Category Archives: Commercial Law

Update on Aussie price-gouging inquiry

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An update on this post from almost a year ago about price gouging in Australia (and New Zealand) by tech companies.

Adobe appears to have bowed to public pressure and cut the price of some of its products – a day after being summonsed to the parliamentary commission investigating the rorts. Adobe had earlier refused to attend voluntarily, which seems a rather strange strategy when you know the result will be a parliamentary summons. Whether the timing of the cuts will help the company in the inquiry or be construed as an admission of guilt remains to be seen, but the timing suggests an attempt to stave off some criticism.

It seems that the price cuts apply to New Zealand customers too, which is only sensible given the proximity of the markets and the fact that New Zealand authorities have signaled they are watching the Australian inquiry with interest.

There is no doubt that New Zealand (and Australian) consumers have been paying far more for identical software delivered via the internet. Australians have seen prices for some digital products stay well above pricing for US customers even as the AUD  exceeded parity with the greenback. It is getting technically harder for companies to enforce regional pricing differentials, and also harder to justify to consumers.

Ironically, when I had to buy Adobe Acrobat last year I was able to pay far less than the online price by buying it (from all places) at Warehouse Stationery. It was the first time in probably 10 years that I had bought software in a box, and will probably (hopefully) be the last! The boxed version was exactly the same software as offered via Adobe’s online store, but much cheaper, even with GST added.

I reiterate that companies should be free to set whatever prices they want (subject to competition laws), but it is good that they can be held accountable by public pressure, competition, and light-handed oversight such as the Australian parliamentary inquiry, which in this case at least has already prompted a voluntary response.

Electronic Transactions Act (Contract Formation) Amendment Bill

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A Bill to confirm that standard offer-and-acceptance principles applies to electronic contract formation has been drawn from the Members’ Ballot. It is the Electronic Transactions Act (Contract Formation) Amendment Bill, in the name of National MP Paul Goldsmith. The operative provision of the Bill reads:

“32A Contract formation

An offer that can be accepted by electronic communication is deemed to be accepted at the time of receipt of the acceptance by the offeror.”

Which simply confirms the general law that is presumed to apply anyway. The only exception is the old postal acceptance rule, which says that a contract is formed as soon as acceptance is posted in the mail (which could be several days before the offeror hears about the acceptance). There has been occasional talk over the years about whether the postal acceptance rule should extend to online scenarios – it’s good law school fodder – but the prevailing view is it should not. The issue was briefly considered in a 2009 Australian Federal Court case, Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA (No 4) [2009] FCA 522, in which the judge concluded in effect that the postal acceptance rule should not apply to acceptance by email.

So it will be perhaps somewhat nice to have this confirmed, but having such an anodyne and relatively trifling Bill in the Members’ Ballot does raise the prospect of (smart) “ballot stuffing” by Government MPs, to reduce the chances of more controversial bills, such as same-sex marriage or euthanasia bills, being drawn!

How robust are your escrow arrangements?

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My new Computerworld article talks about the “curious beast” of source code escrow:

The collapse of one of Telecom’s software providers Aldous demonstrates that the value of source code escrow is only as good as its implementation. This column looks at the Telecom situation, and outlines key components to a robust escrow arrangement.

One point of clarification is that my reference to “onerous” contracts does not refer strictly to the receiver’s powers, but to the receiver’s role, and if (as often happens) a liquidator is subsequently appointed, then the liquidator has express powers to disclaim onerous property.

The judgment referred to in the article, Telecom New Zealand Ltd v Aldous Ltd (in Rec) [2012] NZHC 1501 is not yet publically available, so I have attached it to this post (download here).

The situation confirms my thoughts about source code escrow a few years ago:

Except for special/high-end situations, code escrow has become increasingly irrelevant and has probably long been more hassle than it’s worth.

The impact of cloud computing / SAAS is also counterintuitive to source code escrow. I expect that data escrow will emerge as the more relevant consideration in the future.

The rise of the phoenix company

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The collapse of Maclean Computing Ltd, and the reported purchase of its assets by Maclean Technology Ltd, has led to some discussion on whether the new company may be a phoenix company (see here for the New Zealand definition). While many of the issues being discussed are moral rather than legal issues, here are my quick comments on some aspects of the phoenix rules generally:

Liability for debts

Under the phoenix rules (sections 386A-386F of the Companies Act 1993), a director of a phoenix company is not automatically liable for the debts of the original company. The director of a phoenix company will only be automatically liable (under the phoenix rules) for the relevant debts of the new company (i.e. the phoenix company). For example:

  • Company A Ltd collapses and goes into liquidation owing $1m.
  • Either before or within 5 years of the collapse, a director of Company A Ltd starts up a new company with a similar name, “Company A Technology Ltd”, and starts doing business out of the new company, apparently leaving unsecured creditors of the old company up the river.
  • Company A Technology Ltd will likely be a phoenix company.
  • The director will be personally liable for relevant debts (which has a particular meaning) of the Company A Technology Ltd (i.e. the phoenix company) if it fails.
  • But the director will not be liable for the $1m of debts of Company A Ltd (i.e. the original, failed company).

So the phoenix rules effectively give directors of “failed companies” (note there is a particular definition of that term) what some may consider a free pass on debts of their first company (although they may be liable to fines – see below – and there are also numerous other company law liabilities that may arise and result in personal liability; these are very selective thoughts only). That is the nature of limited liability companies, which are essential for modern commerce. The new rules are aimed at creditors who may be deceived by the phoenix company, rather than creditors of the original company. So a director can rack up large debts in your first company, have that company fail, launch a phoenix, and not be personally liable (under the phoenix rules) for the first company’s debts. But if the phoenix company “fails”, or any second, third or later phoenix company, then the director will likely be liable for those companies’ relevant debts (which should itself act as a deterrent, because it undermines the protection of limited liability).

The very simple way to avoid the phoenix rules is to avoid using a similar name to the failed company.

Capturing the debts of the original company

It may still be possible to make a director of a phoenix company liable for at least some debts of the original company as follows:

  • Put the original company into liquidation (if not already).
  • Apply for and obtain a “pooling order” under s 271 of the Companies Act 1993, in respect of the original and phoenix companies. This is not easy, but if granted has the effect of allowing the debts of the original company to be treated as debts of the phoenix company.
  • Then use the phoenix rules to make the director personally liable for the debts of the phoenix company, which, because of the pooling order, may include the obligation to pay the debts of the original company.

Note that pooling orders are not commonly obtained and have strict requirements, including that the two companies were “related” (as defined), hopelessly intermingled and effectively indistinguishable. This generally requires a period of overlap of existence between the two companies; a phoenix company formed after the collapse of the original company would be unlikely to qualify.

Penalties under the Companies Act

A person convicted of breaching the phoenix rules can face a fine of up to $200,000, or up to 5 years imprisonment. The fine gets paid to the Government, not go to creditors. These punishments will hopefully deter phoenix directors but will likely provide cold comfort to a stiffed creditor.

Other thoughts

There can be other potential remedies for creditors either directly under the Companies Act or, more likely, via the liquidation / receivership process. Remember that the phoenix rules are not intended to protect creditors of the original company.

In any case, at the end of the day it is usually a case of what is economic to pursue.

To end on a positive note, prevention is always better than cure. A key step that creditors can take (if available) to improve their chances in the event of a debtor’s insolvency is to become a secured creditor over appropriate collateral supported by a registered security interest protecting their position.

Company admin reforms

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New Zealand is lucky to have one of the best (if not the best) Companies Office websites in the world. We also have a very liberal company law regime – which is generally a good thing. It is little surprise therefore that New Zealand ranks #1 in the world for ease of setting up a business – the process is almost ridiculously easy and often only takes a few minutes. The proportionally large number of registered companies confirms that setting up and maintaining a company is an easy thing to do.

Two changes will affect this slightly.

First, from 1 August a $45 charge has been introduced for filing of annual returns (previously this was free). As the process is fully automated and does not involve filing accounts, it is difficult to see what this charge is actually for. But it should be a nice little earner: the Companies Office says there were 563,856 active companies at June 2011, and assuming each one files annual returns this will bring in over $25 million.

This will also sting those people who, for whatever reason, sit on numerous shelf companies. Someone with say ten shelf companies will now have an annual holding cost of at least $450 per year, or face having them struck off.

The second, more substantive change (which has not yet occured) are reforms requiring, among other things, companies to have at least one director or agent resident in New Zealand (or an “enforcement country” with whom we have reciprocal arrangements). As Stuff reports:

The Government is fast-tracking reforms to prevent New Zealand companies being used as tools by international criminals.

The move comes after criticism from opposition parties that the Government was dragging its feet on the issue and as the Sunday Star-Times uncovers New Zealand links to a rort of the Ukraine health system, where publicly purchased vaccines were subjected to 300 per cent mark-ups.

As in previous cases of shell company abuse, the vaccine scam relied on New Zealand-registered companies using foreign directors – in this case a Panamanian mother – to obscure transactions.

This is a sensible and probably overdue change. It will not affect the vast majority of New Zealand companies. But there have been numerous instances of New Zealand companies having no local directors, being involved in international money laundering. The requirement for a local director / agent will address this by:

  1. Making it harder to register a company without a New Zealand resident being involved; and
  2. Ensuring (or at least making more likely) that there is at least one person in the jurisdiction (or one with enforcement arrangements in place) who can be investigated or potentially prosecuted if the company becomes involved in suspicious activities.

NZ watching Aussie price-gouging probe

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Submissions have closed on the Australian inquiry into IT price gouging. Stuff reports that New Zealand officials are keeping watch:

New Zealand officials are watching with interest an Australian investigation into whether technology companies are gouging consumers with the price they charge for software and online content…

Similar complaints of over-charging were levelled at information technology companies by consumer groups in New Zealand last year and New Zealand Communications and Information Technology Minister Amy Adams told Fairfax NZ earlier this month that she would be watching the Australian review with “considerable interest”. Adams said she would expect the Commerce Commission to step in if it emerged there were issues here that could be attributed to anti-competitive practices.

This strongly suggests that New Zealand will follow Australia’s lead. Anecdotally, there is little difference between IT pricing in New Zealand and Australia, and if the ACCC takes enforcement action in Australia, the same grounds probably exist to do so here.

It is worth reminding that a prosecution will only follow if there is anti-competitive behaviour alleged. There is no law against “price-gouging” itself, and nor should there be save for special circumstances, however if the price-gouging is a result of (say) price fixing, legal concerns can arise.