain any necessary shareholder approvals – to find otherwise would allow section 200B to be contracted out of and in any event, no estoppel arose on the facts; and
  • payment of termination benefits could not subsequently be ratified by shareholders - prior approval is required.

See the case.


Be very cautious when in the position of a director of both parties to a contract: Agricultural Land Management Ltd v Jackson [No 2] [2014] WASC 102

This case provides a useful discussion on the duties of a person who is in the position of a director of both the vendor and the purchaser under a contract. In particular, the case highlights the fact that the duty to avoid conflicts can be breached even where the director does not actually prefer the interests of themselves or another associated entity but there is a potential for preference or a potential breach of duty. The case also provides some guidance on when a person will be ‘knowingly concerned’ in a contravention of the Corporations Act 2001 (Cth) by another person, namely where there is a ‘practical connection’ between the person’s acts or omissions and at least one of the essential elements of the contravention.

Mr Jackson and Mr Goff were directors of both Agricultural Land Management Ltd (Agricultural) (which was the responsible entity and trustee of Kalgoorlie Apartment Hotel Syndicate and the Agricultural Land Trust (together the Kalgoorlie Scheme)) and Bunbury Centro Pty Ltd (Bunbury). Agricultural and Bunbury were also related parties pursuant to section 208 of the Corporations Act 2001 (Cth) (Act) (as modified by section 601CA). Mr Jackson and Mr Goff signed a contract (Contract) for Agricultural (as purchaser) and for Bunbury (as vendor) in relation to some property in Kalgoorlie (Kalgoorlie Property). Following the failure of the development of the Kalgoorlie Property, Bunbury alleged numerous breaches of duty by Mr Jackson and Mr Goff.

Edelman J in the Supreme Court of Western Australia made the following findings:

  • In failing to take all reasonable steps that a reasonable person would take if in their position to ensure that Agricultural complied with the Kalgoorlie Scheme compliance plan and the related party provisions in the Act, Mr Jackson and Mr Goff breached their duty of care and diligence under section 180 and their duties under sections 601FD(1)(f)(i) and 601FD(1)(f)(iv) of the Act. In this regard, Mr Jackson and Mr Goff admitted that they breached the related party provisions in not obtaining the approval of the members of the Kalgoorlie Scheme and that they failed to comply with the obligations in the Kalgoorlie Scheme compliance plan to table the proposal to purchase the Kalgoorlie Property at a meeting of the directors of Agricultural (together with a due diligence report) and to obtain the compliance committee’s sign off for the proposed transaction with Bunbury as a related party;
  • Mr Jackson and Mr Goff breached their fiduciary duties to Agricultural to avoid placing themselves in a position in which their duties to Agricultural conflicted with their duties to Bunbury as another principal. While the evidence in this case did not show that Mr Jackson and Mr Goff actually preferred their own interests or the interests of Bunbury to the interests of Agricultural, Edelman J held that the conflict rule itself is not limited to situations in which a fiduciary actually prefers their own interest or the interests of associated parties. Rather, it also extends to situations involving a potential for preference or a potential for breach of duty where conflicting duties are owed to different principals;
  • Mr Jackson and Mr Goff’s fiduciary duties were not excluded by the Kalgoorlie Scheme constitution which provided that the law applying to trustees at common law did not apply to Agricultural as responsible entity, except as expressly provided in the Constitution of the Act. Leaving aside the issue of whether such clause could even succeed as an attempt to exclude the usual implication of the conflict duty, the relevant clause in the constitution is subject to the Act which imposes the conflict duty on Agricultural as a statutory trustee; and
  • Bunbury was “knowingly concerned” within section 79(c) of the Act in the breaches by Mr Jackson and Mr Goff of section 601FD(3) of the Act. A person has a ‘concern in’ the contravention if there is a ‘practical connection’ between that person’s act or omission and at least one of the essential elements of the contravention. In this case:
    • Bunbury’s entry into and execution of the Contract was an essential requirement for there to be a related party transaction; and
    • Bunbury, through its directors My Jackson and Mr Goff, had the relevant ‘knowledge’ that entry into the Contract would result in breaches of the compliance plan and the related party provisions.

See the case.


Federal Court cancels shares for non-disclosure of beneficial ownership in a company in financial strife: Australian Securities & Investment Commission v Craigside Company Limited (No 2) [2014] FCA 371

As part of its continuing focus on maintaining fair and efficient financial markets in Australia, ASIC has taken action against an offshore investor in Northwest Resources Limited (Northwest ) under section 1325A of the Corporations Act 2001 (Cth) for failing to disclose information about the ownership of shares in Northwest. Significantly, the Federal Court of Australia diverted from the traditional remedy of share divestment and instead ordered that, given the deteriorating financial and operating situation of Northwest and in circumstances where it would not push any other shareholders over the 20% threshold, cancellation of the relevant Northwest shares was the appropriate remedy.

Craigside Company Limited (Craigside) (a company incorporated in the British Virgin Islands and operating from Hong Kong) owned 15 million (more than 5%) of the shares in ASX-listed Northwest Resources Limited (Northwest) (Shares).

In 2011, ASIC had served a beneficial ownership tracing notice on Craigside in relation to the Shares pursuant to section 672A(1)(a) of the Corporations Act 2001 (Act). Craigside responded that it was merely a nominee shareholder but that it was aware of two individuals who had relevant interests in the Shares or who had given instructions about voting or other rights attached to the Shares. When beneficial ownership tracing notices were served on those individuals, each responded that they did not have a relevant interest in the Shares and did not know who did.

ASIC sought remedial orders from the Federal Court in relation to the Shares pursuant to section 1325A of the Act which enables the Court to make any orders it considers appropriate if a person states in response to a notice issued by ASIC that they do not have particular information about shares or persons who have a relevant interest.

Originally ASIC had intended to seek an order for divestment of the Shares (where the Shares would be sold by ASIC on-market and the proceeds paid to Craigside). However, due to the substantially deteriorating financial and operational position of Northwest, ASIC and Northwest agreed to jointly request an order that the Shares be cancelled rather than divested. The parties submitted, and Jagot J agreed, that:

  • there was a real question as to whether the Shares could be sold for a reasonable price and within a reasonable timeframe given Northwest’s financial position;
  • there was a real question as to whether Northwest would be able to issue further shares to fund its ongoing activities while the Shares were being disposed of; and
  • while the effect of cancellation would increase the proportionality of the ownership interest of and thus benefit other Northwest shareholders, this was not inappropriate including because it would not have the effect of moving any shareholder beyond the 20% threshold.

See the case.


When will a defect in a registration of a security interest be "seriously misleading"? Future Revelation ltd v Medica Radiology & Nuclear Meidicne Pty Ltd [2013] NSWSC 1741

The Supreme Court of New South Wales considered what constitutes a “seriously misleading” defect in a security interest registration under section 164 of the Personal Property Securities Act 2010 (Cth). The key issue is whether the defect will result in the registration not being disclosed on a search of the PPS Register. While it was ultimately found that the recording of the secured party’s ABN rather than its ACN in a financing statement was not seriously misleading (because a search of the PPS Register would have identified the secured party), this case is a useful reminder of the need to take care when completing financing statements to ensure that an error does not result in the security interest not being effective.

Future Revelation Pty Ltd (Future) sought a declaration that registrations on the Personal Property Securities Register were effective despite the fact that the ABN of the secured party was entered on the financing statement instead of its ACN.

Under the Personal Property Securities Act 2010 (Cth) (PPSA):

  • a financing statement must include certain details of the secured party, including its ACN (where it is a body corporate) (section 153): and
  • a security interest will be ineffective if there is a “seriously misleading” defect in any data relating to the registration (or there is a defect of a kind mentioned in section 165 (section 164).

In the absence of any definition of what is “seriously misleading”, Brereton J in the Supreme Court of New South Wales looked to Canadian case law (given that the PPSA is modelled on the Canadian legislation) which suggests that the test for whether a defect is seriously misleading is “whether it will result in the registration not being disclosed on a search.”

Brereton J noted that the purpose of registration is to enable the existence of a security interest in collateral to be searched and ascertained, and while there is facility in the PPS Register to search by reference to the grantor and the collateral, there is no facility to search by reference to the secured party.

On the basis of the above, Brereton J held that a search of the PPS Register would have disclosed the registration and as such, there was not a “seriously misleading” defect.

See the case.

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