In Check Issue 44 (September 2009)
In this issue
Amadio claims on the rise!
The value of good file notes
New Sale of Business Contract
Thinking about merging?
Advising companies under threat of insolvency
Amadio claims on the rise!
Amadio claims peaked at 10% of claims and 18% of the cost of claims in 1994. By 2002 they had dwindled away to less than 1%, but in the last two years they have moved back up to about 5% of the total cost of claims. The lack of available funds to start up or support ailing businesses seems to be part of the reason for this resurgence.
Solicitors need to be ever vigilant about signing solicitor’s certificates particularly where they involve third party security providers. Here are some reminders of what your firm should be doing:
- Only sign certificates for existing clients, not people who ‘walk in off the street’.
- Have just one person in the firm designated to sign the certificates.
- Always see the client alone, never with the borrower or other family members.
- Always ask for identification.
- Always ask why the security provider wants to go ahead with the transaction and record the answer.
- Refer the client off for independent financial advice, particularly if the transaction appears improvident.
- Make it clear to the client you are not providing financial advice.
- Keep a clear file note of the meeting with the client including in the file note: who was present, what questions you asked the client, what answers they gave, what advice you gave the client, how you tested that they understood what you had said, and importantly, how long the conference took.
- If you have the client sign an acknowledgement of what you have advised them, you still should make a file note of the conference because very often the client will allege later that no advice was given and they just signed whatever the lawyer asked them to without understanding what was going on.
For more detailed discussion see our risk management booklet, Learning from Amadio, which is available on our website.
The value of good file notes
A recent Supreme Court decision of Anthony v Vaclav [2009] VSC 357 illustrates the importance and value of good file notes and making inquiries of the client as to why they are acting as they are if
it appears to be to their detriment. The purchaser, Mr Anthony, sought specific performance of a contract of sale of a house owned by Mrs Vaclav. Mrs Vaclav had sought to avoid the contract of sale on the grounds of unconscionability, that it was procured by undue influence or was entered into when she was of unsound mind.
Mrs Vaclav was an elderly lady whose husband had died the previous year. She agreed to sell her home privately to Mr Anthony and sought advice from her long-time solicitor. The judge in the case accepted the evidence given by Mrs Vaclav’s solicitor. He took file notes of the critical conversations he had with Mrs Vaclav and the judge accepted that those conversations took place as recorded in the file notes. The solicitor gave evidence that he was concerned that Mrs Vaclav was vulnerable and that the price agreed upon was too low. He questioned her and satisfied himself that she knew what she was doing and was happy to sell her house at the price agreed. The judge found that ‘critically she was specifically advised by her solicitor on the important issue of the sale price, and understood his advice.’
The judge found that the timing and quality of Mrs Vaclav’s solicitor’s advice was such that any inequality between Mr Anthony and Mrs Vaclav was neutralised. He also found that there had been no undue influence nor was she of unsound mind.
New Sale of Business Contract
The LIV and the REIV will launch their September 2009 version of the Sale of Business Contract in early October. Copies will be available at the Law Institute of Victoria’s bookshop.
The new version has an easy to read format with the particulars of sale at the front of the document and a clear definitions and interpretation section and a contents page. There are 23 general conditions and 8 schedules. The agreement takes an even-handed approach, providing safeguards for both the vendor and the purchaser.
The contract deals clearly with matters which have been the source of claims in small business transactions in the past, including: restraint of trade, employee entitlements, apportionment of stock, notices of default, subject to finance, trial periods and liquor licensing.
Practitioners who practice in this area are encouraged to review the new contract.
Thinking about merging?
In this current economic climate there has been an increase in the movement of firms either by way of merger or acquisition. Your policy of insurance is a ‘claims made’ policy and claims histories will move with a firm in certain circumstances. Claims made after the merger but in relation to a pre-merger firm may also affect the new entity.
Firms considering merging or acquiring other firms should read the details about merging and buying a practice under the Policy and Premium section listed on the left-hand side of our website at www.lplc.com.au.
Advising companies under threat of insolvency
A recent decision of the New South Wales Supreme Court in a test case brought by ASIC brings home the difficulties solicitors face when advising directors of small companies nearing insolvency on how to protect the company assets.
Sections 181, 182 and 183 of the Corporations Act 2001 (Cth) (the Act) require directors of corporations to act in good faith, in the best interests of the corporation, for proper purposes and not to act improperly and use their position to gain advantage for themselves or cause detriment to the corporation.
The NSW Supreme Court in ASIC v Somerville & Ors [2009] NSWSC 934 held that a solicitor, Timothy Somerville, was personally liable along with various company directors for breaches by the directors of their duties under sections 181, 182 and 183 of the Act. The solicitor was liable as a person involved in the breaches because he aided, abetted, counselled or procured the contraventions.
The solicitor was found to have advised the directors of various companies in nearly identical terms on how to transfer all the assets of the companies into new entities in exchange for shares which were found to be valueless. Somerville prepared all the necessary documents to carry out the transactions and arranged execution of the documents. The various companies then became shells, holding only the valueless shares and being left with all the original creditors. The Court found that ‘there was no proper basis for the transactions other than to keep the benefit of the assets in another company without the burden of liabilities’.
It was argued that it would be extraordinary if a solicitor just giving advice should be liable under the aiding and abetting provisions of section 79 of the Act. The Court said that this would depend on the circumstances and:
'If advice is given the result of which brings about an action by directors in breach of the relevant sections of the Act, in
other words, when advice is given by a solicitor to carry out an improper activity and the solicitor does all the work involved in
carrying it out apart from signing documents, it seems to me that there can be no question as to liability.'
Given the current financial climate, practitioners will often be asked by directors to advise companies facing financial difficulties. Practitioners may advise as to the options facing the directors and the companies and as to the obligations and duties of the directors. This would include advising the directors of their potential exposures if they seek to undertake any steps to defeat or defraud creditors. If however the practitioner is then asked to assist the directors with a transaction which may breach the duties of the directors such as the disposal of assets to defeat or defraud creditors, the practitioner may face joint and several liability with the directors for aiding and abetting them in the breach of their duties.