JAN BOWEN is renowned for her ability to express the law in a way clearly understood by the non-lawyer. Her 25 books include the best-selling The Macquarie Easy Guide to Australian law and The Reader's Digest Legal Question and Answer Book. She has been at the fore-front of the movement towards plain English and the law, first with the Law Foundation of New South Wales and then with the Law Society of New South Wales. She now runs her consultancy, Plain English Communications, which advises all manner of businesses, both large and small, on how to communicate in a way that people can understand. To keep life interesting, Jan has also been a columnist with the Australian Women's Weekly, writes travel books, and has authored two interview/profile books, The Fabulous Fifties and Men Talk. Jan Bowen lives in Sydney with her husband and has three sons. RICHARD SCHMIDT is a partner of Sydney firm Bull, Son & Schmidt, specialising in business law. In his 26 years of practice, he has been closely involved with a wide range of clients and their problems — from partnerships in good times and bad to expanding companies and those in financial difficulties. The firm's client base includes everything from sandwich shops to airlines, with turnovers of a few thousand dollars to several million. Richard's interests in matters other than the law have helped him to develop a practical and commercial approach to legal problems. He is happily married with two children.
The author extends her grateful thanks for their invaluable help to the Small Business Enterprise Centre, and especially to Richard Schmidt for his ongoing involvement.
This book has been published with the kind assistance of the Law Foundation of New South Wales to contribute to a better community understanding of our laws.
YOUR BUSINESS AND THE LAW 2ND EDITION
JAN BOWEN with assistance from Richard Schmidt
ALLEN & UNWIN
Copyright © Jan Bowen, 1991, 1998 Your Business and the Law is intended to help members of the small-business community find out more about the law as it applies to them. While every effort has been made to ensure accuracy at the time of writing, the law is complex and constantly changing and legal exactness is not always possible in a book of this nature. The book should not be used as a substitute for professional legal advice, and no responsibility is accepted by the author, publishers and consultants for any loss, damage or injury, financial or otherwise, suffered by any person acting upon or relying on the information contained in it. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. First edition published in 1991 as Small Business and the Law Second edition published in 1998 by Allen & Unwin 9 Atchison Street, St Leonards NSW 2065 Australia Phone: (61 2) 9901 4088 Fax: (61 2) 9906 2218 E-mail:
[email protected] Web: http://www.allen-unwin.com.au National Library of Australia Cataloguing-in-Publication entry: Bowen, Jan. Your business and the law. 2nd ed. Includes index. ISBN 1 86448 533 7. 1. 2.
Small business — Law and legislation — Australia. I. Schmidt, Richard, 1945-. II. Title.
346.940652 Set in 10/12 pt Garamond by DOCUPRO, Sydney Printed by Australian Print Group, Maryborough, Victoria 10 9 8 7 6 5 4 3 2 1
Contents Preface Abbreviations PART 1 ESTABLISHING A BUSINESS 1 Starting out Licences and permits • Registering the name • Deciding on the structure • A sole trader • Questions on starting a business • Questions on buying a business 2 A partnership How to set up a partnership • If there is no written agreement • Legal liability of partners • Limited partnerships • Number of partners • Professional restrictions • Name of partnership • When a partnership does not exist 3 Companies, trading trusts and joint ventures Types of companies • Limited or unlimited? • Public or private? • Company capital • Forming a proprietary company • Memorandum and articles of association • The company name • The Australian Company Number • The common seal • The registered office • After incorporation • Operating a company • Duties of directors • Duties of the company secretary • Financial records • Registers • Continuing life of a company • The cost of a company • When to use a company • Proposed changes • Trading trusts • Joint ventures 4 Acquiring a franchise What is a franchise? • Taking a franchise • The franchise agreement • General laws applying to franchising
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Acquiring premises Leasing premises • Buying premises
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PART 2 OPERATING A BUSINESS 6 Legal documents Contracts • What is a contract? • Contracts in writing • Terms of a contract • False and misleading information • Unfair contracts • Broken contracts • Deeds • Statutory declarations • Affidavits 7 Consumer protection obligations Warranties on goods you sell • Remedies for faulty goods • Warranties on services • Remedies for unsatisfactory services • Consequential loss • Dangerous services • Advertising your product 8 Unfair trading Misleading or deceptive conduct • Unconscionable conduct • Exclusive dealing • Abuse of market power • Price fixing • Resale price maintenance • Price discrimination • Market-sharing arrangements 9 Granting credit The Consumer Credit Code • Advertising goods on credit • Insurance • Lay-bys • Checking a customer's creditworthiness • Recovering debts 10 Employing staff Australian workplace agreements • Rates of pay • Overtime • Deductions from pay • Leave • Employees' duties • Disciplining employees • Right to search employees • Employees' right to expenses • Vicarious liability for employees • Restrictions of future work • Part-time and casual employees • Equal employment opportunity • Health and safety • Workers compensation • Employment records and inspections • Terminating employment 11 Principal and agent What is an agent? • Creating an agency • Rights and duties of an agent • Liability of an agent • Ending an agency 12 Protecting business ideas and information Copyright • Patents • Designs • Trademarks • Passing off • Trade secrets 13 Negligence and liability What is negligence? • Product liability • Occupier's liability 14 Insurance Types of insurance • Basic rules of insurance • Cover notes • Subrogation • Indemnity • Averaging • Renewal • Cancellation of a policy • Complaints
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CONTENTS
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The bank The bank-customer relationship • Advice from the bank • Opening a bank account • Joint accounts • Cheques • Cash transaction reports • Complaints against banks Tax Tax you pay • Income tax • Tax deductions • Depreciation • Tax rebates • Losses • Saving tax • Provisional tax • Fringe benefits tax • Capital gains tax • Tax file number • Superannuation guarantee • Sales tax • Payroll tax • Land tax • Working from home • Buying or selling a business • Keeping records • Objecting to a tax assessment • Tax audits and investigations • Tax agents • Tax you deduct for employees • Group tax • Medicare levy • Higher Education Contribution Scheme (HECS) • Child support • Prescribed payments tax • Other taxes and charges • Customs duty • Stamp duty • Bank charges Bankruptcy and insolvency Bankruptcy • An informal arrangement with your creditors • A debt agreement • A Part X agreement • Voluntary bankruptcy • Payment of creditors • Property owned by your spouse • Advantages of bankruptcy • Disadvantages of bankruptcy • Creditors' petitions • Corporate insolvency • External administration • Liquidation
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195 PART 3 THE LEGAL SYSTEM 18 How the legal system operates The court system • The court process • Enforcing a court order • Alternative dispute resolution • What to expect from a lawyer Index
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Preface Small business is a growth area. More and more Australians are choosing to `go it alone' — some because of unemployment, some because they have an idea they want to try and some because they want what they consider to be the freedom and flexibility that comes with being your own boss. Never before has it been so easy to start a business from home. Computers, e-mail, faxes, mobile phones, answering services and other technological developments mean that you need never be out of touch and no longer need to provide office accommodation for receptionists, telephonists and other staff. The end of the kitchen table may still fall short of an acceptable business environment but a spare room is easily convertible, at relatively modest expense. On the other hand, business operation has rarely been more complicated and fraught with pitfalls. Laws of one kind or another surround every aspect of conducting a business and people embarking on an enterprise must know what they are or risk severe penalties, including imprisonment. Anyone who sells goods or services, is engaged with manufacturing a product, has to raise finance, is director of even a small family company, employs staff, engages contractors, or deals with suppliers or customers must know what law relates to their dealings or risk being in breach of that law. It is a truism to say that ignorance of the law is no excuse but such leeway as may have been granted in the past no longer exists. The courts have made it very clear that they will
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not deal lightly with people who elect to go into business but fail to familiarise themselves with the obligations that entails. The first edition of this book was published in 1991. Since then much has changed. In particular, the laws relating to employees, such as those dealing with unfair dismissal, have become more rigorous. The court decision in the Morley case changed forever the idea that a director of a company, even a small family company, could plead ignorance of the affairs of the company in mitigation of responsibility for the company not meeting its obligations. Credit laws are now vastly different and affect both those providing credit and those obtaining credit. The laws relating to insolvency have been overhauled so that procedures are now simpler, with more scope for recovery by trading out of financial difficulties. Those in small business who fail to keep up to date with the law in all areas that affect their business do so at their peril and sometimes to their disadvantage, since some of the laws are there to protect small businesses from unfair practices by large corporations with seemingly unlimited resources. This second edition of Your Business and the Law provides a basic, readily accessible reference, a series of signposts, in clear easy-to-understand language. Part of running a small business is to get proper, professional advice — but sometimes it is difficult to know whether you need that advice. This book will alert you to possible problems, tell you what to look out for and, if you do need professional help and advice, will enable you to make that advice more cost-effective by knowing what questions to ask. Jan Bowen
Abbreviations ACCC ACN ADR AIPO AIRC ASC AWA CGT CPI CRAA CTRA FBT HECS IEC ITSA PAYE SAA TAFE TFN
The Australian Competition and Consumer Commission (formerly the Trade Practices Commission) Australian Company Number Alternative Dispute Resolution Australian Industrial Property Organisation Australian Industrial Relations Commission Australian Securities Commission Australian Workplace Agreement capital gains tax Consumer Price Index Credit Reference Association of Australia Cash Transaction Report Agency fringe benefits tax Higher Education Contribution Scheme Insurance Enquiries and Complaints The Insolvency and Trustee Service of Australia Pay As You Earn (tax) Standards Association of Australia Tertiary and Further Education tax file number
PART 1 Establishing a business
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1 Starting out The first decisions you must make when you resolve to start up in business on your own are what licences or permits you will need, what name the business will have, and how it will be structured.
LICENCES AND PERMITS Depending on the type of business you are proposing, you may need a licence or permit to run it. The State small business agency is the best place to find out what you need and how to go about getting it.
REGISTERING THE NAME If you will be carrying on business in a name other than your own, you must register the name, so that the public, creditors and the like can identify who is operating the business, and pursue any debts or other legal rights. The registration process is not difficult. You simply fill in a form and lodge it with the business affairs authority in your State. You will be asked to provide details of: the name of the business
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the nature of the business the place where business is conducted the date of commencement the name and address of each person carrying on the business. A business name will not be registered if: it is being used by another business it could be confused with another business it is obscene it implies that the business is associated with certain bodies, such as the government, the royal family, or an ex-services organisation it implies that the business is a charity or non-profit organisation. If the name is available, you pay a fee and registration will be granted. You will receive a certificate of registration which must be displayed where it can easily be seen at your place of business. The business name must also be displayed prominently outside your place of business, and must appear on all business correspondence, invoices, receipts, cheques and any other business documents. The registration must be renewed every three years. If you are forming a company, the name will be registered as part of the procedure for incorporation (see chapter 3, `Companies, trading trusts and joint ventures'), and in this case you will lodge the documents with the Australian Securities Commission (ASC).
DECIDING ON THE STRUCTURE To operate your business, you have the choice of being a single proprietor (usually called a sole trader), forming a partnership with someone else, or forming a company. Each has its pluses and minuses and you should consider the options carefully in consultation with an accountant or lawyer. However, what you decide is not set in concrete for all time and can be changed if circumstances change. A great many businesses in Australia have started as a single proprietorship, or perhaps a partnership of two or three, have been converted into a private company, and have eventually grown into a public company listed on the stock exchange.
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A SOLE TRADER A sole trader is the simplest form of business entity. It is simply a person who owns and operates a business on their own. If you are a sole trader you may do everything involved in the business yourself, such as organising the finance, paying the bills, ordering the stock, servicing the customers and making the deliveries; or you may do very little, employing staff to carry out the various tasks. Independent corner store owners, tradespeople and market gardeners are all typical sole traders. So is the person who sits on the side of the road with a station wagon full of fruit and a sign saying `WATERMELONS FOR SALE'. You may be operating as a sole trader without being aware of it. Thousands of people work from home, perhaps doing word-processing or writing, or another activity which yields them an income. All of these people are sole traders. You can become a sole trader without taking any formal steps at all. You may decide to operate as a sole trader if your business is small and there is no need for a large amount of capital. Raising capital may be difficult as a sole trader, and you will have to rely on your savings, profits from the business, or an overdraft or personal loan. Once a business becomes large and sophisticated, it is usually no longer appropriate to operate as a sole trader. You can operate as a sole trader using your own name or a business name. If you use your own name, for example `Amelia Jones, Caterer', there is no need to register the name. However, if you use a business name, such as `Amelia Jones Catering Services', then it must be registered. Although there are no formal steps as such involved in setting up a sole-trader business, of course you are subject to normal business regulation, in the same way as other businesses. You will need to acquaint yourself with such matters as tax laws, health and safety laws, workers compensation, council by-laws, public liability insurance, and environmental, pollution and noise-control laws. You may need a licence, for example, if you intend to operate something like a childcare centre. You must also conform with any standards laid down by the authorities for your particular type of business. For example, you may not operate as a plumber without being registered with the plumbers' registration authority, which will require evidence of a successfully completed apprenticeship.
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Apart from the ease of establishment and operation, the main factor to consider in setting up business as a sole trader is the nature of your legal liability. You will be totally liable for all debts, both private and business. If the business fails, your private assets, including your home and car, may be seized to pay your debts. This liability extends to injury or damage caused in the course of business by you or any employees you may have. For example, if a customer is injured on your premises and sues you for negligence, you will be personally liable (although you can and should insure for public liability). There may also be some tax disadvantages, both as to the rate of tax and the payment of provisional tax. A sole-trader business automatically comes to an end if you die.
QUESTIONS ON STARTING A BUSINESS Many people start up businesses each year for a variety of reasons, and hope to achieve success in one or many ways. Unfortunately, a lot of these businesses will fail. This is due in many cases to hasty, ill-informed or emotional decisions to go into business. All business decisions should be made on objective commercial principles. To assist in the decision-making process about starting in business, you should consider questions in the following six categories: personal location financial legal marketing growth. Remember that these are only the basic questions to give you some guidance. You should check out your ideas and theories with an experienced lawyer and/or accountant.
Personal 1
Why do you want to start in business — are you really only buying yourself a job? If so, there may be better ways to find work.
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Do you have the necessary personal qualities and skills to succeed in business? Seek an unbiased opinion from a non-family businessperson. Have you had experience in the type of business you wish to run? If not, it is advisable to work in the industry to gain this experience. Have you had any business-management training? If not, consider enrolling in a short-term course at TAFE or a commercial institution. Have you good people skills and the ability to control staff? Can you relate professionally to staff who may be family members? You may need to discuss this with your family carefully before you commit yourself to long hours working and living together.
Location 1 2 3
Do you know the preferred location and type of premises for your business? Remember, location is vital to a retail outlet, and important to some service firms. Does your proposed location have easy access to all facilities that you will require? Think about parking, suppliers' access and maintenance, for instance. Have you discussed with a solicitor the provisions of any lease that may have been offered to you? Do not sign any lease without reading all the clauses.
Financial 1 2 3 4
Have you estimated just how much it will cost you to set up in business? Remember the rental bond, fittings, stamp duty and other fixed costs. Do you know what the cost of running the business will be? At the very least there will be rent, light, insurance, telephone, and possibly wages. How much money can you put into the business? Remember that your ownership is the amount of your cash in the business, not the money you borrow. Do you understand where to find finance you need and what the cost will be to borrow? Do not use short-term finance to fund long-term assets.
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Can you afford to start in business, meet the business costs and support yourself until enough income is produced to support you and meet costs? Check out your plans with an accountant. It may be some months before you can draw profits from the business. Has your accountant prepared a financial plan and budget for the next twelve months? This should form the basis of any application to a bank for a business loan or overdraft facility. Have you discussed with an accountant the records you need to keep to maintain control of your business? The right record-keeping system can save time and money when you deal with your accounts, the Tax Office and corporate affairs agencies.
Legal 1 2
3
Do you know what legislation affects your proposed business? Are you aware of the registrations and licences you may need? Check with the business licence office. What is the best business structure for your proposed venture? Check with a solicitor when considering how you will conduct business and whether limited liability is important to you. What are the local council regulations and zoning requirements concerning both your type of business and premises? You will have to comply with these. Check with your council before entering into any lease of premises.
Marketing 1 2
3 4
Do you really have something to offer in the marketplace that people will want to buy? It doesn't matter how good it is if no one will buy it. Have you a new product or service to offer, or will you be competing for a share of an established and defined market? Is there sufficient business available to support your entry into the industry? Have you consulted with the relevant industry association to discuss your intended venture, and trends in your industry? Have you spoken with possible suppliers to find out their terms of supply? The quantities you anticipate may not be available on the best terms.
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Have you prepared a marketing plan for the business? A major part of this plan is to look at the internal strengths and weaknesses and external opportunities and threats that affect your planned business. Do you know the best forms of advertising and promotion for your business? You will have to include money in your budget for some way of letting customers know you're in the market. Can you avoid competing only on price? Most people buy because of price and at least one of a number of other factors, such as convenience, quality, courtesy or after-sales service.
Growth 1
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Will the nature of your business allow you to add products/ services as demand changes? The ability to diversify may be the difference between success and failure when a new competitor enters the field. How will you keep up-to-date with new technology or product development? Find out the magazines to read and the industry associations to be part of. Where do you think your business will be in five years' time? Think about your personal goals and likely changes in clients' demand, so you can plan effectively.
QUESTIONS ON BUYING A BUSINESS Your decision about whether to buy a business will be a crucial one. It will affect the future of you and your family for years to come. It is surprising just how many people rush into the transaction without adequate preparation. They tend to arrive at their decision guided more by emotion than by logic. The fact is that buying a business is a complicated matter. For example, you must be sure that any goodwill figure you agree to pay is in line with industry averages. There are a number of questions you should address before closing the deal. When you are deciding whether to buy a business, it is suggested that you address seven key areas:
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sales costs profits assets the seller and you the purchase agreement legal issues. Remember that these are only the basic steps to give you some guidance. For advice and protection you should seek the services of an experienced solicitor and an accountant.
Sales 1 2 3
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Is the business in a good location? Consider access, parking, visibility. What is the sales pattern year by year and month by month? Is the pattern seasonal or related to some business cycle? Do the records show that the rate of stock turnover is in line with what the current owner states? Check that existing stock does not include old or unsaleable items. Also check that the stock level has not been run down. A low level of stock will mean you need additional finance to build up to a reasonable trading level. Will you be able to continue buying from existing suppliers? Will you be able to increase sales with current resources? Are new developments going to be commenced or opened in a nearby location which could affect your trade? Remember that any new business is an extra competitor. Is the business expanding, decreasing or remaining static? What are the unique competitive advantages of the business? Does a small percentage of customers represent a large percentage of sales?
Costs 1 2 3
Are all the anticipated expenses shown in the records? Will you have the same level of expenses? Is the business going to generate sufficient profits to give you a reasonable income, in addition to an adequate profit margin? Is the depreciation claimed for the equipment reasonable?
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Have the terms of the lease been explained to you by your solicitor? What effect would decreased or increased sales have on your costs? Has the stock been accurately shown at true current value, for calculating actual costs of goods sold? Is the stock resaleable?
Profits 1 2 3
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Look at the effects of increased or decreased sales on your profit. Are the profits adequate to warrant taking the risk? Have you considered what effect inflation will have on sales and on costs? Analyse the financial records for as many years as possible. This includes balance sheets, profit and loss statements, purchases and sales records. Is the gross profit declining over time? This may indicate increasing competition. Check that the gross profit is in line with the industry average. Have the records been well-kept? Check this.
Assets 1
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What exactly are you buying? If there is an asset list, make certain that you check each item off. Check the depreciation schedule for the equipment, fixtures and fittings, etc. What are the book value, the market value and the replacement value of the fixed assets? Check that the equipment is in good repair. Is it the equipment you need, or is it in danger of becoming obsolete? Can the equipment be sold easily? Is any equipment leased? If so, check profit and loss statement expenses items and compare with lease company charges. Have you consulted with the various specialists familiar with the valuation of real estate (Australian Institute of Land Administrators and Valuers), plant and equipment (equipment dealers and auctioneers) and fixtures and fittings (auctioneers and agents)? Have you checked the business credit rating with suppliers and checked to see if the suppliers will continue to trade with you? Have you checked that cash flow is sufficient to pay your debts and provide a good return on your investment?
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The seller and you 1 2 3 4 5 6 7
8
What are the reasons for the sale of the business? Is the seller being cooperative in supplying information? If not, why not? Is the seller willing to sign a non-compete agreement [restrictive covenant]? Otherwise they may start a similar business down the street. Will the seller train you and assist you after purchase? Is the seller prepared to give you a trial in the business for one to two weeks? Is this the type of business you were actually looking for? Is the type and size of business compatible with your interests, personality, experience and financial capacity? If you are ready to negotiate: Do you feel comfortable with the business? Can you see yourself in the business serving the customers with their needs? Can you afford the business? Are there any key employees and, if so, is there a service contract?
The purchase agreement 1
2 3
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When considering the purchase agreement, do you remember that a business is worth no more than the highest price someone will pay or no less than the lowest price the seller will accept? Does the draft agreement cover what assets are to be purchased, what liabilities are to be assumed and when the business is to be taken over? When drafting your offer, have you included escape clauses covering obtaining finance, inspecting all records, receiving necessary licenses and rights, and minimum trading levels being met during the trial period? Have you a record of all the cash sales and banking during the trial period, to ascertain sales turnover?
Legal issues 1
Have you consulted a solicitor about the terms and conditions of any applicable lease agreements and your rights under these agreements?
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Does the agreement reflect what you have agreed to and/or does it contain things you have not agreed to? Has there been a recent change in landlord? If so an increase in rent may be in the offing or there may be redevelopment plans. Have there been any rezoning applications lodged with regard to either this business or nearby locations? Are there any outstanding notices from council for work needed on the premises? Do you understand your obligations under the business structure you intend to operate — that is, as sole trader, partnership, or Pty Ltd (proprietary limited)? You should consult a solicitor, accountant or business adviser. Most Fair Trading or Consumer Affairs offices have a small business section with experienced business advisers who can help develop your managerial skills. This service is free and confidential. What warranties do you need and is the seller prepared to give these? Remember: Failing to plan means planning to fail.
2 A partnership A partnership is legally defined as the relationship that exists between persons carrying on business in common with a view to making a profit. In essence, partners are owners of the business, with roughly equal status, rather than one person being superior to the other as in the employer/employee relationship. Of course sometimes one partner owns more or less than other partners, or one partner may be designated as `senior partner' (common in professional partnerships), but this is an internal matter and does not affect the way the partnership is regarded in law. Unlike a company, a partnership is not a separate legal entity but is simply an arrangement between the individuals who comprise it. Partnerships are often set up to pool money and experience. They were virtually unknown before the fifteenth and sixteenth centuries. Until then, business life was uncomplicated and limited in its scope, and people usually muddled along on their own. With the discovery of the New World, however, merchants started to speculate and business ventures began to involve large amounts of high-risk capital. Businesspeople found it made sense to gather together to raise the necessary funds and spread the risk. In the past, partnerships have often been formed for tax reasons, to split income between high and low earning members of a family, but a series of cases where such arrangements were successfully challenged by the Tax Office has meant that this is
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no longer such an attractive option. At the very least, anyone wanting to take such a step should get expert advice. Most professionals, for example, lawyers and accountants, still operate as partnerships, although stockbrokers, for example, now tend to favour limited liability companies. A partnership is one of the few areas of law where the doctrine of caveat emptor (let the buyer beware) still applies. A partnership must comply with any applicable laws as to misleading or deceptive conduct, for example, the Fair Trading laws, but for the most part it is still the responsibility of an incoming partner to satisfy themselves as to the soundness of the partnership and to remember that because personal liability is unlimited, private assets as well as their capital contribution to the partnership are at risk.
HOW TO SET UP A PARTNERSHIP Like a sole proprietorship, there are no formal requirements for establishing a partnership, other than agreement between the partners. There does not even have to be a written partnership agreement. One of the most long-standing and successful Australian partnerships, generating many millions of dollars, has been that between film star Paul Hogan and his manager, John Cornell, and it is said that it is based merely on a handshake. This is not, however, recommended. Partners do not have to register a partnership with any external authority, but they should have a written partnership agreement between themselves setting out the terms of the partnership. In most circumstances, not to do so is to invite argument and dispute, and displays a lack of business commonsense. The partnership agreement should have in it: the names and addresses of the partners the name and purpose of the business how much capital each partner will contribute to the partnership and what interest (if any) will be paid on that capital how the profits (and losses) will be shared what authority partners have to act on behalf of the partnership the role of each partner in the management of the business how the accounts will be kept
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where bank accounts are to be kept and who the signatories are what will happen if a partner dies or becomes bankrupt how new partners will be admitted what will happen when a partner retires how partners can leave the partnership how the partnership will be wound up, including the distribution of partnership assets how disputes among partners will be resolved. Apart from these broad aspects, if you are entering into a partnership you should ensure that your lawyer tailors the agreement to your particular needs. Other matters you may wish to consider are whether the partners will be paid a salary before profits are divided, and what holidays partners will be entitled to and when they should be taken.
IF THERE IS NO WRITTEN AGREEMENT If there is no written partnership agreement, partners will be bound by the law of partnerships which lays down some basic rules. The law says that partners must always act with the utmost good faith in their dealings with one another. All partners are entitled to share equally in any profits made by the business and must contribute equally to any losses. This is one of the matters that is often changed by a partnership agreement. Professional partnerships, for example, often say that longstanding partners are entitled to a larger share than newer partners. Similarly, if one partner puts in more capital than another, it might be agreed that the greater contributor should get a greater share of the profits. Each partner is wholly responsible for all the firm's contracts and dealings. This principle cannot be stressed too strongly and its ramifications should be clearly understood. It means that all partners can be bound by an agreement signed by only one partner and that any individual partner can be held responsible for debts incurred by another individual partner. One of the important features of a partnership agreement is usually to limit the extent to which partners can suffer from the possible bad judgment or behaviour of another partner — but it is virtually impossible to avoid
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liability completely. The principle has meant that some professional firms are having difficulty in attracting partners, because people are reluctant to put themselves in the position of being liable for another partner's possible dishonesty, especially where a partnership is large and diverse so that it is impossible to know other partners well and make a judgment as to their trustworthiness. An added disincentive is that a dishonest partner may invalidate the firm's insurance. All partners are equally responsible for the firm's management, and are entitled to participate in it. Every partner has a right to see the firm's accounts, which must be kept at the place of business. A partner must not set up business in competition with the other partners without their agreement. If this happens, the other partners are entitled to a share in the profits from the competing business. The law also provides that decisions that affect the nature of the partnership, such as the admission of a new partner or the expulsion of an existing partner, must be unanimous. Other decisions can be made by a majority. If there is no written agreement, the partnership will automatically come to an end if one partner retires, leaves or dies. Each state has its own Partnership Act which contains other provisions of various kinds, however, those outlined above are some of the most common and important.
LEGAL LIABILITY OF PARTNERS Except in very special circumstances, in law, partners cannot avoid being individually responsible for obligations of the firm, especially debts entered into with third parties. This is the case even if the partnership agreement provides otherwise. The law takes the view that outsiders dealing with the firm should not be affected by the internal arrangements between the partners, especially since they are unlikely to know about them. The partnership agreement might say that partners will bear the costs of their own mistakes or negligent actions, but this cannot be enforced as far as a third party is concerned. In other words, a third party can nearly always recover compensation from any of the partners, even partners who were not responsible for the
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loss, and it is then up to the innocent partners to recover their money from the partner at fault — if they can. Even if a partner acts outside the scope of the authority given to them in the partnership agreement, the other partners may still be liable, unless the third party knew that the authority was being exceeded. Sometimes a third party might be expected to infer that an action was outside the scope of authority — for example, if a partner in a business that didn't require much travel bought a luxury car on borrowed funds allegedly for use in the business, the lending body might be expected to question their authority to do so. Consequently, third parties should not rely completely on the provision that costs can be recovered from any of the partners — it depends on the circumstances. The partners themselves should always be aware of what is happening in their business. The liability of partners towards one another even extends as far as fraud, if the fraud arises out of the normal course of the business. Mrs P dealt with a firm of solicitors called H and W. She was specifically a client of Mr H senior, but on one occasion he was unavailable and Mrs P was seen by his son, who advised her to put her money into a highly questionable company. Mrs P's money was not seen again and, when it became apparent that Mr H junior had also disappeared, she sued the other two partners. The court decided that they were liable, since advising clients on the investment of money falls within the normal scope of a solicitor's business. But the court also decided that the other two partners were not liable for another sum of money lost by Mrs P as a result of becoming involved with Mr H junior in a business transaction. The court said that this transaction was quite outside the scope of a solicitor's business, and was a business engagement entered into by independent contracting parties, not a solicitor and client.
LIMITED PARTNERSHIPS It is sometimes possible to enter into a limited partnership, which means that you contribute capital but liability is restricted to the amount invested rather than being unlimited, as in the case of an
A PARTNERSHIP
19
ordinary partnership. The disadvantage of such an arrangement is that limited partners (sometimes known as sleeping partners) do not take part in the management of the firm and so cannot intervene if they see things going wrong. If they do become involved, they automatically cease to be limited partners. Since 1992, a limited partnership has been treated as a company for tax purposes, so the previous tax advantages, especially with regard to passing losses and giving tax-free distributions to investors, no longer exist.
NUMBER OF PARTNERS As a general rule, a partnership must consist of fewer than twenty partners. However, many professional groups are exempted from this, and some of the big accountancy and legal firms have partnerships of several hundred.
PROFESSIONAL RESTRICTIONS Some professions such as doctors, dentists and solicitors specify that their members may not enter into a partnership with an unqualified person. As a matter of tradition and ethics, barristers may not form partnerships with each other and therefore must operate as sole traders, often sharing secretaries, libraries and other facilities.
NAME OF PARTNERSHIP A partnership can operate under the names of the partners, for example, `Black and White', without its being registered. But if a different name is used, or the name of only one partner, for example, `Black and Partners', then it must be registered. In practice, most partnerships do register the name, even if it is not absolutely necessary, to remove the possibility of being in breach of the law if one partner leaves, retires or dies. If any of these events occur, the name would no longer refer to the current partners.
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WHEN A PARTNERSHIP DOES NOT EXIST For a partnership to exist, it is important for the three factors in the legal definition to be present: a business must be carried on it must be carried on by persons in common it must be carried on with a view to making a profit. In one case in which joint owners of a racehorse agreed to share the winnings and expenses, it was held that although there was a hope of profit there was no business, and therefore no partnership.
Even if there is a written partnership agreement, in determining whether a partnership exists the courts will sometimes look beyond that to the intentions of the parties and what the facts are. Samantha D had $20 000 to invest. She enjoyed yachting and decided to put the money into a business selling and repairing yachts. Two friends who also had an interest in yachting agreed to go into the business. They did not have any money, but were prepared to work full-time. The two friends were to be partners. A deed was drawn up saying that Samantha would lend their business $20 000 in return for a share of the profits. The deed also said that she would bear a share of any losses up to 25 per cent. She had the right to inspect the books and to insist on the return of her money if things were obviously not going well. The business failed very quickly. When all the creditors were called together to share in the division of the business's assets, Samantha applied to be included. The others objected on the grounds that she was really a partner in the business and not a creditor. The written agreement between Samantha and the two partners actually said that she was not a partner, but the court nevertheless held that she was. In fact, the court said the business seemed to belong to Samantha rather than the other two, who
had
never
contributed
money
of
their
own.
It
was
A PARTNERSHIP clear that she had been involved in the running of the business, as well as sharing in its profits. That made her a partner rather than a creditor of the business.
21
3 Companies, trading trusts and joint ventures A company is an association of individuals who join together to undertake some activity, much like a partnership. The distinguishing feature of a company is that it exists as an entity of its own, separate from the individuals (shareholders) who own it. A company can enter into contracts, own property and generally undertake business dealings on its own account, quite separately from the shareholders. The act of becoming a company is known as incorporation. Companies are strictly regulated by law and must conform with many requirements in the way they operate. Unlike partnerships, which largely come under State law, companies are regulated by federal law administered by the Australian Securities Commission. The main advantage of operating as a company is that it is a separate entity which means that debts incurred by the company are company debts, and as a general rule the individual owners of the company are not responsible for them although it is not always possible to escape liability completely even with a company — see `Duties of directors' on page 31.
TYPES OF COMPANIES There are different types of company allowed by law depending on the extent to which the shareholders are liable if the company fails and so cannot pay its debts.
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23
A company limited by shares This is the most common type of company and it means that the liability of shareholders for the company's debts is limited to their shareholding. For instance, if someone has 100 shares valued at $1 each, $100 is the most that person can be called on to pay if the company fails.
A company limited by guarantee This is a slightly different type of company which does not have shareholders or share capital, but members who provide funds for the working of the company. The members guarantee to contribute money if the company goes out of business. This sort of company is sometimes used for clubs and charitable or other non-profit organisations, when the guaranteed amount is usually a nominal sum — perhaps $1 per member. A company limited solely by guarantee is unsuitable for most trading purposes, and is not usually chosen as a business structure.
A company limited both by shares and guarantee This is a combination of both the above types of company, and is very rare.
An unlimited company An unlimited company is one in which the liability of its members is not restricted in any way. It may have share capital, or it may be formed without share capital. There are very few of these in Australia.
A no-liability company A no-liability company is a special form of company for the mining industry, because of that industry's inherently speculative nature.
LIMITED OR UNLIMITED? For obvious reasons, most companies are incorporated with limited liability. Very few people want to put their personal assets at risk in addition to the company assets. (Even if you are putting all
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your assets into the business so that the question of limited liability does not seem to matter, it may become important if the business is successful!) The fact that a company is limited, however, does not always mean in practice that you can escape liability for everything the company does. For example, if you buy something for the company knowing that it cannot pay, you can be held personally liable (see `Duties of directors' on page 31). Furthermore, banks and other lending institutions, knowing that companies not infrequently fail, often insist on a personal guarantee before a loan will be granted, and so your personal assets are placed at risk anyway. For these reasons, the advantages of a company are not always as great as they seem, especially as it is normally open to sole traders and partners to put major personal assets, such as the family home, in the name of a spouse or into a trust, and so ensure that the asset cannot be seized by a business creditor. (Anyone embarking on this course of action should get legal advice since it has its own disadvantages, such as the possibility of complications arising from death or divorce. In some circumstances, it may also be regarded as fraudulent if it is undertaken specifically to avoid liability.)
PUBLIC OR PRIVATE? A company can be a public company or a private (proprietary) company. A public company offers its shares to the general public and so to protect investors, public companies are subject to stricter controls than proprietary companies. Almost by definition, very few small businesses are public companies and so these are not covered here.
Proprietary companies Since December 1995, with the passing of the First Corporate Law Reform Act (`First Act'), the law relating to proprietary companies has been significantly simplified. The information that follows is intended as a guide to what a small business owner should be aware of and does not cover the law in detail. Anyone operating as a company will need to get expert advice as to what they must comply with.
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One of the intentions of the new Acts is to make the law more user-friendly to small business and, with this in mind, proprietary companies are now classified as `small' and `large'. A small proprietary company is one that meets two of the following tests: it has gross revenue of less than $10 million per year it has assets of less than $5 million it has fewer than 50 employees (or their part-time equivalent). Proprietary companies now need have only one member. This person can be shareholder, director and company secretary and means that it is no longer necessary to ask family members to be directors, when they do not have any real involvement in the running of the business. At least one director must reside in Australia. Note that if there is only one director, they must still follow the proper procedures and, for example, keep written records of company decisions.
COMPANY CAPITAL A company must have capital (money) to operate. It can raise this capital in two ways — by issuing shares, and by borrowing.
Share capital The amount of capital a company intends to operate with must be stated in the documents establishing the company. It is called the authorised capital (sometimes the nominal capital), and is simply the maximum amount the company can raise by issuing shares. It does not mean that the money is actually held by the company. The authorised capital is then divided into units, called shares, each with a fixed value. For example, the authorised capital might be $100 000, divided into 100 000 shares worth $1 each. Or there might be 50 000 shares worth $2 each. The number of shares bought by shareholders is the issued capital. If ten people each buy one share worth $1, the issued capital will be $10. For anyone doing business with the company, the issued capital is a much more important figure to know than the authorised capital, since it represents the amount of money the company actually has available.
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Sometimes shares are not fully paid for at once, but are partly paid for. The outstanding amount is owed to the company, and can be called for if necessary. Sometimes there are different types of shares which give their respective owners different rights as to payment or voting. The most common types of shares are ordinary shares and preference shares. Normally, most of the company's capital is made up of ordinary shares, which carry voting rights proportionate to the shares held. Preference shares enable the holders to be paid a dividend before the holders of other shares. The shareholders of a company are its members. A person may become a shareholder by: subscribing to the issued capital of the company before it is formed having shares issued to them after the formation of the company (to enable the company to increase its issued capital) taking a transfer of shares from an existing shareholder a transmission of shares, usually as part of an estate.
Loan capital Loan capital is money raised by borrowing. A company can borrow in the same way as a person, for example, from a bank or finance company. A company can also issue debentures. A debenture is a document by which a company acknowledges a debt and gives security. A debenture-holder lends the company money in return for some security, possibly land or buildings or other assets owned by the company, or there may be a floating security over all the company's assets, including stock. A debenture-holder is not a shareholder, and is not entitled to vote or participate in the company's management. Companies seeking to raise funds by means of debentures must comply with strict procedures and debenture-holders have clearly laid-down rights.
Buying back shares Historically, to ensure that on the winding up of a company creditors were paid before shareholders, there was a general rule that a company could not buy back its own shares. This was
COMPANIES, TRADING TRUSTS AND JOINT VENTURES
27
changed in 1989 to provide that a company could buy back its shares as long as no-one was disadvantaged. The 1995 law then simplified the steps that must be undertaken, depending on what kind of buy-back is intended.
FORMING A PROPRIETARY COMPANY Since the establishment of the Australian Securities Commission (ASC) in January 1991, forming a proprietary company is quite straightforward. All you need to do is complete an application form issued by the ASC, giving the required details, including: the type of company in what way liability is limited details of share capital the registered office the main business office the main activities the company will engage in the names and addresses of subscribers to the company, together with their signatures. Once the documents are lodged and processed, a certificate of registration is issued, and the company is then in existence. Once incorporated, a company is recognised throughout Australia. Sometimes a company is formed by means of a shelf company, which is an alreadyexisting company acquired from a commercial enterprise which has hundreds of companies already incorporated and for sale `off the shelf'. It is only necessary to transfer the issued shares to the new shareholders, a procedure that can be done in a few minutes. The company will already have a name — it is usually possible to find one that is suitable for the proposed business — but this can be changed if necessary. The ease and speed with which a company can now be established through the ASC has to some extent reduced the appeal of shelf companies but they are often still appropriate.
MEMORANDUM AND ARTICLES OF ASSOCIATION The memorandum and articles of association are the documents which give the company its identity and set out the internal rules as to how the company will operate.
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The memorandum will usually state: the name of the company the share capital (if any) a statement that the liability of the shareholders is limited (according to what type of company it is) the names, addresses and occupations of the shareholders that the shareholders agree to take the number of shares set out opposite their names. The memorandum may state the objects of the company, but as this can limit the ability to expand or change what the company does it is usually not included. If the objects are stated, the company must comply with them. The Corporations Act sets out everything that is required in the memorandum and articles and this is assumed to apply unless documents to the contrary are lodged. You only need your own memorandum and articles if you want something different from the Act. Once the memorandum is lodged, any alteration must be approved by at least 75 per cent of the voting shareholders in a special resolution passed at a meeting of which there has been at least 21 days' notice. Special rules apply to one-person companies. A company's articles of association are the rules by which the company is run internally. The articles cover such matters as the appointment of directors' powers, the holding of meetings, the transfer of shares, the payment of dividends, accounts, and so on. The articles are essentially a contract between the shareholders and the company, and between the shareholders themselves. In general, the law is not overly concerned with what the articles contain. Outsiders are not involved, only the internal workings of the company, and this is a matter for the company's owners. However, any alterations must be for the benefit of the company as a whole.
THE COMPANY NAME The name of the company must tell the world that it is a private company, and so not subject to the rigorous controls of a public company. The name must also say that the shareholders' liability
COMPANIES, TRADING TRUSTS AND JOINT VENTURES
29
is limited (if this is the case). Consequently, most small businesses have a name which is something like `HIJ Enterprises Proprietary Limited' (usually abbreviated to Pty Ltd). If you intend trading under a name different from the incorporated name, you must register the business name separately.
THE AUSTRALIAN COMPANY NUMBER On incorporation, the company will be issued with a nine-digit Australian Company Number (ACN). No other company has this number. The ACN must be included in the common seal and on any public documents, accounts and negotiable instruments such as cheques and letters of credit. In effect, all business transactions must contain the ACN. It is not generally necessary to put it on business cards and the like unless you choose to.
THE COMMON SEAL All companies must have a common seal, containing the company's name, ACN and the words `Common Seal'. Important documents, such as leases and contracts, on which the company signature is required are signed by a director, secretary or an authorised company officer and the common seal is added. In effect, the common seal is the signature of the company. The seal should be placed above or next to the signature — the signature should not go through the seal. Affixing the common seal was once a solemn occasion. The paper was put between two metal blocks and the common seal was then embossed onto the paper so that it could not be rubbed out. Today the common seal is probably a rubber stamp or printed sticker.
THE REGISTERED OFFICE A company must have a registered office in Australia. This need not be where the company actually carries on business, but it must be on public record as the place where the company can be contacted, and where notices and other business communications
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can be addressed. The registered office is often that of the company's accountant or lawyer. The company secretary, or their agent, must be present at the registered office during business hours.
AFTER INCORPORATION Once the company is established, certain matters must be attended to, even if it is a small company: the shareholders must appoint the directors of the company (if they have not already been named in the articles of association) the directors must consent in writing before their appointment the directors must meet and deal with whatever is necessary to make the company operational. At the first meeting, the directors will usually: appoint one of their number to be chairperson and generally assume a leadership role appoint a company secretary — who must consent in writing appoint a public officer for tax purposes adopt the common seal organise bank accounts and decide who may operate them allot shares to applicants authorise the secretary to set up suitable accounting procedures instruct the secretary to keep the various registers required by law. At a subsequent meeting, it will be necessary to: arrange appropriate insurance arrange the necessary registration for payroll tax, group tax, sales tax ratify any agreements entered into on behalf of the company before incorporation, for example, the lease of premises. Within one month of incorporation, there must be lodged with the authorities a list of the directors, managers and company secretary, and a statement of the allotment of shares. An application for a tax file number should be made to the Tax Office.
COMPANIES, TRADING TRUSTS AND JOINT VENTURES
31
OPERATING A COMPANY The operations of a company are controlled by its board of directors. In a small family company there may only be one or two directors. Larger companies often have several directors, although if a board gets too big it can become unwieldy and make decisionmaking difficult. The day-to-day activities of a company are carried out by a manager. If this person is also a director, they are the managing director. The director or managing director is normally given broad operating instructions by the board, and is accountable to the board. As a general rule, the board makes policy decisions, and perhaps major operating decisions, and the rest is up to the manager. For example, the board may decide to set up a new division of the company, such as a marketing division, and it is then up to the manager to implement that decision by hiring the necessary staff, instructing them as to their tasks and ensuring that they carry out their jobs properly. There is no longer any legal requirement for a proprietary company to have an annual general meeting unless the articles of association require one.
DUTIES OF DIRECTORS The directors of a company do not have to be shareholders unless the company requires it. Many companies do have such a provision in their articles of association, in which case it is usually enough for the director to hold one share only. Directors have very clear responsibilities, and the law takes a stern view of any director who does not comply with these. The articles of association may set out what is expected of a director of a particular company, but regardless of what the articles say a director has an overriding duty to act in good faith for the benefit of the company. A director must not exercise their power for personal advantage. As well as adhering to this all-encompassing duty, a director must exercise the degree of skill that may reasonably be expected from a person of their knowledge and experience. This degree of skill varies from situation to situation, and will be judged according to the circumstances.
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A director must act diligently. This means that they must ensure that they know enough about the business of the company to perform duties in the normal way. A director must avoid being in a conflict-of-interest situation. For example, a person who was a director of two companies in competition with one another would inevitably have a conflict of interest. Similarly, a director who sold personal property to the company would have a potential conflict of interest. Any director who breaches their duty commits a criminal offence, and is liable for heavy penalties. By law, if it is appropriate, shareholders may excuse a breach of duty by a director, but not if there has been fraud. It is important to be aware that directors may be liable personally for the company's debts. A director of the failed National Safety Council was held to be personally liable for NSC debts of $97 million. The court said that if the director had checked the accounts he had signed for the annual general meeting, it would probably have led to the exposure of fraud by the chief executive officer, John Friedrich, and further losses would not have occurred.
Directors of a family business who play only a nominal role in the company's affairs may still be liable both for debts and criminal offences of the company, even if they are unaware of them. In a landmark case in Victoria, the Supreme Court held that a widow, Mrs M, was personally liable for $165 000 owed by a company of which she was a director. The circumstances were not unusual. A family company, KM Trading Pty Ltd, had been established by Mrs M's husband to run a group of tobacco kiosks in Melbourne. When Mr M died, the couple's son, I, had taken over the running of the business, and Mrs M had had even less to do with it than when her husband was alive. She occasionally signed a document when it was put in front of her, but that was all; her son no longer insisted that she receive regular reports as to the state of the business, as his father had done. Mrs M was getting older, and she was more than happy to leave everything to her son. The business did not prosper under the son's management; in 1988, when
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33
goods were bought from Statewide Tobacco Pty Ltd, the company was technically insolvent, so that it was unlikely to be able to pay the bill. Even though Mrs M had no idea the company was in financial difficulties, she was sued by Statewide Tobacco, who claimed against her personal assets for the money owed to it.
Until this case, it has been open to `sleeping directors', such as spouses and children who simply sign documents without actively participating in running the business, to argue successfully that a debt was incurred without their authority or consent and that therefore they should not be liable for the money. The court in the Victorian case said that this is simply not good enough. The court said that a director cannot claim that a debt was incurred without their knowledge if that director had given another director (or employee or agent) the authority to act on their behalf. This authority does not necessarily have to be written: it may be implied. In this case, I was a director of the company, and when Mr M died, Mrs M and her daughter J (also a director) had implicitly looked to him to fill the role of managing director. Although there had never been a formal board resolution to that effect, it was obvious that both women had given I the authority to act on their behalf. The court went on to say that a director is not entitled to hide behind ignorance of the company's affairs when that ignorance is of their own making and has been contributed to by their own failure to make the necessary enquiries. In other words, the courts are no longer prepared to allow company directors, even directors of small family companies, to escape responsibility for actions of the company simply because they have taken no interest in how the company is run. In the M case the court added that it does not expect directors to become full-time managers, and that their obligations do not go beyond what is reasonable. It said: Even in a small company a director should ask for and receive figures, albeit of a basic kind, on a regular basis. If those are sought and reveal no difficulties and the director has no other reason to suspect that the company may not be able to pay its debts as they fall due, the director may be shown to have acted reasonably. Directors
cannot
be
required
to
make
their
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own further investigations or to `audit' the accounts provided, unless they have particular responsibilities or expertise, and they can only be required to seek more information if the company's accounts, together with any other information from the company's executives, put them on inquiry.
One of the ramifications of this judgment is that family assets can no longer be assumed to be beyond the reach of business creditors simply because they are, say, in a spouse's name. If a spouse is a director of a family company, any assets, including the family home if it is in the spouse's name, may be seized to pay a business debt even though the spouse had no knowledge that the debt was being incurred.
DUTIES OF THE COMPANY SECRETARY All companies must have a secretary who is over 18 years of age. The company secretary may be a director unless the articles of association provide otherwise. The role of the secretary is to keep the minutes of meetings and ensure that board decisions are carried out properly. Because the secretary knows so much about the company, they have a legal obligation to treat all its business, including board transactions, as absolutely confidential.
FINANCIAL RECORDS For the most part, a small proprietary company no longer has to prepare and lodge annual accounts. The exceptions are if 5 per cent of shareholders request it, the ASC requests it, or the company is foreign-owned and does not satisfy the relevant requirements. If annual accounts are not required, the accounting records nevertheless must be sufficient to explain transactions and the company's financial position. The records must present a fair and accurate view and be able to be audited if required. Legal exemptions notwithstanding, most companies will want to keep proper financial records as a matter of sound business practice. Some of the reasons are: a tax return has to be lodged every year
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35
a credit provider, such as a bank, may wish to inspect accounts accounts may be requested by 5 per cent of shareholders or the ASC and if they do not already exist this is likely to be a fairly onerous task given the limited time in which, by law, such a request must be complied with directors are required to monitor the solvency of the company or they may be personally liable for debts incurred if the company becomes insolvent and they need appropriate accounts to fulfil this obligation company dividends can only come out of profits and these can only be determined if there are proper financial records it is difficult to know how a business can be properly run without adequate financial information. It is necessary to lodge an annual return with the ASC by 31 January the following year. The requirements for this have also been simplified and if the details are the same as last year, the annual return need only be signed and returned with the filing fee (currently $195).
REGISTERS Registers may now be maintained on computer and the requirements have been simplified. The main registers which must be kept are of: members option holders debenture holders charges over the company's assets.
CONTINUING LIFE OF A COMPANY Because a company exists separately from its owners, once it is established it continues regardless of what happens to its owners. Thus, unlike a sole-trader business or a partnership, a company continues even if an owner (shareholder) retires or dies. A company may cease to operate, but it does not cease to exist until it is wound up and removed from the register.
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According to one story, all members of a company in England during World War II were attending a board meeting when a bomb dropped on the building, killing them. The company nevertheless survived. In the same way, it is possible that the sole director, or even two directors, of a small family company could be killed, for example, in a road accident, but the company will survive.
The advantage of continuity in a company is that all dealings, contracts and so on remain operative, regardless of ownership of the company. If one owner dies or the business is sold, the company and all its dealings remain intact; all that has happened is that the ownership has changed.
THE COST OF A COMPANY The cost of setting up a company consists of incorporation fees charged by the ASC and any legal fees, which will usually total about $1000. Recurrent annual costs mostly relate to financial records. Although small proprietary companies do not have to submit audited accounts to the ASC, most companies will employ an accountant to prepare the income tax return and company accounts, if only to ensure that they comply with the law. A fee (currently $195) must be paid to the ASC with the annual return.
WHEN TO USE A COMPANY You will usually decide to use a company structure when the number of people involved in the business is so large that a partnership is unworkable, or the enterprise involves an element of risk and you wish to limit your liability, or there are tax advantages. But remember that you should not attempt to set up a company unless you have received sound legal and accounting advice.
PROPOSED CHANGES The law relating to companies was changed significantly when the First Corporate Law Simplification Act came into operation in 1995.
COMPANIES, TRADING TRUSTS AND JOINT VENTURES
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The law will change further when the Second Corporate Law Simplification Bill is passed. At the time of writing, the Bill has not yet been introduced into Parliament; nevertheless, it is expected that it will become operative in early 1998 and so a brief outline of the proposed changes follows.
Company formation The process for setting up a company will be simplified even further. There will no longer be a requirement to have either a memorandum or articles of association. The basic rules of internal management normally found in a company's articles will now be contained in the law itself as `replaceable rules', and companies can adopt a constitution containing their own rules. It can be noted that the replaceable rules are based on the model articles contained in the present law and so, in practice, the new law will not be significantly different from the law as it currently exists. Companies limited by guarantee will be able to convert into companies limited by shares, provided that the rights of creditors are not materially disadvantaged. Registrations of a company limited both by shares and guarantee will no longer be permitted and nor (with the abolition of the concept of par value of shares) will it be possible to register a no-liability company. All companies will now be able to take advantage of the main benefit of no-liability companies, that is, the capacity to issue shares without the price constraint of an arbitrary par value. A proprietary company will no longer be required to keep its registered office open to the public and nor will it be required to have a common seal.
Company meetings Companies will be able to make use of technology to hold meetings. Directors can utilise any form of technology they agree on, and for members' meetings it will be possible to use any form of technology that gives members a reasonable opportunity to participate in the meeting. A general meeting must be held at a reasonable time and place and members must be given 21 days' notice; however, members may agree to shorter notice for most matters. Members holding at least 5 per cent of the votes, or 100 members entitled to vote at a general meeting will be able to require: the directors to call and arrange for the holding of a general meeting;
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a proposed resolution to be put on the agenda of a general meeting; or a statement about a proposed resolution to be distributed to members. With regard to proxies, members may fax their proxy or transmit it electronically provided it complies with company requirements. A member may appoint one or two proxies. There will be various changes to the way proxies may vote. A quorum for any general meeting will be two members, and the minimum number of members for both public and proprietary companies will be one. In the case of single member companies, any decision which is required to be made by a general meeting can be made by the member recording the decision and signing the record.
Share capital Shares will no longer have a par value and procedures for issuing all types of shares will be streamlined. Reductions in capital will no longer have to be approved by the court but must be fair and reasonable to all shareholders, must not materially prejudice the company's ability to pay its creditors, and must be approved by shareholders. Restrictions on companies acquiring their own shares will depend on the company's actual control over those shares. In the case of a company providing financial assistance for the purchase of its shares, shareholder approval will only be required if the assistance would materially prejudice the interests of the company or shareholders, or the company's ability to pay its creditors.
Financial statements and audit Companies will have to prepare a cash flow statement, as well as a profit and loss statement and balance sheet. Directors' reports to members will be required to contain a general discussion and analysis of the business performance of the company, and of the factors underlying its financial position. A company will be able to send members a concise version of the annual report, however, members may request a copy of the full report without charge.
Annual return The annual return will be simplified and it will be easier to lodge it electronically with the ASC.
Company deregistration and company names It
will
be
easier
to
deregister
defunct
companies,
for
example,
a
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39
newspaper advertisement will no longer be required and ASC procedures will be streamlined. The rules for obtaining and using company names and ACNs will be rewritten.
TRADING TRUSTS A trust is a popular type of business form for small businesses. A trustee, often a proprietary company established especially for the purpose, conducts the trust's business on behalf of the members of the trust. The income created belongs to the beneficiaries of the trust. The rights and duties of the beneficiaries are set out in the trust deed. Unlike a company, a trust is not an independent legal entity and cannot contract in its own right. The trustee contracts on behalf of the trust. This makes a trustee personally liable for trust debts and obligations. However, it is possible for the trustee expressly to state that they are acting as such and do not accept personal liability. It is also possible for the trust documents to state that trust assets are not available to meet the demands of creditors. Needless to say, most lending institutions and other creditors are unwilling to make loans or extend credit under these circumstances and commonly require a personal guarantee from the trustees or beneficiaries of the trust, so putting the personal assets of these individuals at risk anyway. Trading trusts have significant tax advantages in certain situations. You should discuss these advantages with your accountant. Anyone asked to act as trustee should bear in mind that the law imposes strict standards of behaviour, including that they must always act in the interests of the beneficiaries. A trustee also has a duty to maintain the financial well-being of the trust so that, for example, a trustee investing trust money needs to be very careful as to the level of risk they are prepared to accept.
JOINT VENTURES A joint venture is a commercial arrangement in which two or more parties join together, usually for a particular and one-off undertaking (unlike a partnership which is ongoing). If the joint venture
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involves assets, these are usually owned by the parties as tenants in common, with each party having an individual share. The parties have a right to receive their share of income and to dispose of it separately. Sometimes separate invoices are issued and the joint venturers are paid separately. It has been said that `the activity of a joint venture is joint, but little else is intended to be joint'. It is a tricky area of law and each situation depends on the facts. The main differences between a joint venture and a partnership are: joint venturers are individually liable rather than jointly liable, so they cannot be held responsible for the mistakes or misdeeds of other joint venturers the only restrictions of the disposal of an interest in a joint venture are contained in the joint venture agreement, whereas partners must comply with the Partnership Act in assigning their interest in the partnership one joint venturer has no authority to bind another joint venturer as agent joint venturers receive their profits separately. Sometimes the difference between joint ventures and partnerships can be crucial. A company, A, which was responsible for performing artists such as Cilla Black and Elton John touring Australia over a number of years, entered into a finance contract with another company, B. The contract avoided any reference to partnerships and clearly stated that the finance was to be a loan to the `joint venture', that management of the joint venture would involve the two parties, and that a bank account would be opened for the venture. Losses by the co-venturers were not to be shared on the same basis as profits and any differences would be settled by arbitration. Further finance was later provided by a third company, C, and the question then arose as to which company should be repaid first. If B was a partner in the venture, then clearly its claim would take priority over C's claim. The High Court said that a partnership did exist — that whatever the partners may have written down, the tests of partnership were fulfilled and the arrangement was legally a partnership. Consequently, B had a greater right to be repaid than C.
COMPANIES, TRADING TRUSTS AND JOINT VENTURES
Sole trader A sole trader trades on their own. The business operates under the control of that person, they are solely liable for all business debts and the tax burden of the business is borne solely by that person. A sole trader: • has the simplest ownership structure of their business • controls all aspects of the business • is responsible for all decisions which affect the business • has no need for formal agreements to establish the business • is usually limited to the capital and finance available to the owner • is generally limited to their own expertise and management skills • means the owner and the business are one and the same legal entity • can start the business with little cost or formality • may need to register a business name • must comply with regulations governing specific activities • has to consider who does the work if they are ill or on holiday • will probably be subject to provisional tax • is entitled to all the profits of the business • must bear all the losses of the business • may offset business losses against other income • can carry forward losses to subsequent financial years indefinitely, and claim a tax deduction against later profits • pays tax at their own personal rate • is personally liable for all the debts of the business • has the opportunity of knowing clients personally and being directly involved with all interpersonal aspects of the business, such as supervising employees.
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Partnership In a partnership, partners contribute their time, talents and money towards the business and in return share in both the profits and the responsibilities of the business. A partnership: • is easy and inexpensive to set up • does not require any legal formalities (although a written partnership agreement is sound practice) • can give access to more funds • can give access to a greater range of talent, skills and experience • is flexible — the partners only have to agree between themselves to change the nature of the business • can keep business affairs confidential • is subject to minimal supervision by corporate watchdogs • does not pay tax — although a partnership return must be lodged • means the partners are assessed on their share of the net profits and pay tax at their individual rates of tax • cannot pay salary and wages to partners. All income partners receive from a partnership is treated as business income and may attract provisional tax • requires a separate partnership tax file number • is assumed to divide profits equally between partners. For tax purposes, any distribution other than equal shares must be documented in the partnership agreement • generally needs to register a business name • shares the responsibility for running the business between partners • means the partners jointly share in the income and may each be liable for the debts of the partnership • only lasts as long as all the partners are in business together.
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COMPANIES, TRADING TRUSTS AND JOINT VENTURES
Company A company is a separate legal entity, distinct from the directors, shareholders and members who create and run the company. The liability of shareholders is limited to the share capital subscribed (except for debts they personally guarantee). A company: • can be formed by one person who is both director and shareholder • is regulated by the Australian Securities Commission and must comply with the Corporations law, irrespective of the time and cost involved • must file financial statements and other information as public records • requires a separate tax file number • must file a separate company tax return at the end of the financial year • is a separate legal entity from the owners, liable for the debts the company incurs • pays tax at a flat rate from the first dollar of income (i.e. there is no tax-free threshold) • pays tax either in quarterly instalments or in one lump sum depending on their size • can distribute dividends to shareholders. These may have tax credits under the imputation system and be subject to provisional tax • can have employees, which include directors and may include shareholders. Income paid to employees is treated as salary and should not attract provisional tax • cannot distribute losses to shareholders, however, losses can be carried forward indefinitely and claimed as a tax deduction against later profits.
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4 Acquiring a franchise Franchising is now such a well-accepted type of business operation that about a fifth of all non-manufacturing businesses in Australia are franchises. Franchising was once confined mainly to the fast-food business, but now encompasses a wide range of operations, including jewellery chains, homeware suppliers, fashion retailers, financial advisers, video rental stores, real estate agencies, motor vehicle retailers, petrol stations, convenience stores, lawnmowing and cleaning services. It is generally accepted that the risk of business failure is reduced by franchising. One fifteen-year survey found that the survival rate for franchised businesses was 2.25 times the survival rate for other small businesses (76.5 per cent and 33.36 per cent respectively). At its best, franchising combines the advantages of being your own boss with the support and resources of a large organisation.
WHAT IS A FRANCHISE? In a franchise arrangement a parent company (the franchisor) grants an operator (the franchisee) the right to market a product developed by the company, and usually the right to use its business name or trademark. The franchisee operates the franchise as an independent business, providing their own capital and usually paying a fee for the right to use the company name and
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any other services provided such as management assistance, advertising and marketing. From the franchisor's point of view, the advantages of franchising include: the capacity to expand the company's business with minimal capital a more rapid penetration of the market than might otherwise be possible a level of commitment and motivation on the part of the franchisee beyond that displayed by ordinary employees less likelihood of industrial disputes making the most of local knowledge of franchisees in their particular locations. From the franchisee's point of view, franchising may offer: a way of going into business with an already-proven product or service availability of the franchisor's management experience and expertise availability of the franchisor's marketing expertise easier access to finance use of proven business systems bulk-buying and group advertising capabilities which enable competition with large chains. However, franchising is by no means devoid of risk. There have been some major franchising failures, and bear in mind that if you are a franchisee and the franchisor fails, you may go down with it. Furthermore, although most franchisors are honest and wellmotivated, a few may prove to be incompetent, sharp or dishonest, just as in any other type of endeavour. Never enter into a franchise arrangement unless you have both the business and legal aspects checked thoroughly and are completely sure of what you are agreeing to. The level of franchisor involvement may vary significantly. Some franchisors insist on rigorous standards and dictate procedures at every level of business, usually with the purpose of promoting the image of the company as a whole. In other instances, after the territory has been allocated and perhaps some initial training provided, the franchisee is left largely alone to develop their own reputation and goodwill. Make sure you
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understand and accept company policy in this regard. If you yourself have an entrepreneurial flair, you may find a highly interventionist company difficult to live with. On the other hand, if you have little business experience, a company that expects you to make your own way may be more than you can cope with. There are few laws in Australia relating specifically to franchising so that for the most part, the relevant laws are the general laws of contract, and to some extent the Trade Practices Act. Petrol station franchises are regulated to some extent, and there are some State laws dealing with franchises in the real estate industry, but these are mainly concerned with licensing requirements. Since 1993 there has been a voluntary selfregulating Franchising Code of Practice. The relationship between franchisor and franchisee is essentially dictated by the agreement between them. The agreement will set out the obligations of both the franchisee and the franchisor in the operation of the business. It is true that successful franchises usually rely on a good working relationship between the parties. It is also true that the agreement is `the bottom line'. If things go wrong or there is a dispute, it is the agreement which will determine what happens. If the agreement is unfair, or if it fails to deal with something, it can lead to the loss of a great deal of money and time, not to mention the emotional cost. Remember that the franchisor/franchisee relationship is likely to be a long-term one and needs to work satisfactorily.
TAKING A FRANCHISE The most important thing when deciding on a franchise is to verify that what the franchisor says is so, really is so. According to the Franchising Code, the franchisor should provide a disclosure statement setting out details of the franchise and their own business operation, including financial accounts. This will enable you to establish the financial soundness and success of the franchisor. Insist on seeing the operations manual, even if you have to undertake to keep its contents secret. The agreement will normally provide that you must follow the manual and it will dictate how you carry out the business, so you should make sure that it is acceptable.
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Since the trademark or business name is likely to be crucial to the success of the operation, a search of the Australian Industrial Property Organisation to ensure that they are registered is a sound precaution. Talk to as many existing franchisees as you can and find out if they consider the arrangement to be working well, and what they think of the franchisor. If possible, talking to former franchisees may also be enlightening. Get legal advice. The Code provides that the franchisor should encourage you to do this, but in any event, you should ensure that you consult a lawyer, preferably with some experience in the franchise area.
THE FRANCHISE AGREEMENT A franchise agreement normally allows you to market a product in a geographic territory allocated exclusively to you for an agreed period. Alternatively, it may only give you the right to carry on business in a specified location. You will want to know precisely what rights the franchisor has to establish additional outlets which may compete with you and, for example, whether the territory remains exclusive only if a certain level of turnover is achieved. If exclusive territory is not granted, find out from existing franchisees if the franchisor has any history of establishing competing outlets which may detract from your business. You will probably be required to pay an upfront fee for the right to the product as well as an annual royalty — usually based on turnover, although occasionally on profit. You may be required to remit all receipts to the franchisor who will pay the expenses, take out the fee and then pay the rest to you. There may be provision for ongoing management support, advertising and marketing. You should ensure that these provisions are as specific as they can be, and also, if possible, that you get some idea from existing franchisees of how they work in practice. If the franchisor does not, in fact, provide support services, it might be difficult to do anything about it, especially if the agreement is vague. The franchisor will probably retain sole discretion as to advertising expenditure but you are entitled to insist on at least annual details as to expenditure. If the location of the outlet is not specified but is to be
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determined by a selection mechanism, make sure that the agreement sets out what is to happen if you cannot agree after a certain period of time. Generally there should be provision that you will be entitled to repayment of the fee, perhaps less the franchisor's reasonable expenses. Insurance obligations should be clearly set out. If the franchisor arranges the insurance, evidence of payment of premiums should be provided. You may wish to increase minimum levels of insurance and the agreement should give you this right. If the proposed franchise is for a retail outlet, you may be required to decorate and outfit the premises in a particular way. You will normally be responsible for paying the rent and other expenses such as council and water rates. The agreement will normally provide for initial and ongoing training, both for you and your staff. Make sure the location and duration of the initial training program is specified, as well as responsibility for the payment of expenses. Normally you will be required to work full-time in the business and undertake that you will not carry on any other business during the franchise. You will probably be prohibited from setting up in competition if the franchise ends, although there may be a limit as to how far this can be enforced. The agreement should provide what will happen if there is a dispute, and how and when the franchise can be terminated. Find out whether you are free to sell or assign the business, and to whom — can you dispose of it to a third party, or does the franchisor have the right of first refusal at a fixed price, which may be less than the prevailing market value? You will want to ensure that the franchise is not able to be terminated by the franchisor in unreasonable circumstances — for example, for minor breaches of the agreement. The agreement should also say what happens to the business premises if the franchise is terminated — do you keep them, or do they pass to the franchisor? The agreement should say whether you will be compensated for the goodwill you have built up — in most cases, no compensation will be payable (take this into account in your decision). In a major court case, the Federal Court held that, in the absence of a specific agreement, a service station franchisee who had been told to go on the expiry of the franchise agreement was not entitled to compensation for goodwill built
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up over twenty years. The oil companies argued successfully that a franchise is just like any other tenancy — when the lease expires, tenants cannot expect compensation from the landlord.
The agreement may provide that you must buy all your equipment from the franchisor. This may give you the advantage of reduced prices flowing from bulk orders, but it may also prevent you from taking advantage of bargains elsewhere. The agreement sometimes gives the franchisor the right to sell the product through other outlets, such as supermarkets. If so, you will need to consider carefully the likely effect on your profits. You will probably be prohibited from starting a similar business should your franchise end. Make sure this provision is not too restrictive. If it is, and you agree to it, you may be able to challenge it through the court but this can be both expensive and difficult. Large, well-established franchisors may have a standard agreement which is difficult to change. With smaller, newer franchisors, there may be room for considerable negotiation and amendment. You should always have a franchise agreement checked by a lawyer who is familiar with business law but it will help if you have given some thought as to what is acceptable to you. In particular, you may need to check local government regulations in your area. Even a well-informed franchisor may not be completely up-to-date on the regulations, and these may significantly affect your business. For general comments, ask two or three existing franchisees (not necessarily those recommended by the franchisor) if they are satisfied with the agreement and if they have any suggestions for improvement. Remember that the agreement will be drawn up by the franchisor, and so will reflect the franchisor's interests. Make sure that someone representing your interests checks it out.
GENERAL LAWS APPLYING TO FRANCHISING Laws that apply to business in general apply equally to businesses operating as a franchise. For example, you will usually have to register the business name, get any necessary licences, check out local government regulations, arrange insurance, give appropriate
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notifications to the Tax Office, organise necessary finance and so on. If you will be carrying on business under a name associated with the franchisor, but with the addition of some other identifying feature, such as `McDonald's North Sydney', the name must be registered (assuming it was part of the name and not just an indicator of locality). If you register a separate name, you will normally have to undertake to allow the name to be transferred to a third party if the franchise agreement comes to an end. You will also need the consent of the franchisor to register a name that includes his or her business name. You may intend to carry on business under your own name and use the franchisor's trademark to describe the relevant product. If so, business documents must contain the name under which the business is operated. With regard to a trademark, it is a sensible precaution to have a search made of the records at the Australian Industrial Property Organisation to ensure that the franchisor is registered as the owner of the trademark. As a provider of goods or services, you will be bound by the consumer protection laws. If you sell something that is faulty or not of merchantable quality, the consumer can insist that you replace the goods or give a refund, irrespective of the fact that the supplier may have been the franchisor. It is up to you to take the matter up separately with the franchisor, if that is appropriate. A franchise is an independent business and therefore, in general, the franchisee and not the franchisor is liable for debts and obligations to third parties. There have been cases in the past where the franchisor has exercised extensive control, including over the day-to-day activities of the business and the courts have held, for example, that the franchisor was liable for compensation. However, under most modern franchising arrangements this would be unlikely.
Trade Practices Act and Fair Trading Acts The federal Trade Practices Act and the State Fair Trading Acts may provide a remedy for you against a franchisor who has behaved badly. However, the sale of goods from a franchisor to you will not normally be a consumer transaction, and so may not be covered by the consumer protection provisions. Franchisors must comply with the law with regard to competition. In particular, the law states that:
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A franchisor may require that you stock only its products or approved products, but only if this does not have the effect of substantially reducing competition in the marketplace. A franchisor may not require you to obtain goods from a third party (unless it is related to the franchisor) even if there would be no effect on competition in the marketplace; for example, a franchisor may not insist that you take out insurance with a particular company. The franchisor may insist that you supply goods or prohibit you from supplying goods to particular people, for example, a competitor, provided this does not substantially lessen competition in the marketplace. The franchisor may not stop you from selling goods below a certain price. A recommended retail price is permitted, provided it is not intended to be binding. A franchisor may not offer goods to different franchisees at different prices if this would lessen competition in the marketplace. However, the franchisor may make reasonable allowances for differences in the cost of manufacture, distribution, sale or delivery, or to meet a price offered by a competitor. In general, a franchisor may not behave in a way that may lessen competition in the marketplace. Special considerations sometimes apply to franchise arrangements, however, and each case will be judged according to the particular circumstances. Some of the most useful provisions of the laws governing franchisors have been those relating to misleading conduct, in particular with regard to the purchase of a franchise. Franchisors may not mislead a potential purchaser, for example, by significantly overstating expected profit or turnover. In a widely reported case, franchisees of a failed homeware retail chain claimed that they were induced to purchase the franchise as a result of representations made by the parent company as to the profitability, risk, experience and suitability of the franchise site, and that these representations were misleading. The court accepted the franchisees' arguments, saying, among other things, that even though one of the franchisees had previously managed the store she had no real
understanding
of
the
true
financial
position;
the
franchisees
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had strongly and persistently been persuaded to purchase the franchise despite the fact that they had said that they could not afford it; the franchisees were given a cash flow projection and estimates of net profit, and the franchisor claimed expertise in these matters as well as in site selection. (The court made the point that statements of opinion would not have been misleading provided they were honestly held and there were rational grounds to support them; however, the company had claimed that the concept was `completely proven', and this could not be sustained.) The court awarded the franchisees $130 000 in damages.
Other grounds on which franchise agreements may sometimes be overturned are that the agreement is grossly unfair, harsh and unconscionable (see `Contracts' in chapter 6). However, as with other contracts, the unfairness or harshness has to be real, and inherent in the agreement. You cannot take action just because a business risk does not come off, for example, because of changed economic circumstances. The court may consider an agreement is unfair if you have had no previous business experience, you received no legal or financial advice, you were pressured into signing the agreement, or representations made to you as to business potential and profit were materially inaccurate, going beyond mere `puffery' or allowable exaggeration as part of the selling technique.
5 Acquiring premises You may acquire premises for your business either by leasing or buying them. Consider the advantages and disadvantages of each carefully before proceeding.
LEASING PREMISES By far the most common way for a small business to acquire premises is to lease them — that is, to acquire the right from the owner to occupy and use the premises in return for paying rent. The owner is the lessor and the tenant is the lessee. A lease is a legal contract, and once you sign it, both you and the owner are bound by it. Since 1994, New South Wales has had a Retail Leases Act, which covers most small retail premises and with which the written lease must comply. In general, however, commercial lessees do not have as much protection under the law as residential tenants. Residential tenancies are usually covered by laws saying that, regardless of what the lease states, tenants are entitled to certain notice of rent increases or termination of the tenancy, or that the tenant has the right to undertake certain repairs at the landlord's expense and various other conditions designed to protect tenants. In most cases, no such protection applies to commercial leases. People who operate a business are supposed to be sufficiently well-informed or well-advised that they are able to look after
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themselves. Although most States now have a Retail Tenancy Code, these often give only limited protection. A commercial lease is an important document. The lease will not only specify the amount of rent, it may also specify the type of business you can carry on — make sure it does not prevent you from diversifying or extending the scope of your business in the future. There will also be a clause saying how long the lease is for. This can be crucial, since, once the term is up, if you cannot renew the lease and are forced to move, you may lose all the goodwill you have built up in that particular location. Also, under a commercial lease, the landlord may not have an obligation to tell you that the premises are in a poor state of repair or to keep the premises maintained or ensure that they are fit for habitation. This is different in New South Wales where at least seven days before a retail shop lease is entered into, the lessee must be given a disclosure statement containing certain information about the proposed tenancy. If the disclosure statement is not given or if it is materially false or misleading, the lessee has the right to terminate the lease.
Types of leases There are various types of leases. The two most common are fixed-term and periodic leases. A fixed-term lease is for a defined period — for example, three years or five years. Once the period has elapsed, the lease is at an end, although it may be possible to extend it or to negotiate a new lease. A periodic tenancy goes from one rental period to another, for example, from month to month. The tenancy can be terminated by either side giving notice of one rental period. Periodic tenancies often come into existence at the end of the fixed-term tenancy if the lease is not terminated. The tenant simply stays on a monthly basis. From a business point of view, it is obviously preferable to renew the lease for another fixed term but if, for example, the building is up for sale, the landlord may not agree to this.
Options Most business-owners will want their lease to contain a clause giving them an option to renew for another term when the period of the lease expires. An option means that the landlord is under
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an obligation to give you the opportunity to renew the lease for a further term. There is usually a time during which the option must be exercised — for example, you must give three months notice of your intention to renew — and renewal is subject to the negotiation of satisfactory terms and conditions, such as an increase in rent. It is important to exercise the option within the stated time limit, otherwise you lose your right to a new lease. The term of the option will not necessarily be the same period as the original lease. For example, you might be given a three-year lease with a one- or two-year option, if the landlord is considering redevelopment of the site in the next five years.
Rent Unlike rents for residential premises, commercial rents are often based on the size of your business. There are various ways your rent may be calculated. It may be: a base rent adjusted to `market' (the most common) a base rent, calculated on the number of square metres of space a base rent, plus a percentage of gross sales a total rent as a percentage of gross sales. The rent for retail businesses, especially those in large shopping complexes, is likely to take account of sales. For example, there may be a base rent for sales up to a certain amount, with a percentage added on for sales over that amount. If your base rent is calculated according to sales, make sure that an increase in rent would reflect an equivalent increase in the number of sales. The rent for businesspeople in service industries, for example, lawyers, doctors and physiotherapists, is usually calculated simply on the number of square metres. It is rare for a commercial lease not to have an annual increase of some kind built in. This may be either according to an agreed formula based on increases in the CPI or (more usually) in line with market. You are responsible for paying the rent for the term of the lease, regardless of the success or otherwise of your business. Make sure you pay your rent on time. If it is late too often, you may be regarded as an unreliable tenant and give the landlord grounds to evict you if they want you out for any reason.
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Permitted uses The lease will usually say what activities you are permitted to carry on in the premises. It may also say that trading is to be limited to certain hours or, alternatively, that you must be open for business at certain times. Make sure that you are willing and able to comply with these requirements. Major shopping centres, in particular, often impose strict requirements on tenants to ensure that they service the needs of people coming to the centre, and that the nature of the various businesses is not changed too far beyond what was agreed. These requirements are aimed at maintaining a mix of services in the centre. For example, if you set up business as a florist, you will not be allowed to change your shop to a delicatessen. There will normally be restrictions aimed at preventing you from creating disturbances, a nuisance or damage. Be sure that you acquaint yourself with the restrictions and that you can comply with them, especially as far as deliveries and storage are concerned. Check with the local council that your proposed use of the premises is permitted under council regulations.
Other provisions The lease will usually also deal with: parking common areas sharing of rates, taxes and other outgoings with the landlord and/or other tenants delivery of goods storage of goods disposal of rubbish and waste membership of a tenants' association (similar to the body corporate in a block of home units) landlord's right to enter the premises repair and maintenance of the premises compliance with relevant laws and regulations insurance general conduct of the business what happens if either party breaches the lease what happens if you wish to assign the lease to someone else.
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It is common in commercial leases for the tenant to have to meet all repairs and maintenance costs. For example, if the plumbing breaks down or the shop needs painting, you may have to pay for this. You may find that you have the responsibility for keeping the drains clear. In addition, the tenant often has to meet all rates and taxes and other outgoings related to the premises. You normally must get the landlord's permission before installing fixtures and fittings, and it will be your responsibility to ensure that floors and walls are not overloaded. You may not usually carry out improvements to the property unless the landlord agrees. Once the lease has been signed, you have a general right to occupy the premises without being unreasonably disturbed by the landlord. However, the landlord has certain rights of entry — for example, to show prospective tenants over the premises when the lease is due to expire, or to carry out repairs, or to inspect — provided you are given reasonable notice. In theory, leases are always open to negotiation, but in practice this is likely to depend on the type of landlord involved. Large shopping centres which have many tenants are usually not prepared to depart from the standard lease for the complex. Smaller landlords may be more willing to vary the terms. In tough economic times, when tenants are hard to get, landlords may be more amenable to suggested variations than when the economy is flourishing. Never sign any lease unless you have had it thoroughly checked by your lawyer. You must also be certain that you understand what it says and that the conditions are acceptable to you.
Repairs The question of who is responsible for major repairs is a vexed one, not adequately covered by law. If the building is destroyed or damaged so substantially that continued occupation is impossible, the question may arise as to whose responsibility it is to have the premises restored, and what your obligations are with regard to rent. Modern leases usually contain a clause saying that the tenant will be entitled to a rent abatement in the event of an act of God such as an earthquake. However, not all leases have such a
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provision, and in this event a tenant who stops paying rent without the agreement of the landlord runs the risk of being in breach of the lease and therefore having it terminated, and possibly being sued for damages by the landlord. Obviously, a tenant whose premises have been so severely damaged that it is impossible to continue operating will want to find alternative premises and get on with the business. However, many leases say that you cannot do this until the landlord has had the opportunity to elect to rebuild the premises, or unless the landlord does not rebuild the premises within a specified time, or a reasonable time. If this is the case, you will be subject to delays and interruptions to business while the landlord gets insurance assessments and quotes, as well as arranging building feasibility studies and the like. Although ultimately you will probably be able to terminate the lease, it is far better to have the matter clarified in the beginning.
Assignment of lease It is vital to have the right to transfer the lease in case you want to sell the business. Generally the lease will give you the right to sell the tenancy or assign it with the landlord's consent. The landlord must not withhold consent unreasonably. Assignment means that someone else takes over all your rights and responsibilities under the lease. The person who takes the lease by assignment is responsible to the landlord, and it is usual in cases of assignment to have an agreement which is signed by the tenant, the landlord and the new tenant. However, there are circumstances, even with assignment, where you are not released from all obligations if the new tenant defaults. You should never agree to an assignment unless you have had expert legal advice. Assignment is preferable to subletting, which means that you remain responsible to the landlord for the terms of the lease, and the sub-lessee is responsible to you.
Ending the lease A lease will be ended when its term expires. The lease will probably state that certain notice must be given if the tenancy is not to be renewed. Apart from this, a lease may be ended if either party breaches its terms and conditions. If you are in this position you should
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get good legal advice, since it is a difficult matter and solving it can be lengthy, timeconsuming and expensive.
BUYING PREMISES If you intend to buy premises from which to operate your business, the process is the same as if you buy a house.
Types of title There are various types of ownership of or title to property. If you are buying the building and the land it is on, the most common forms of title are old system title (general law in some States) or Torrens title. Old system title is the system of land ownership Australia inherited from England. It means that every time the land changes hand the title must be investigated back through previous owners, sometimes to the first grant from the Crown. Torrens title is a system, developed in Australia, which dispenses with the arduous and expensive investigations involved in old system title, and requires only one certificate of title. This certificate, issued by the government, essentially guarantees that the person it names is the legal owner of the land. About 90 per cent of all land in Australia is now registered under the Torrens system. If you are buying space in a multi-storey building, it will normally be by company title or strata title. Company title is the older form of title, and means that the building as a whole is owned by a company. Ownership of part of the building is acquired by means of a shareholding in the company. Shareholders are, of course, subject to the rules of the company, and may be restricted in disposing of or leasing the property. Strata title emerged as a result of the development of home units and townhouses, and is increasingly being adapted to the commercial property market. If you have a strata title, it means that you actually own part of a building — you can sell, lease or mortgage it without anyone else's permission. In New South Wales, in 1997, the Strata Titles Act was significantly amended and if you are entering into a strata title arrangement you should make sure your knowledge is up-to-date or you get expert advice. In particular, the Act now contains sets of model by-laws applying
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to different situations, including a set especially for non-residential situations. Community title enables common property to be created within subdivisions and essentially fills the gap between conventional subdivision and strata subdivision. It is mainly appropriate for developers.
Methods of ownership If you are buying the premises with another person, such as a partner or spouse, you will need to give thought as to what method of joint ownership is most suitable. You have the choice of becoming joint tenants or tenants in common. Confusingly, `tenants' in this case refers to owners, not lessees. In a joint tenancy, each joint tenant owns an equal, undivided share of the whole property. On the death of one joint tenant, ownership automatically passes to the surviving joint tenant, so joint tenancy is normally appropriate when a spouse is involved, but not when the partner is not a relation. The most usual form of business ownership is a tenancy in common. Tenants in common own any share of the property agreed between them, for example, 50/50 or 75/25. When a tenant in common dies, their share forms part of the estate in the same way as other assets do. A tenancy in common may be sold or mortgaged without the consent of the other party.
Acquiring the property To acquire the property, you will make your selection and agree on the price with the existing owner, usually in conjunction with a real estate agent. Ownership of the property will then be transferred to you by the legal process called conveyancing. Most businesses engage a lawyer for the conveyancing and let them carry the burden of ensuring that everything is as it should be. In particular, it is essential to ensure that zoning and local government regulations will not stop you from carrying out your business in the way that you intend, or may intend in the future.
PART 2 Operating a business
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6 Legal documents Broadly, a legal document is one that has the force of law. Over time, some documents have evolved in a form that is generally recognisable and accepted. Some of the more common documents you may encounter in your business life include: contracts deeds statutory declarations affidavits.
CONTRACTS It would be impossible to operate a small business without constantly entering into various contracts. Every time you buy stock, sell goods, sell services, employ someone to do some work for you, buy equipment, or do virtually anything in the course of your business day, a contract is involved. To run a business properly, it is essential to have a basic knowledge of the law of contracts.
WHAT IS A CONTRACT? A contract is simply an agreement. A party to a contract may be an individual or it may be a legal entity, such as a company. In
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small business especially it is vital to know precisely who the contracting parties are. For example, if you enter into a contract with `Luscious Cakes', that is only a business name, it is not a legal entity, and you would find it difficult to enforce the contract. Many people are caught by not knowing with whom they have the contract. It is a common misconception that a contract has to be in writing to be enforceable. This is not so and people frequently find themselves in trouble because they have made a verbal commitment of some kind, which they later do not wish to adhere to and are under the impression that because there is nothing in writing, they are not bound by the commitment. Except in certain specified circumstances, a verbal agreement can be just as binding as a written one. Sometimes a contract may even be inferred from a person's behaviour without any written or verbal agreement having been reached. There are, however, certain basic elements that an agreement must have before it is regarded by law as an enforceable contract. These include the intention to create legal relations, an offer, acceptance, consideration, the ability to enter into a contract, and legality of purpose. Intention to create legal relations There is an overall condition that, for a contract to exist, there must have been an intention in the minds of the parties to create a legal agreement with legal consequences. This is to distinguish a contractual agreement from a mere social arrangement, such as inviting someone to dinner. If a guest you have invited to dinner fails to turn up, you cannot sue for breach of contract. Since few people specify whether or not they intend a legal arrangement to exist, there are certain presumptions made by law. It is presumed that arrangements between family members relating to social occasions are not, on the whole, intended to create a legal relationship. Commercial arrangements, however, are presumed to involve an intention to create a legal relationship — unless there is evidence to the contrary. Offer For a contract to exist, there must be a definite offer by one party to the other.
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If a supplier says that it will sell you a full carton of widgets at a 10 per cent discount, that is a clear and definite offer. However, if the supplier says it is considering importing a load of widgets if it can get enough orders and asks if you would be interested in taking a full carton at a discount, that is not a definite offer. You can respond that you would be interested, and if you do not ultimately decide to buy the widgets it would be difficult for the supplier to sue you for breach of contract. Similarly, you could not sue the supplier if it did not deliver the goods. There is a difference between an offer and an invitation to make an offer or to negotiate. The latter is called an invitation to treat, and, for example, applies to goods displayed in a shop window with a price tag on them. The display is simply an invitation to customers to come into the shop and offer to buy — usually at the price on the tag, but not necessarily. If customers want to negotiate a lower price they can try. Equally, if the price on the tag is wrong, for instance $9.99 instead of $999, the customer is not entitled to insist that you sell at the incorrect price. The period for which an offer will remain open may be specified, otherwise it remains open for a reasonable time, depending on the circumstance. An offer relating to perishable goods, for example, would be considered to have a shorter period than an offer relating to land, unless there was some special reason for urgency. Acceptance It is not enough if one party merely makes an offer. The other party must accept the offer before an enforceable contract comes into being. If you think a carton of widgets at a 10 per cent discount is a good deal that you want to take advantage of, you must tell the supplier clearly that you accept the offer. If you simply say vaguely that it seems like a good idea, you would find it difficult to sue the supplier if the widgets were not delivered. An acceptance must be unconditional. For instance, if you respond to the offer of a 10 per cent discount by saying that you would buy the widgets at a 12 per cent discount, you have not accepted the offer, but have made a new offer. It is then up to the supplier to accept your offer before there is a binding contract.
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This process of offer and counter-offer can sometimes go on for a very long time before there is eventual agreement and a binding contract. Supplier: I've got a load of widgets coming from Taiwan. If you take a whole carton, you can have them at 10 per cent discount. (Offer) Retailer: I'd take them at 12 per cent off. (New offer) Supplier: I could let you have 12 per cent off for two cartons. (New offer) Retailer: Would I get them in time for Christmas? (Question — no acceptance: she wants to discuss another factor) Supplier: Yes, but we'd have to add a $50 urgent delivery charge. (Revised offer to include delivery) Retailer: OK. Fine. (Acceptance) An offer can be withdrawn at any time before an acceptance is made. However, the person to whom the offer was made must be made aware that it has been withdrawn. The notification of withdrawal need not be direct, but may be made indirectly through a reliable third party. In situations where an offer is instantaneously accepted, for example, by phone or telex or fax, the contract is formed when the acceptance is received. If for any reason the acceptance does not reach the person making the offer, there is no contract. A British company, Entores Ltd, was negotiating by telex from London with the agents in Holland of a New York company, Miles Far East Corporation. Entores made an offer to the Dutch agents to buy goods, and the offer was accepted by telex, received in London. The question arose as to whether the contract was made in London and the court held that, with instantaneous communications, the parties were in the same position as if they had negotiated in each other's presence. The contract was formed when the telex accepting the offer was received in London.
For the most part the law still has to come to terms with electronic means of communication and it is an area of some uncertainty. It will take time for legislation to be passed and precedents to be set. In particular, the Internet is a growing source of electronic contracts — people join up, order goods and embark
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on many other courses of action via the Internet. When these contracts come into being, and their enforceability, may be open to question. In the case of acceptances by mail, the acceptance becomes effective as soon as the reply is posted, even if the letter is lost, delayed or destroyed — provided the parties are aware that the post is being used as a means of communication. However, it may still be possible for the acceptance to be withdrawn before it reaches its destination if the letter can be retrieved from the post office. The question of acceptance by post can be especially important to mail-order businesses. If an offer is rejected, then that offer is automatically terminated. Consideration As well as an offer and acceptance, there must also be consideration. Consideration is a complex legal concept with many subtleties. Broadly, it means that a promise can only be enforced by the person to whom it was made if that person gives or promises to give something of value in return. In other words, if a person promises to do something for nothing, he or she cannot legally be held to the promise. For example, if your son says he will give your new office a coat of paint over the weekend and then goes to the beach instead, unless you originally undertook to pay him for the work you cannot sue him for breach of contract. An exception to this is when a promise is made under seal. Then it is called a deed and, provided the correct procedures have been followed, the promise is binding (see the section on `Deeds' on page 71). Consideration normally involves money, but not necessarily so. For example, if you offered someone a month's free meals in your restaurant in return for painting it, that would still be consideration. Nor does consideration have to reflect the value of the promise, provided it has some value. The offer of one free meal in return for a weekend's work would be unlikely to reflect the value of the work, but it would nonetheless fulfil the requirement of consideration. The courts do not see it as part of their job to determine whether someone has been adequately rewarded, since this may involve a number of elements, such as the desire to get more business, the return of a favour, or any other factor.
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Consideration cannot be something that happened in the past. For example, if someone undertakes to paint your restaurant and then reneges, you cannot enforce the promise on the basis of a free meal that person had several weeks ago (unless this was part of the agreement at the time). If a person promises to keep an offer open for a certain period (that is, gives you an option), that is a separate matter and, for the promises to be enforceable, must have its own consideration. In other words, for an option to be binding, there must be the payment of some money or some other consideration in return for the option itself, in addition to that proposed for the goods or whatever is involved in the main contract. There are many other facets to consideration. If you have any doubt about what it consists of or whether it does in fact exist, expert legal advice is essential. Ability to enter into a contract A valid contract can only be made between people who are capable of making a legally binding agreement. This means that they must be of sound mind, and it usually means that they must be over 18 years of age. Minors can sometimes enter into contracts if it is for their benefit — for example, to buy food — but if a teenager buys a video or a set of golf clubs from you and you do not get the money, you would be hard-pressed to sue for it. Most States have special laws saying that contracts involving the lending of money to a person under 18 cannot be enforced. People who have been declared bankrupt are limited in the extent to which they can enter into contracts. Legality of purpose A contract cannot be enforced if its purpose is to do something illegal.
CONTRACTS IN WRITING The reason most contracts are in writing is that it reduces the likelihood of ambiguity and conflict. If something is written down
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and signed by both parties, it is clear evidence that a contract exists; it is also much more difficult (but by no means impossible!) to argue that one party meant one thing and the other party meant another. Some contracts must be in writing to be enforced. These include contracts for the sale of land and some contracts for the sale of goods worth more than a certain amount (depending on the State, but generally between $20 and $50). However, if the buyer has received the goods or has paid a deposit for them, the contract does not have to be in writing to be enforceable. Apart from this, it cannot be emphasised too strongly that contracts do not have to be in writing. They can be verbal or even inferred from behaviour — if you act as if a contract is in place, it may be held to exist if you try to argue that it does not.
TERMS OF A CONTRACT The terms of a contract are the parts that make up the whole. For example, in a contract for the purchase of goods, there will usually be terms stating, among other things: what the goods are the quality when they are to be delivered when payment is to be made. Never sign a contract unless you have read the terms and understand what they mean. There is a basic presumption that, if you sign a document, you know what you are signing. If you do not like something in the contract, raise the matter before you sign it. Once a contract is signed it is virtually impossible to have it changed, and it is normally of little use to say that you did not realise what something meant or that you had not read the contract properly. The terms that are actually contained in a contract are called express terms. Normally, if something is not included in a contract it is assumed to be not part of the contract. Sometimes, however, the law says that certain terms exist in a contract even if they are not specifically written down. These are called implied terms. The most important implied terms, as far as people with small businesses are concerned, are usually those applying to consumers.
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It does not matter if there is a written contract or not, or what it says; when goods are sold to the public, there are implied terms in the contract of sale that the goods are of merchantable quality, fit for the purpose for which they are sold, and as they are described. If you sell goods that do not comply with these requirements, action can be taken against you. Similar implied terms apply to services (see chapter 7, `Consumer protection obligations').
FALSE AND MISLEADING INFORMATION A contract cannot be enforced if it is based on information that is false or misleading. If you sign a contract on the basis of information supplied by the other party, and the information later proves to be incorrect, then the contract will not be enforceable. Similarly, if a contract drawn up on your behalf contains false or misleading information, you will not be able to enforce it. The position is changing with regard to behaviour that is regarded as false and misleading. Until recently there was a tendency for judges to look at the strict legal position, and not necessarily to enforce what might be termed the moral position. Increasingly, however, the courts are likely to take a wider view and to find against parties to a contract who behave unfairly. The days are virtually gone when someone could tell a small fib or fail to disclose a fact and then argue that it was merely part of the negotiating tactic. `Let the buyer beware' is no longer a guiding principle. Two recent cases in which a buyer sued and won involved, first, the sale of a restaurant which the seller claimed seated 124 customers when in fact it was licensed to seat only 84 and, second, the leasing of a shop which the prospective lessee believed could be seen from the road. In fact, it was blocked by a kiosk that was not drawn on the plan.
UNFAIR CONTRACTS Although signatories to a contract are generally assumed to have read and understood the document, if the contract is very unfair it is sometimes possible to have it overturned by the court. The
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legal term describing unfair conditions is harsh and unconscionable, and it means very oppressive and unjust, not just difficult or inconvenient to comply with. People in business need to remember that this can work against them as well as in their favour. It may well provide a useful lever in the case of companies with whom they deal (although it is sometimes difficult for a person running a business to argue that a contract should be overturned because it is harsh and unconscionable — the courts may assume a degree of intelligence and worldly wisdom on the part of a business-owner). However, legal action can also be brought against small businesses on these grounds, and you should be aware that unjustified pressure on your part or failure to disclose the true facts can lead to a lawsuit. Giovanni and Cesira Amadio were an Italian migrant couple. Now in their seventies and with little formal education, they had worked hard and long in their marketgarden business to make a good life for themselves and their four sons. They were especially proud of their second son, Vincenzo, whose ritzy parties and glamorous lifestyle clearly indicated his prosperity and success with his building company. When Vincenzo came to them and said he had struck a sticky financial patch and needed them to guarantee a temporary loan by the bank to tide him over, they agreed to help out. They were told the loan was for a maximum of $50 000 for six months. Vincenzo arranged for the bank manager to visit his parents with him, and they signed the guarantee, secured by a mortgage over some property which provided their retirement income. The senior Amadios spoke little English, and completed the formalities as they were instructed by the bank manager and their son. A few months later, the Amadios' world collapsed. Not only was their son in default on the loan, they found that the amount at stake was not $50 000 as they had been led to believe, but $240 000. Furthermore, at the time of taking out the loan their son was not merely experiencing temporary cash flow shortage — his business was virtually insolvent, a fact of which both he and the bank were aware. The bank had been helping him daily to maintain the appearance of prosperity by
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dishonouring some cheques drawn on his account and meeting others so that critical creditors were paid. The bank gave notice that it intended to enforce the guarantee. The Amadios decided to fight. Five years later, in a landmark decision by the High Court, they won. The court said the Amadios' lack of English was a special disability. It must have been obvious to the bank that they were unaware of what they were getting into, and under the circumstances the bank had a clear obligation of disclosure. It would be, in the court's view, unfair and unconscionable to allow the bank to enforce the guarantee. The Amadios were released from their legal obligations under the contract.
BROKEN CONTRACTS If a contract is broken by one party and causes loss or damage to the other party, the injured party can claim compensation. However, in most circumstances, you cannot insist that the contract be carried out. The courts will not usually force people to do something they no longer want to do; they will only award compensation for any loss suffered. As an example, if one of your suppliers decides to supply someone else instead of you so that you no longer receive a particular brand of goods to sell in your shop, you can sue the supplier for the damage caused to your business but you cannot usually force the supplier to resume supplying the goods. Actual loss To claim compensation, you must be able to show that you have suffered some loss. You may be able to get nominal compensation simply for the fact that the contract has been broken, but this will not be a significant amount. The court will only compensate you for what you lose, not for inconvenience, irritation or hurt feelings. For example, if someone agrees to sell you a vintage car for $50 000 and then refuses to go through with the sale, your position is that you have $50 000, but no car. The damage that you have suffered is the difference between the $50 000 and the purchase price of another, similar car. If you have to pay $75 000 for another
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car, you would be entitled to $25 000 in damages. However, if you could get another car for $40 000, you would not have suffered any damage. The damages you would be awarded for simply proving your point would be unlikely to cover the legal fees involved. Similarly, assume that you opted out of the deal. The seller would have no money, but would still have the car. If the car could be sold on the open market for $50 000, there would be no loss. If, however, it could only be sold for $30 000, you could be sued for $20 000 in damages. Mitigating the loss A person suing for breach of contract has an obligation to mitigate the loss — that is, to take reasonable steps to ensure that the loss is as small as possible. For example, if one of your customers sues you for compensation because a washing machine you supplied has broken down and he or she has to pay to do the washing at the laundrette, the customer is under a legal obligation to have a reasonable load of clothes done at any one time and not incur extra expense by taking a few items every day. Partly performed contracts If a contract is not performed fully but in part, there may have to be some reasonable payment for the work done or the goods supplied. Time limits on suing If you do not sue for breach of contract within a certain time after the contract has been broken, you may lose your right to do so. Each State has its own rule as to time limits, but generally the period is about six years. If you have any doubts about this you should get legal advice.
DEEDS A deed is a particular form of written contract, which traditionally was `signed, sealed and delivered'. Whereas a contract is only binding if there is consideration (that is, something of value, see above), a deed is binding even if there is no consideration,
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provided it is signed in a certain way. A promise contained in a deed is called a covenant. The minimum requirement for a deed is that the person signs in front of a witness and the witness then also signs. Some documents, such as a power of attorney, may only be witnessed by certain people. Now that very few of us have a personal seal, if the signatory to a deed is an individual, their signature is deemed to be their seal as well. If the deed involves a company, then it must affix its seal in the presence of both a permanent officer of the company and a director, who then sign the deed as witnesses. In the same way as other similar documents, a deed is not valid and cannot be enforced unless stamp duty has been paid on it. Common deeds are: deed of arrangement — a written agreement between a debtor and creditor deed of assignment — a deed by which a debtor transfers their property to a trustee for the benefit of creditors deed of covenant — an undertaking to pay an agreed amount over an agreed period deed of gift — a deed transferring property from one person to another when there is no payment involved. Gifts made other than by deed are not generally enforceable. deed poll — in which there is only one party, for example, declaring a change of name, and so called because the parchment was cut smoothly at the top (polled) rather than having an indented line (indenture) along which the deed could be cut to make two copies.
STATUTORY DECLARATIONS A statutory declaration is a written declaration made under oath or affirmation and signed before someone who has authority to administer an oath and be a witness, such as a justice of the peace, solicitor or notary public. A statutory declaration may only be made by a person who understands what they are doing and the nature of the oath or affirmation. A statutory declaration is normally used in non-court situations but it has a similar effect to a statement made under oath in court. A person knowingly making a false statutory declaration may be fined or imprisoned or both.
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Statutory declarations deal with matters of fact, not opinion. This can include belief (`to the best of my knowledge and belief the deceased made a will in Sydney in 1985'), but not `I think the deceased . . .' Standard statutory declaration forms can be obtained from law stationers or most newsagents. It is not necessary to use these but the document must use the correct form of words. The Commonwealth Statutory Declarations Act sets out the required wording as follows: I, (Full name) of (Address) (Occupation) do solemnly and sincerely declare: (Set out the statements in point form, i.e. 1. 2. etc.) And I make this solemn declaration by virtue of the Statutory Declarations Act 1959, and subject to the penalties provided by that Act for the making of false statements in Statutory Declarations, conscientiously believing the statements contained in this declaration to be true in every particular. (Signature of declarant) Declared at (Place) on the (Day) 19 , Before me,
of (Month)
(Signature of person taking declaration) (Title of person taking declaration)
AFFIDAVITS An affidavit is a sworn written statement usually used as a substitute for oral evidence in court proceedings. You will normally need the help of a solicitor to make an affidavit as strict rules apply and these vary according to the court.
7 Consumer protection obligations This is the day and age of consumer protection. Consumers have more rights than ever before, and are more aware of them. If you run a business that involves selling goods or services to the public you must be familiar with what the consumer protection laws say.
WARRANTIES ON GOODS YOU SELL There are certain legally implied warranties in all goods you sell. You warrant that goods bought from you are: of merchantable quality fit for the purpose for which they are sold as they are described. If goods do not comply with these standards they are said to be faulty and the customer is entitled to repair, a replacement or the money back. If you are the retailer who sold the faulty goods, the customer is entitled to bring them back to you and expect you to deal with the problem. Usually you will do this by returning the goods to the manufacturer and asking them for a refund or replacement goods. However, the customer has a right of action against you. If the manufacturer refuses to cooperate or has gone out of business, you must still provide a remedy to the customer, and then pursue your own remedy yourself in whatever way you can.
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When you sell goods you warrant that you have the right to sell them (that is, you have title to them). You also warrant that they are not dangerous. The warranties apply irrespective of anything you may say, or any written warranties accompanying the goods.
Merchantable quality All goods that are sold to the public must be of merchantable quality. This is the consumer protection catch-all. It means that goods must be of a reasonable standard, and must be fit for the purpose for which goods of that kind are normally bought. For example, a toaster must toast, a clock must keep the time, the zipper in a pair of slacks must slide, and so on. If customers buy something and it does not work properly or is not of a standard they are reasonably entitled to expect, they can bring it back and insist that you replace it or refund their money. Your obligation with regard to merchantable quality is reduced if you draw attention to faults in an item before someone buys it. For example, if you have shop-soiled goods and you advertise them as such at a reduced price, a buyer would be expected to accept the fact that they are not in their original pristine condition. Similarly, if you sell a load of factory seconds, provided you make it clear what they are, a customer would have to accept minor defects. But even in these circumstances customers may have some rights. For example, they might be expected to accept that an electric kettle had a scratch on the side, but if the kettle did not have an element so that it could not boil water, it could be returned. Customers who have inspected goods before buying and could reasonably be expected to have seen a defect may have reduced their right to complain. However, you may find it hard to rely too strongly on this. It would depend on the circumstances, but if, say, a customer bought a chair after looking at it in the shop, and later at home discovered the fabric was torn, even in a conspicuous place, it would be a brave shopkeeper who would refuse to respond to a complaint.
Fit for the purpose Goods must be fit for the purpose for which they are sold. This is an important warranty, and traders are not always as conscious
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of it as they might be. It goes beyond the general fitness for purpose contained in the merchantable quality warranty, and means that if customers tell you of the particular purpose for which they want something, whatever you sell them must be fit for that purpose. For example, if a customer tells you that she wants to wear a watch while scuba diving, the watch you advise her to buy must be waterproof. Jane B asked the shopkeeper for a chair to support her back, and that she could sit in for long periods without causing her back to ache. The shopkeeper pointed to a chair and said, `That's the most expensive chair in the shop, but it's the one you want'. Jane indicated another chair with a more flexible back, but the shopkeeper said the high, rigid back on the chair he was recommending was better. After a week of sitting in the chair, it became apparent to Jane that her back was aching just as much as before and that a flexible-backed chair would be more suitable. The shop refused to change the chair. The manager said that Jane had made her choice and it was now too late to do anything about it. The shop was entitled to its stand on the test of merchantable quality — the chair Jane had bought was beautifully made, and had no flaws of a general kind. However, Jane had made it very clear that she wanted a chair for the particular purpose of preventing her back from aching, and the chair she had been advised to buy did not fulfil the purpose. Eventually, after some legal argument, the shop agreed to replace the chair.
Note that shopkeepers are not normally expected to be experts in medical matters, and the case was a complex one. It nevertheless illustrates the fact that there is a specific obligation over and above the merchantable quality warranty. Here is a case with a different outcome: Mrs Griffiths bought a coat without telling the salesperson that she had abnormally sensitive skin. She subsequently contracted dermatitis, and sued the shop. The court held that she was not entitled to damages as there was nothing in the cloth that would have affected the skin of a normal person. Mrs Griffiths had not disclosed that she had skin problems.
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A customer is entitled to rely on your skill and judgment in assessing whether goods are fit for a particular purpose, if it is reasonable to do so. Shop assistants will generally be expected to have sufficient knowledge about goods they sell for customers to be able to rely on what they say (although probably not if the assistant is a checkout operator). But if customers substitute their skill and judgment for yours, for example, by asking for a particular brand, then they cannot hold you responsible if the item does not fulfil the purpose for which they bought it.
As they are described If goods are described in a certain way, they must fit the description. For example, if handbags are described as leather or shirts are described as pure cotton, they must be made from those materials and not vinyl or polyester. If a kettle is described on the box as black and when unpacked turns out to be brown, the customer has the right to return it. This provision applies to any verbal descriptions you may give, or to descriptions on the product label or in an advertisement. If customers buy something as a result of a sample you have shown them, the goods they buy must be the same as the sample, especially with regard to standard and quality. The same provision applies to goods, for example, small electrical appliances bought on the basis of a demonstration. Something that is bought on the basis of a sample must also be free from defects that would not have been obvious on a reasonable inspection. A firm of manufacturers submitted a sample of material to some cloth merchants, and an order was subsequently given for a quantity of material of a weight and quality equal to the sample. It was later discovered that the cloth, when made up into garments by tailors who were customers of the cloth merchants, split at the seams and was therefore unsuitable for the purpose for which it was intended, even though it was equal to the sample. The court said that the cloth merchants were entitled to compensation because, although the cloth was equal to the sample, the defect could not have been discovered by a reasonable examination.
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Title Customers are entitled to assume that you have the right to sell goods you are offering for sale — in other words, that the goods are not stolen or mortgaged to someone else. If you were to sell stolen or leased goods, customers would have the right to get their money back. It is the true owner who has the right to the goods.
Safety The law relating to unsafe goods has been strengthened in the last few years. In a nutshell, if goods are unsafe the customer is entitled to return them. If the goods have caused an injury, the person who was injured (the customer or anyone else who used the unsafe item) may be entitled to compensation. Obviously the purpose of the goods is sometimes a relevant factor; if someone is cut by a sharp knife they can't usually complain. In general, the manufacturer is liable for unsafe goods but there are some circumstances when the retailer may be liable, for example, if the retailer has put their own brand on the goods. Many potentially dangerous goods are covered by special safety standards as well as the general law, and manufacturers should be well-acquainted with these or risk being prosecuted as well as sued for damages. It is possible to take out product liability insurance to protect you against a claim arising out of unsafe goods.
REMEDIES FOR FAULTY GOODS If goods are faulty, the customer has the right to a refund, a replacement or repair — the choice is the customer's. Most customers will agree to a replacement item, but they are entitled to insist on a full refund — perhaps they would rather take their business somewhere else. The customer cannot usually be held responsible for the costs of returning goods to the manufacturer. Either you will have an agreement with the manufacturer that they will bear freight costs, or you will have to bear them yourself. If unsatisfactory goods are portable, you can usually expect that the customer will return them to you and you will then organise their return to the manufacturer.
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WARRANTIES ON SERVICES If you sell services, you provide certain legally imposed warranties in the same way as someone who sells goods. In the case of services, you warrant that: the service will be carried out with due care and skill any materials you supply will be fit for the purpose for which they are required the service and any materials used will be fit for any particular purpose made known to you.
Due care and skill A person engaged in a trade or profession must carry out work with the same care and skill as a reasonably competent member of that trade or profession. For example, if you are a qualified carpenter, you are expected to produce work of a standard normally provided by skilled carpenters. This would be higher than the standard of work expected of an odd-job person. Because standard of work can be hard to assess objectively, it is a frequent cause of dispute. Generally, the most practical way of resolving a dispute is to get at least two independent opinions from other qualified contractors. Sometimes trade associations have mechanisms for resolving such disputes.
Materials fit for the purpose This is similar to the merchantable quality provision for goods, and means that any materials provided in the course of repairs or work done as part of a service contract must be of reasonable quality and suitable for the purpose for which they are intended. However, if the customer insists that particular materials be used, and this is contrary to your advice, the customer cannot then complain if they turn out to be unsuitable.
Services fit for the purpose If a customer makes known a particular purpose or desired result from a service before you start work, the service must achieve that result. For example, if you are engaged to build a carport to house a caravan and when the carport is completed the roof is too low for the van to fit under, the customer can require you to
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build the carport again — assuming that you know or should have known the dimensions of the caravan.
REMEDIES FOR UNSATISFACTORY SERVICES If a customer can establish that a service you have provided is unsatisfactory (on an objective assessment, not just according to their own standards), the customer can ask you to do the job again without further charge. This includes doing the work and providing any materials required, as well as any work involved in starting again, for example, tearing up concrete that has subsided and cracked (provided this was not the customer's fault). The customer is only entitled to compensation for that part of the work that was unsatisfactory. For example, if part of a driveway cracks, you probably only have to replace the cracked section. The question of damages for delay usually depends on the contract. If there is a clause saying that time is of the essence in completion of the work, then the customer is entitled to be compensated for any delay. Normally contractors try to avoid such clauses, since delays may be beyond their control. If you get into a dispute with a customer over delay, you should see a lawyer, as various procedures must usually be followed and you will need professional advice.
CONSEQUENTIAL LOSS Additional loss that flows directly from faulty goods or unsatisfactory services is called consequential loss. A customer may have a legal right to claim compensation for this as well as for the item or service itself. For example, a customer whose new freezer fails to operate may be able to claim not only for the freezer to be fixed or replaced but also compensation for spoiled food. Similarly, if you replace the tiles in a roof and do not do the job properly, so that water leaks in and ruins the carpet, the customer may be able to claim the cost of the carpet as well as having the work on the roof done again. Consequential loss is a difficult area of the law and, in practice, not many claims are successful; however, the potential is there for a claim.
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DANGEROUS SERVICES If a person is injured as a result of an improperly performed service, he or she can sue you for compensation. This is so even if the person has no direct relationship with you. For example, if you service a lift and leave it in a dangerous condition, you can be sued by anyone injured in the lift.
Limiting liability and exclusion clauses To try to avoid liability for damage or injury suffered as a result of the goods or services they provide, businesses sometimes include in their contracts a clause stating that they are not liable. Sometimes these clauses are against the law, and sometimes they are useless. Sometimes they are worth having. You cannot contract out of liability for unsatisfactory goods and services. The consumer protection laws apply irrespective of any statement you may make to the contrary. Goods must be of merchantable quality, and so forth, and services must be carried out with due care and skill. Nor can you limit the extent of your liability, for example, by a warranty saying that if an item proves faulty within three months it will be repaired free of charge, but not after that. There is no time limit on the right to make a claim if an item is inherently unsatisfactory. As a general rule, you cannot contract out of liability for negligence. If you or one of your employees is unduly careless and damage or injury is caused as a result, you will normally be liable, regardless of any exclusion clause. You may be able to contract out of liability for loss or damage from other causes, although increasingly the courts are refusing to enforce what they consider to be unjust exclusion clauses. For an exclusion clause to stand up, you must take reasonable steps to bring it to a customer's attention before he or she accepts the goods or services you are offering. Make sure a notice excluding liability is prominently displayed where customers can see it as they enter the premises. Exclusion clauses are something of a vexed question, and the law is changing. If you want to exclude liability in your business dealings you should get expert legal advice.
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In a case in Victoria, Mr J took his car to a local car wash. He handed the car over to one of the employees for attention. As the employee drove the car on to the conveyor rail, the exhaust was torn from the car. Mr J wrote to the company requesting reimbursement for the cost of the repairs. The company refused, referring to the conditions for use of the car wash, displayed at the entrance to the site, which said that no responsibility was acceptable for any possible damage. Mr J took the matter to the Small Claims Tribunal, which found the company liable because it had failed to exercise due care in the performance of its services. The Tribunal said that the company was not entitled to contract out its obligation in this regard, and that therefore the conditions on the sign did not form part of its contract with Mr J. The Tribunal went on to say that even if the conditions had been part of the contract it would have considered them harsh and unconscionable and set them aside on that ground. The referee of the Tribunal concluded his findings by saying: The message is clear. Traders will not be permitted to avoid their obligations in the provision of goods and services. Traders should take heed that displaying a sign disclaiming liability for damage does not relieve them of the responsibility to perform their services with due care.
A decision of a small claims tribunal does not carry the weight of a court judgment, but it is an indication of the trend in thinking.
ADVERTISING YOUR PRODUCT Most businesses advertise what they are selling in one way or another. You may use advertisements such as large full-page spreads in the Saturday newspapers, or smaller ads in the local rag, or simply signs in your shop window or perhaps a few lines in the classifieds. Whatever type of advertising you use, it must comply with strict laws.
Truth in advertising First,
and
most
importantly,
an
advertisement
must
tell
the
truth.
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If it does not, customers who have been misled by the advertisement can demand their money back for purchases resulting from it. As well, you can be prosecuted by the authorities for a criminal offence, and heavily fined. Advertisements must not only be true in fact, they must also not create a false impression. For example, in one case a manufacturer stated that its product had been `laboratory tested' — which was true as far as it went, but the product had failed the test! The firm was fined for misleading advertising. A distributor of skin creams, Sunspot complained to the Federal Court that a rival distributor, Narhex, packaged its cream in such a way as to represent that the product was manufactured in France or has some close connection with France or Paris when, in fact, the product was made in Japan. Narhex pointed out that the package stated that the cream was made in Japan, but the court found against the company. The court said that the general elegance of the design of the Narhex packaging, including rich but tasteful colouring, coupled with the prominent use of the word `Paris', a description of the cream in French, and the fact that the directions for use included in the box were in both French and English, all combined to convey the impression of a definite connection with France. The court decided that the impression conveyed was much more than that of a mere historical connection with France; it indicated that the product was currently available to consumers in France and Paris and could even be said to convey overtones of acceptance of the product by discerning Parisian buyers.
You may not give a certain impression in your main advertisement and then include small print qualifying what has been said. Similarly, a TV advertisement may not, in a swift flash at the end, qualify something that people hardly have time to read. You are allowed to compare your product with a competitor in an advertisement, but it must be an honest comparison. For example, you may not compare your six-cylinder car with the opposition's four-cylinder car, unless you draw attention to the difference.
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It is against the law to represent something as new when it has been used. You may not advertise that a product has sponsorship or approval that it does not in fact have. A well-known electrical company published advertisements in top-circulation magazines such as The Australian Women's Weekly, New idea and The Reader's Digest, saying that every microwave oven sold by the company had been tested and approved by the Standards Association of Australia (SAA). The advertisements also carried a reproduction of the Standards Association trademark. It turned out that the ovens had not been given SAA approval, even though they did in fact conform with the standard. The company, which pleaded guilty, was fined $100 000.
The law, however, acknowledges that a certain amount of exaggeration is part of the competitive scene. You would not be prosecuted for advertising a sale with `the biggest bargains ever'.
Price advertising It is especially important to ensure that advertisements as to price do not mislead your customers. For example, if goods are advertised as `from x dollars', there must be a reasonable number of items available at x dollars. It is specifically forbidden to disguise price by not including additional things that are needed to make an item work, such as batteries for a mechanical toy or transistor. If essential extras are not included in the advertised price, this must be clearly stated. You may not state only part of the price of goods without also stating the cash price. For example, it is an offence to show goods available at a low deposit or on low repayment terms and not say what the full cash price is.
Price reductions If you advertise something for sale at `x dollars off', this must be a genuine reduction in the regular selling price. If you say
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something is less than the regular retail price, you should know what the regular retail price is. A bakery reduced the weights of certain loaves of bread, and advertised that prices would be reduced accordingly. In fact the prices were not reduced, and in some cases were actually increased. The bakery was prosecuted, and fined over $8000.
Advertisements claiming that goods are `below cost' must take into account any discounts or allowances received from the wholesaler. In other word, the `cost' must be what the goods cost you on this occasion, not on other occasions. You may not `rig' a price reduction. This means that you cannot, for example, mark something up from $5 to $10 if you do not intend selling it at $10, but only intend advertising it at a later date as `was $10, now $5'. Reductions must be reasonably substantial. It would be misleading to advertise goods previously selling at $50 as `$49.99, reduced'. If you advertise an opening sale, you must genuinely intend to increase the prices at a later date. If you are having a closing-down, clearance or liquidation sale, this must be a genuine sale.
Free gifts and prizes You may not offer a `free gift' with a purchase if the price has been inflated to cover the cost of the items you are `giving away'. Also, you must make it quite clear when the free gift applies. For example, you may not advertise a free gift for purchasers of an appliance and then limit the gift to people who buy the most expensive model. A free gift or prize must not be substantially different from what has been advertised.
Bait advertising So-called `bait advertising' is an offence. This means that you cannot advertise a bargain to get people into your shop and then say that the reduced price item is no longer available, but a more expensive model is. If you offer goods at a special price they must be available in a reasonable quantity for a reasonable time after the advertisement
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appears. What is reasonable will depend on the circumstances. As an example, if you are a small suburban electrical supplier, you will not be expected to have as large a supply as a busy department store. You may not escape your obligations by including a statement such as `goods available while stocks last'. While this may be true, you will have a responsibility to have adequate supplies. If stocks are genuinely limited because, say, you are closing down, you should say so. If you include a statement to the effect that you accept no responsibility for supply because of circumstances beyond your control, the onus is on you to establish that circumstances really were beyond your control.
8 Unfair trading The primary purpose of both the federal Trade Practices Act and the various State Fair Trading Acts is to maintain the advantages flowing from free competition and protect consumers against misleading or deceptive conduct in trade or commerce. The federal Act is administered by the Australian Competition and Consumer Commission (ACCC).
MISLEADING OR DECEPTIVE CONDUCT Section 52 of the Trade Practices Act says: A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
A simple statement, with almost limitless application. If you do something in the course of your business that misleads or deceives anyone else — another business-owner with whom you have dealings, or a consumer, or the public at large — the full force of the law can be brought against you. Conversely, if you are misled or deceived you can take legal action. It is not necessary for someone actually to have been deceived for action to be taken. It is enough that the conduct might deceive someone. Furthermore, whether or not deception is intentional
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is irrelevant. If conduct has the effect of misleading or deceiving, it is against the law, even if you did not mean to mislead or deceive. Remember that if you are found guilty of misleading conduct it is likely to prove expensive. You may have to pay not only a substantial fine, but also your legal costs and probably your opponent's legal costs. Conduct that merely causes uncertainty does not infringe the law, it must actually be misleading. McWilliams marketed 20-litre bottles of wine in an advertisement, with `Big Mac' written across the top. McDonald's fast food chain marketed a hamburger under that name, and sought to stop the McWilliams advertisement on the ground that it was deceptive and misleading. The court found against McDonald's. It said that even though McWilliams' conduct might cause confusion in a person's mind as to whether there was a business connection between the two companies, such a person would not be misled. Any misunderstanding that did occur would be induced by an erroneous assumption on that person's part. Paul Hogan and the owners of copyright in the film Crocodile Dundee successfully stopped an advertisement for Grosby shoes on the basis that it was deceptive and misleading. In this case, a television commercial was consciously designed as a send-up of the knife scene in the movie. `He's wearing leather shoes. You call those leather shoes? Now these are leather shoes . . .' The court said that potential purchasers were likely to be misled into believing that the shoes were in some way connected with the film, that a licence for marketing had been given and that Paul Hogan had agreed to associate himself with them.
Because of its broad scope, Section 52 is one of the most litigated sections of the Act. Most of the cases have been brought by one business against another, so in practice it has become just as important in regulating commercial relations as in consumer protection.
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UNCONSCIONABLE CONDUCT Companies are prohibited from engaging in unconscionable conduct. This is a deliberately vague term that is basically intended to prevent large, powerful companies from using their might to force unfair bargains on small companies. These are some of the matters the court will consider in deciding if conduct is unconscionable: the relative bargaining positions of the parties how difficult the provisions in the contract are to comply with, and how necessary they are whether the other party was able to understand written documents used in the transaction whether any undue influence, unfair pressure or other unfair tactics were used.
EXCLUSIVE DEALING Traders may not impose conditions that restrict the buying and selling decisions of their customers or suppliers if these conditions have the effect of substantially lessening competition. For example, a large brewing company may not say in a lease agreement with a hotel that the hotel is forbidden to sell boutique beers to its customers. However, this provision may not apply if the arrangement can be shown to be of benefit to the public. Then it is possible to obtain a clearance from the ACCC. A supplier may not supply goods on the condition that the buyer must (or must not) acquire goods and services from another unrelated supplier. It may be an offence for a supplier to sell goods on the condition that the buyer will not resell the goods to any other specified person, if this substantially lessens competition. Legion Cabs offered a number of benefits to its members, including a radio service and discounted petrol and emergency repair facilities from Shell service stations. Legion's rules required members to buy certain quotas of fuel from Shell. Shell had lent Legion money to install a new communications system, and had agreed to allow rebates to Legion where
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sufficient quantities of fuel were bought. The rebates were set off against the loan. If Legion's members did not buy certain minimum amounts of fuel from Shell, they were severely penalised and could even be expelled from the cooperative. The ACCC took action against Legion, which was fined $3000.
ABUSE OF MARKET POWER If a company is in a position substantially to control the market for goods or services, the company may not take advantage of that position to put a competitor out of business, or damage the business of a competitor. For example, a large and powerful company may not use its position in the marketplace to make it impossible for a small competing business to operate.
PRICE FIXING At one time it was common practice for suppliers of similar goods to agree between themselves that they would charge the same price for the goods. This is now against the law, although the ACCC will sometimes allow an exception to be made. When Bankcard was being set up by the various banks, they asked the then Trade Practices Commission (now the ACCC) to allow them to agree on the fixing of merchant bank service charges and interest charges. Each bank organised its own Bankcard, but all banks had set up a joint venture service company to carry out the accounting services associated with the system. The Trade Practices Commission said it would authorise various aspects of the agreement because the public would benefit from the efficiency resulting from the joint operation of the Bankcard scheme.
RESALE PRICE MAINTENANCE Resale price maintenance is the practice of fixing the minimum price of goods at subsequent levels of distribution. This is
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prohibited. A manufacturer may not tell a wholesaler, who may not tell a retailer, what price is to be charged for goods. Ron Hodgson Motors, which dealt in both new and used cars, was awarded a franchise by Westco Motors to sell Mazda cars. After a period, Westco noticed that Ron Hodgson Motors seemed to be selling cars at a discount price. Westco was also unhappy with the commercial stability of the dealer, and cancelled the franchise. Ron Hodgson Motors argued in the Federal Court that Westco's action amounted to resale price maintenance. Westco argued that it had valid reasons for cancelling the franchise, apart from being dissatisfied with the dealer's discounting practices. The court found in favour of Ron Hodgson Motors, saying that it was enough that the discounting practices were one of the reasons for the termination of the franchise. This was sufficient to establish resale price maintenance conduct.
PRICE DISCRIMINATION Price discrimination is when a supplier provides goods at one price to one retailer, and at a different price to another. This was most commonly seen in the supply of goods to supermarkets, with their enormous stock turnover, at very much cheaper prices than to small corner stores. The result for the general public was cheaper prices from supermarkets while corner stores struggled to exist. Although cheaper prices were clearly in the interests of consumers, after some debate it was decided that consumers would not be well-serviced if small corner stores were forced out of business. Consequently, the Act says it is unlawful to discriminate between purchasers of like goods in price and various related areas, if the discrimination is likely to have the effect of substantially lessening competition.
MARKET-SHARING ARRANGEMENTS The law prohibits any agreement that divides up the marketplace so that it creates an area of monopoly.
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The National Automatic Laundry and Cleaning Council (NALCC) was a group of 100 automatic laundry-owners and a number of distributors of coin-operated laundry equipment. The distributor members accounted for 60 per cent of the equipment market. The rules of the council said that no distributor should supply equipment to any establishment situated less than 0.75 km from an NALCC member laundry. The ACCC said that this was a market-sharing agreement for the benefit of NALCC members, and ordered that the rule could no longer stand.
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9 Granting credit Granting credit has long been accepted business practice. It generates both customer loyalty and new customers who are attracted by the ease of buying. It also means you have to collect the money. Credit transactions generally occur in one of three ways — customers buy something using a credit card, they operate a monthly account, or they enter into some kind of timepayment arrangement. In the case of a credit card, and usually in the case of time payment, you will not grant the credit yourself, but will hand the arrangements over to a financial institution whose business is providing credit. Historically, credit has been a complicated and fragmented area, covered by a mishmash of State laws. During the 1980s, most States standardised their legislation so the position improved. However, the situation was still far from ideal and on 1 November 1996, the Consumer Credit Code was adopted by all States so that now all consumer credit arrangements in Australia entered into after that date are governed by the Code. A broad overview of the Code is given below. However, it is a lengthy and detailed piece of legislation and anyone extending credit should get proper advice from a lawyer or accountant to ensure that they comply with the Code. Credit transactions entered into before 1 November 1996 are still governed by the various State Credit Acts which existed before the implementation of the Code.
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THE CONSUMER CREDIT CODE The Consumer Credit Code governs most credit transactions with which business is concerned. Credit will be covered by the Code if: the debtor is a natural person or strata title corporation the credit is mainly for personal, domestic or household purposes there is a charge for the credit (normally this will be interest on the loan) it is part of the business of the credit provider (for example, a loan between friends would not be subject to the Code). Note that the Code generally does not apply if the borrower is a company (even a small family company) and the monetary limits on credit transactions which applied under the old credit acts no longer exist. The types of transactions to which the Code applies include: personal loans staff loans bank term loans overdrafts credit card facilities credit and debt facilities housing loans hire of goods consumer leases retail credit. Basically, the Code provides that credit information must be made available in a clear, easy-to-understand way, in a typeface that is not less than 10 point. You must tell a borrower what their rights and obligations are in writing and you must provide a written contract disclosing all relevant information about the arrangement, including interest rates, fees and commissions. You have a legal obligation to be careful about whom you extend credit to and to avoid entering into a credit arrangement with a customer who would find it difficult to repay the money. If the contract is unjust, the court can order that it be changed or even declare it void.
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Credit contracts Credit arrangements must be in the form of a written contract signed by both credit provider and borrower. Either before or as part of the contract you must give the borrower certain information including: the name of the credit provider the amount of credit to whom the payments are to be made the annual percentage rate how interest charges are calculated the total interest amount if the contract is for less than 7 years the number, amount and frequency of repayments credit fees and charges details of any changes that can be made under the contract, especially regarding fees and charges the arrangements as to statements of account any default rate of interest details of enforcement expenses details of any mortgage or guarantee details of any commission payable details of insurance financed by the contract a clear description of the goods and their price if they are being paid for by instalments any other information or warnings which may be required by the Regulations. As well, you must provide an information statement explaining the borrower's rights and obligations under the Consumer Credit Code (as set out in Form 2 of the Regulations and obtainable from the government information service).
Exceptions to the Code The Consumer Credit Code does not apply to: short-term credit (for 62 days or less) credit provided without any prior agreement (for example, if your cheque account is overdrawn and you don't have an overdraft facility) continuing credit where no interest is paid but account charges may be imposed
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the debit part of a joint debit and credit facility bills of exchange or promissory notes insurance premiums paid by instalments credit for investments credit for business purposes credit provided by pawnbrokers (unless the transaction is unjust) credit provided to beneficiaries by trustees of an estate (unless the transaction is unjust) most employee loans (but you should check this as some provisions apply). Note that if you obtain credit, for example, for the purchase of goods from a supplier, the Code will probably not apply since it is for a business purpose. Furthermore, if you operate as a company you will not be protected by the Code in obtaining credit. Although it is not required by law, as a matter of practice, if the credit is being provided for business or investment, whether you are the credit provider or the borrower, there should be no doubt as to its purpose and that the loan is not governed by the Code.
Consumer leases A consumer lease, that is, a contract for the temporary use (hire) of goods, is regulated by the leasing provisions of the Consumer Credit Code if there is no right or obligation to purchase the goods. If there is right or obligation to purchase, the arrangement is covered by the credit provisions of the Code. Consumer leases are not covered by the Code if they are for a fixed period of four months or less, if they are for an indefinite period, or if they are part of an employment package or benefit. A consumer lease must be in writing and must include: a clear description or identification of the goods hired the amount of the deposit or any other thing of value required before the goods are hired the amount of any stamp duty or other government charges any fees or charges not included in the normal rental charge the amount of each rental payment the date when the first rental payment is due
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when subsequent rental payments are due the number of rental payments due the total amount of rent to be paid a statement of the conditions under which the lease can be terminated a statement of any liabilities incurred if the lease is terminated. Once the lease is signed you must provide a copy to the lessee within fourteen days together with the Information Statement as set out in Form 11 of the Regulations to the Code, explaining the lessee's rights and obligations.
Hire-purchase The Consumer Credit Code treats hire-purchase as a `sale by instalments' and if a hirepurchase arrangement passes the `for personal, domestic or household purposes' test, it will be regulated by the Code. The only States in which specific hire-purchase legislation now exists are Victoria, Queensland, Western Australia and Tasmania and it applies only to non-consumer activities such as those of small business and farmers which are not covered by the Consumer Credit Code. In this case, there are warranties that the goods are free from any encumbrances, as well as the normal consumer protection provisions that goods are of merchantable quality and fit for the purpose for which they are sold.
Guarantees The Consumer Credit Code contains specific provision for situations where someone has gone guarantor for a credit contract. In this case: the guarantee must be written and signed by the guarantor the guarantee must be easily legible and clearly expressed the amount required under the guarantee may not be more than the borrower is liable for if an extension of the guarantee is sought, the credit provider must give the guarantor a copy of the contract and obtain the guarantor's written acceptance if an increase in liability is sought the credit provider must give the guarantor notice in writing and the guarantor must agree in writing enforcement expenses may only be those reasonably incurred.
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Changes to the contract or lease The contract can be changed if both parties agree. In this case, you must confirm the changes in writing within 30 days and provide the borrower with any information required under the Regulations. A credit provider can only change the contract if there is provision in the contract allowing them to do so. If you want to increase the amount, frequency, the way repayments are calculated or increase credit fees or charges you must give 30 days written notice. Interest rate changes, however, can be notified up to the day of the change.
Personal hardship If a borrower suffers personal hardship, for example, loses their job or becomes ill so that they cannot keep up the repayments, they have the right to have the contract varied to take account of this. For example, the payments may be reduced or suspended until they recover or get a new job.
While the credit contract is in force The obligations of a credit provider do not end once the contract has been signed. For the duration of the contract, you must supply the borrower with regular account statements that include: the dates on which the statement period begins and ends the opening and closing balances for the statement period all fees and charges details of each amount of credit provided during the statement period the name of the supplier in any credit card purchases interest charges, including when they were charged the annual percentage rate, including any changes during the statement period any payments and transfers to and from other accounts the minimum payment owed and the date it is due any insurance payments made, including the name of the insurer and any commission paid any corrections to previous accounts. Note
that
accounts
are
not
required
if
rates
and
payments
are
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fixed, or if the customer has no outstanding debts and has not accessed the account during the statement period.
Requests for further information In addition to the account statements, a borrower or guarantor is entitled to ask for: the current balance in their account any amounts credited or debited during a specific period any overdue payments and the due date any amount payable and the date it became due. You must reply to a request in writing within 14 days (30 days if the information sought is over a year old) — but you do not have to reply if you have already given the information within the last three months.
Repossession Of course, the credit provider has the right to repossess goods if the borrower fails to make payments. However, certain strict procedures must be followed or you risk legal action. Where goods are provided on credit you must: give 30 days notice of an intention to repossess, and allow the borrower to either make the outstanding repayments or reach a mutually acceptable agreement for repayment before taking action against a guarantor, obtain a court judgment against the borrower and allow 30 days to pay obtain a court order if the amount outstanding is less than 25 per cent or up to $10 000 (whichever is the lesser), before you repossess. After you have taken possession of the goods you must give the borrower a written notice containing the estimated value of the goods and the enforcement expenses to date (which must be reasonable). If the borrower pays this amount within 21 days, you must return the goods. If the borrower surrenders the goods voluntarily, you are entitled to sell them without the notice period but you must obtain the best price you reasonably can. For example, if you were to sell the goods at auction for less than half their proper value and
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without concern for the interests of the borrower, you may have to compensate the borrower for the difference. Before you can repossess leased goods you must give 30 days written notice to the lessee, unless: the lease says you can take possession of the goods on a specified date at the end of the lease you have reasonable grounds to believe the lessee has disposed of or intends to dispose of the goods you have been unable to contact the lessee despite reasonable attempts the lessee is unable to meet future repayments you have a court order allowing you to do so. The borrower or lessee has the right to negotiate a postponement of enforcement proceedings if the amount of credit is less than $125 000; if the negotiations are unsuccessful the borrower may apply to the court for a postponement. You may not enter the borrower's premises to repossess without their permission or a court order.
Penalties If you breach a key requirement of the Code you may be liable for a penalty of up to $500 000 plus compensation for any loss suffered by a borrower or guarantor. Any attempt to contract out of the Code is automatically void and an offence for which you may be penalised up to $10 000.
ADVERTISING GOODS ON CREDIT The advertising of credit is governed by the federal Trade Practices Act and the various State Fair Trading Acts. In general, these provide that if you advertise goods on credit, you must tell customers how much they are really paying for the goods. You may not simply say something like, `Only x dollars weekly' but must state: the cash price the length of the contract the total amount repayable under the contract — that is, the cost of the goods, plus the interest and any charges involved.
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The Consumer Credit Code also contains specific provisions about advertising and marketing credit, basically: if the advertisement refers to the cost of credit, it must contain the annual percentage rate and disclose any fees and charges there must be no false or misleading representations a credit provider's representative must not harass anyone or visit anyone's residence without prior arrangement, to induce them to apply for credit.
INSURANCE A customer may not be forced to take out insurance as a condition of getting credit, except in the case of compulsory third-party insurance or in relation to a mortgage. If insurance is a legitimate condition of the credit, the credit provider may not insist that it be with a particular insurer. For example, if a person is buying a car, he or she cannot be forced to insure it with an insurer connected with the finance company. There are many detailed provisions as to the information that must be supplied to customers who are arranging insurance in relation to a credit contract. Business-owners involved in this should ensure they are familiar with what the laws are, and that they comply with them.
LAY-BYS Lay-by is still a common way for retail businesses to provide direct credit for customers: the customer pays a deposit on the goods, and you retain possession of them until the full amount has been paid. Provided there is no interest or other credit charge made on laybys, they are not covered by the Consumer Credit Code. Some States have detailed laws covering lay-bys, others do not. Generally, either guidelines exist, or the common law prevails. If something is bought on lay-by, it should be set aside and kept safe and undamaged. It should be labelled clearly, and the customer should be given an identifying number. The customer has the right to inspect the goods at any mutually convenient time. When the sale takes place, the customer should be given a
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document setting out the terms of the sale. A statement of the customer's rights should also be supplied. If the goods have to be ordered in, you may not be able to ask for a deposit that is more than 20 per cent of the purchase price. The customer is entitled to cancel the sale at any time before the full purchase price has been paid. If this happens you must refund the instalments, but you are entitled to deduct an amount to cover your costs. You are entitled to cancel the sale if the customer fails to pay the instalments, or for any other reason. However, you must notify the customer of your intention to cancel, and give them the opportunity to bring the payments up to date. If you go ahead with the cancellation, you must refund the instalments already paid, with a deduction to cover your costs. If the goods are lost or damaged in your possession and you cannot replace them, the customer is entitled to recover not only the money already paid, but also the difference between the price originally charged for the goods and the current price for which the goods are now selling.
CHECKING A CUSTOMER'S CREDITWORTHINESS If you are intending to provide credit, it is almost certainly worth joining one of the credit-checking associations such as the Credit Reference Association of Australia (CRAA). This is a private non-profit organisation, owned and controlled by its members, which keeps files on some 11 million Australians who use credit. The Association keeps computer records to which members have access and will enable you to find out if a customer seeking credit has previously defaulted on payments; if so, you can decide if you are prepared to accept the risk. (Contrary to popular belief, credit associations do not give credit ratings but simply state the relevant credit history.) You should get the customer's written consent before carrying out a credit check.
RECOVERING DEBTS If you grant credit at all, chasing money owed to you is likely to take up a large amount of your time. Although most people pay
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their debts, some do not and you have no option but to embark on the process of trying to force them to meet their obligations. No matter how much time and effort you put into it, there is no guarantee that you will be successful. The rate of recovery of bad debts is depressingly low. If someone has no money, a court order saying that they must pay a debt is of little use. The court can say that you are owed money and that it should be paid, but the court cannot conjure up the payment. Do not grant credit unless you have reasonable grounds for believing that the person is likely to be able to pay.
What to do Obviously, the first step to take in recovering money is to send an account. Then perhaps follow it with a letter drawing attention to the outstanding debt and, depending on the circumstances, possibly make a couple of phone calls as well. You can, of course, employ a debt collection agency to pursue a debt, but you, and not the debtor, will usually have to bear the cost. State laws with regard to debt recovery vary, but the basic position is the same. You normally start by sending a letter of demand. This should say what the debt is, and that unless payment is received within a specified period, usually seven days, legal proceedings will be started without further notice. If all else fails and the debt is not repaid as a result of the letter of demand, you may then start court action. There are two main stages: obtaining judgment — legal recognition by the court that the debt exists and you have the right to be paid enforcing judgment — actually getting the money from the debtor. For most debts, your case will be heard in the local court. If the amount involved is not great, you may decide that it is not worth incurring legal fees, and conduct the matter yourself. You will fill out a summons, including details of your claim, and file it with the court. The court will issue the summons (stamp it with the court seal) and arrange for it to be served on the debtor. You will have to pay a fee. In most instances, if the debtor does not take action to repay the debt within 14 to 28 days, the court can make a judgment
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against the debtor without the need for a court hearing. Of course, if the debt is disputed, the debtor has the right to have the case heard. More often than not, there is no dispute and no defence. If that is the case, the court will make a default judgment against the debtor, provided it has received two sworn statements from you: an Affidavit of Debt — saying how much is owed and an Affidavit of Service — saying that the summons has been served. If the court makes a judgment in your favour, the amount of money due to you is now called a judgment debt. You will generally be awarded some costs, but not all. So far, so good. However, you still may have to collect the money. If the debt remains unpaid, you can ask for a garnishee or attachment of earnings order (the terminology depends on the State). This means that the employer is ordered to deduct a certain amount from the debtor's wages and pay it to you, or the bank may be ordered to pay you a certain amount from the debtor's bank account. In some States there are restrictions on the use that can be made of garnishee orders. If requested by the debtor the court may grant an instalment order which means that the court will ask for details of the debtor's financial position and then make an order for repayment in instalments according to what the debtor can afford. In some instances, a writ of execution (also called a warrant of distress) will be issued against the debtor. This orders the bailiff (a court official) to seize the debtor's goods and sell them to pay the debt. If the debtor owes more than $2000 (in total, including money owed to other creditors), you may elect to take bankruptcy proceedings against them. In this case, unless you are a secured creditor, you will almost certainly not be paid in full, but will receive a certain number of cents in the dollar (see chapter 17, `Bankruptcy and insolvency').
10 Employing staff Once your business grows to the extent that you need to employ someone else to do some of the work, there are many laws to take into account. Australian laws relating to employees are wide-ranging and strict, and anyone who does not comply with them risks being prosecuted by the authorities and sued by an employee. Historically, almost all conditions relating to employment have been covered by awards negotiated by the various employer and employee groups and ratified by either the State or federal industrial commission. Now it is open to individual employers and their staff to negotiate terms and conditions of employment that are appropriate for the particular business in an Australian Workplace Agreement. As well, the federal Workplace Relations Act which became operational at the beginning of 1997 substantially changed the earlier Industrial Relations Act 1988. Each State has a government agency responsible for employment, geared to answering enquiries. If you have a query about some aspect of employing staff, help is usually simply a matter of a phone call. Alternatively, you may be able to get assistance from your trade or professional association.
AUSTRALIAN WORKPLACE AGREEMENTS (AWA) An Australian Workplace Agreement (AWA) is an individual agreement between an employer and an employee about the employee's
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wages and conditions of employment. An AWA may be negotiated with a group of employees but it must be signed by each employee who is a party to it. All signatures must be witnessed — but not by a bargaining agent involved in the negotiations, or a director or manager of the company. An AWA must be filed with the Employment Advocate for approval within fourteen days of signing. The Employment Advocate can approve an AWA if: it complies with the Workplace Relations Act it passes the no-disadvantage test (see below) you gave existing employees a copy of the AWA at least fourteen days before signing or new employees a copy of the AWA at least five days before signing you explained the effect of the AWA to relevant employees after they received the copy and before they signed it the employee freely consented to making the AWA in instances where you did not offer the same AWA to all employees doing the same kind of work, you did not act unfairly or unreasonably.
The no-disadvantage test The no-disadvantage test means that any terms and conditions in an AWA must not be less than those contained in the relevant award or other law. If an employee is not covered by an award, the Employment Advocate may designate an appropriate award (you can apply for a designated award by writing to the Employment Advocate). The no-disadvantage test means that the overall package must not be less favourable than the award. In other words, some terms and conditions may be below award standards provided they are balanced by increases in other terms and conditions.
Other AWA requirements As well as passing the no-disadvantage test, an AWA must include the model antidiscrimination clause, contained in the Regulations made under the Act. If the clause isn't included it is deemed to be included. An AWA must also include a dispute resolution procedure. A model procedure is set down in the Regulations and is deemed to be included in the AWA if there is no alternative.
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Apart from this, what goes in your AWA is up to you and your employees to decide.
Voluntary nature of AWAs It is against the law: for anyone to apply duress to an employer or an employee in connection with an AWA to try to persuade another person to make, or not to make, an AWA, by making a false or misleading statement for anyone who is not a party to AWA negotiations (for example, a union) to use threats or intimidation to try to hinder the negotiations for an employer to dismiss an employee because that employee refused to negotiate, make or sign an AWA. If an employee is dismissed under these circumstances, they have the right to bring a claim for unfair dismissal.
Term of an AWA An AWA stays in force for three years after signing, unless an earlier date is specified. Once the expiry date is passed, the AWA continues until it is replaced by a new agreement, terminated by agreement between the parties or terminated by the Australian Industrial Relations Commission, on application by one of the parties, and provided that termination is not contrary to the public interest.
Who can make an AWA? Because the Workplace Relations Act is a federal law, there are some limitations on which enterprises it covers. However, any business that operates as a company may make an AWA. For the most part, partnerships and sole traders are not covered by the Act except in Victoria and the two federal territories where even unincorporated businesses may make an AWA, and in Queensland where unincorporated businesses covered by a federal award may make an AWA.
Bargaining agents If
you
don't
think
that
you
have
the
time
or
the
expertise
to
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negotiate an AWA yourself, you may appoint a bargaining agent. In essence, a bargaining agent may be anyone who: is at least 18 years of age is not a bankrupt is not acting as a bargaining agent for your employees does not have a criminal record (if this is relevant, you should check the specific provisions, which deal with the severity of the crime and other matters). Some of the people you might use as a bargaining agent include representatives of employer organisations, industrial relations or human resource management consultants, and lawyers. Of course, employees may also appoint a bargaining agent.
Which award covers your employees? Since an AWA cannot contain less favourable terms and conditions than the relevant award, you will need to know what the award(s) relating to your employees are. You can find out by contacting either the State or federal Department of Industrial Relations, or your industry or professional organisation. Checklist — Making an AWA Are you eligible to make an AWA? Do you know which award covers your employees? If you are not a designated award?
covered
by
an
award,
have
Have you thought about changing any ditions set out in laws which apply to your employees?
you
applied
employment
for
con-
Do you want to use a bargaining agent? Will you offer the same kind of work?
same
AWA
to
all
Have you worked out what is to go into your AWA?
employees
doing
the
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Have you given your employees a copy of the Information Statement prepared by the Employment Advocate before they sign the AWA? Have you explained ees, before they sign it?
the
effect
of
the
AWA
to
your
employ-
Did you give your employees a copy of the AWA and have they had the required time to consider the AWA before signing it? Have you and your employees AWA, and had your signatures witnessed?
signed
Have you filed your within 14 days of signing?
the
AWA
with
Is the filed copy of the AWA and signed Employer Filing Application?
and
dated
Employment
accompanied
by
a
your
Advocate
completed
Is the official filing copy of the AWA in English? Where non-English speaking employees are involved, and the AWA has been prepared in a language other than English, does a true and correct English translation accompany the signed AWA? Reproduced with kind permission from the Office of the Employment Advocate (tel 1300 366 632)
RATES OF PAY Once a rate of pay has been set down in an award or AWA it is not open to either you or the employee to negotiate a lower rate of pay. For example, if someone offers to work for you for half pay in return for a job, you are breaking the law if you agree. Once employees are on the regular payroll, if they are at work you must pay them, generally for a 35- or 40-hour week, even if there is no work for them to do. You must pay wages in money and not in kind. For example, you may not pay an employee with company products.
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You must give your employees a statement of how their wages are made up. The statement should include: the gross amount paid, including overtime and any other payments how much is ordinary pay and how much is overtime the amount of tax deducted any other deductions, such as the Medicare levy, child support or health insurance the net amount paid.
OVERTIME An employee who works more than the standard working week (usually 40 hours from Monday to Friday, although this may vary) is normally entitled to overtime. You are entitled to require employees to work a reasonable amount of overtime, provided you pay them. But if overtime is likely to be a regular part of the job, it is sensible to discuss it at the job interview to avoid later difficulties. For example, an employee may be unavailable after hours because she has committed herself to an evening educational course. Overtime rates may differ according to whether the work is done on a weekday or a weekend. Higher penalty rates usually apply for weekend work. It is now open to you to build overtime and penalty rates into an overall rate of pay under an AWA.
DEDUCTIONS FROM PAY You can only make deductions from an employee's pay according to law. You must deduct tax and the Medicare levy. You may have to deduct payments for child support if the employee is separated or divorced and there is an order from the Child Support Agency. If there is a court order saying that an amount is to be deducted from wages to pay debts, you must deduct that amount. No other deductions may be made unless the employee authorises you in writing to do so. The most common requests are for health insurance and superannuation, but usually very small businesses leave these to employees to arrange for themselves.
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Some employees pay off their HECS obligations via the tax system and in this case you may be asked to make an appropriate deduction for that purpose.
LEAVE Annual leave Each year, all employees are entitled to four weeks' fully paid leave. Strictly, leave does not become due until the employee has been in the job for a year but, in practice, many employers will agree to appropriate leave being taken before this — for example, a week after three months in the job, or two weeks after six months. You are entitled to insist that leave be taken at a particular time — say, between Christmas and the New Year — but you must tell employees at least a month before. Similarly, if you do not want leave taken at a particular time, for example, when you are stocktaking, you must give employees at least a month's notice. You cannot keep insisting that it is an inconvenient time for an employee to take leave. Employees should meet your reasonable needs, but they are entitled to holidays and, within reason, provided you are given at least a month's notice, they can choose when to take the holidays. Public holidays are in addition to annual leave, and so must be deducted from the total leave taken if they fall while an employee is away on leave. If an employee leaves or is dismissed, they are entitled to be paid for the amount of annual leave that has accrued.
Sick leave Most employees are entitled to be paid for at least some sick leave, depending on the particular industry, and usually between seven and ten days each year. If sick leave is for more than a day or so, you are entitled to insist on a medical certificate. Unused sick leave may accrue from year to year, but generally employees are not entitled to be paid for unused sick leave when they leave the job. Some businesses are trading sick leave for an increase in the base rate of pay.
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Long-service leave Long-service leave provisions vary from State to State, but usually employees will have some long-service leave entitlements after ten years. There may also be some longservice leave considerations if you sack an employee after five years, or they have to leave because of illness or pressing family commitments.
Parental leave In general, women who have worked for you for at least twelve months are entitled to one year's unpaid maternity leave. It depends on the workplace but increasingly there is provision for up to 52 weeks' parental leave which can be taken by either parent provided they have been in the job for at least twelve months, The leave usually cannot be taken by both parents together, except for the week of the child's birth. When they return from leave either parent is entitled to their old job back or, if that no longer exists, a job as close as possible in pay and status.
Other leave There are many other kinds of leave, including compassionate leave, carer's leave, study leave, bereavement leave, unpaid leave, leave for military service and leave for jury service. If an employee is called up for jury service they are entitled to leave of absence and it is an offence to sack or otherwise penalise such an employee. Depending on the award, you may have to pay the difference between the jury allowance and the employee's ordinary rate of pay.
EMPLOYEES' DUTIES People whom you employ have a general duty to do what you tell them. However, they do not have to obey you if this would damage their health or you ask them to do something illegal, for instance to falsify the books. Nor do they have to do something that is outside the reasonable scope of their job. For example, you cannot expect a telephonist to clean the toilets. However, some areas are not quite so clear-cut. For instance, is it reasonable to ask a secretary to take over the switchboard
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during the telephonist's lunch break? Ensure that you define a job clearly from the beginning, to avoid disputes. Your employees have an overriding duty of fidelity, or faithful service. This means they must not do anything that will harm your business. As part of this duty, employees must not disclose confidential information relating to your business, including client lists. This obligation continues even after employees have stopped working for you.
DISCIPLINING EMPLOYEES As a general rule, the only action you can take if employees misbehave is to sack them. You cannot fine them or withhold their wages or dock their pay (unless they are late for work, or away without satisfactory explanation, in which case you can deduct an amount to correspond to the time they were absent). Nor, under most circumstances, can you suspend them. Normally your only real choice is to warn them and then, if the misbehaviour is continually repeated, to sack them. At least one warning should be in writing.
RIGHT TO SEARCH EMPLOYEES You have no general right to search employees or their personal belongings. If you suspect an employee of stealing and consider a search is warranted, call the police and hand the matter over to them. A dishonest employee may surrender stolen goods voluntarily if you tell them that this is what you propose to do. If your business is such that searches of employees are necessary on a regular basis, this should be made clear at the beginning of the employment.
EMPLOYEES' RIGHT TO EXPENSES Employees have a legal right to be reimbursed for any expenses incurred as part of their job. For example, if an employee has to use their car to carry out job-related tasks, you must pay for the use of the car (but not for travel to and from work).
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VICARIOUS LIABILITY FOR EMPLOYEES If one of your employees, acting in the course of their employment, causes injury or damage to someone else, you may be liable. At law, an employee is regarded as an extension of the employer and the principle is known as that of vicarious liability. To cover yourself for this as an employer, you must, as a matter of sound business practice, have adequate public liability insurance. Matthew, aged 12, was walking home alongside a horse-drawn cart owned by Parr and Sons. The boy had his hand on a bag of sugar loaded on the cart, and the driver mistakenly thought he was about to steal it. The driver hit the boy on the back of the neck and he fell under the wheels of the cart, injuring his foot. The boy's father sued Parr and Sons on behalf of his son. It was held that the employer was liable for damages, since an employee has a duty to protect an employer's goods, and hence there was a close relationship between what the employee was employed to do and the conduct causing harm.
But sometimes your employee may be personally liable. Opal Ruby Pearl Barlow worked as a barmaid in a hotel at Manly. One afternoon, during an altercation, Mrs Barlow threw a glass of beer in the face of one of the customers, Mr Flew, who was blinded in one eye. Mr Flew sued the hotel. In this case it was held that the employer was not liable. Mrs Barlow was employed to serve beer, and her conduct in throwing a glass of beer at Mr Flew was not part of her job.
RESTRICTIONS OF FUTURE WORK You may want to restrict an employee's right to set up in competition with you if they leave you. This is called restraint of trade, and you are entitled to protect your business in this way — up to a point. The courts will not enforce such a clause in a contract beyond what they think is reasonable. You can probably stop employees setting up business next door, and in the same street, and possibly in the same suburb,
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but you would not be able to stop them establishing a business in the same city. Nor can you impose unreasonable time limits even within narrow geographical areas. The courts recognise that you are entitled to protect your business interests and stop an employee making use of knowledge and skills acquired at your expense, but this will be balanced against an individual's right to seek the employment or means of earning a living of their choice. Mr L was employed as a real estate agent by Mr D, and signed a contract saying that he would not work as an estate agent for three years within one mile of Mr D's business. Mr L left and set up business down the road. Mr D took Mr L to court. The court held that the three-year time limit was unreasonable and found in Mr L's favour.
PART-TIME AND CASUAL EMPLOYEES A part-time employee, that is one who works less than the standard number of hours, but on a regular basis, is usually paid pro rata according to the number of hours worked, and must be given the same benefits, for example, holidays, sick leave and so on, calculated pro rata. Casual work usually means that the person works when required, and is not entitled to the same benefits as permanent employees, such as holidays. Also, you can probably dismiss casual workers with only a couple of hours' notice. A casual employee may be entitled to a higher hourly rate of pay (generally about 15 per cent higher) to make up for the lack of security and other benefits. Some industries have provisions for a minimum period of hire, usually two to four hours.
EQUAL EMPLOYMENT OPPORTUNITY Providing equal employment opportunity is not only required by law, it is part of modern business practice. It means judging people according to those qualities which are relevant to their ability to perform the job and not according to personal characteristics, such as race or gender, which have nothing to do with job performance.
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The suitability of any applicant for employment or promotion must be assessed regardless of: race colour gender sexual preference age disability marital status religious beliefs political opinion national origin social origin. Anti-discrimination laws apply to employment in all its aspects — recruiting staff, advertising for staff, dealing with an employment agency, selecting which applicants will be interviewed, asking questions in the interview, hiring staff and in the treatment of staff on the job, including selection for training, transfers and promotion. You may not advertise a job as being for `men' or `women' or for a `Girl Friday'. You may not ask men and women job applicants different questions, for example, asking only women applicants how they will cope with childcare responsibilities. You may not sack a woman because she is pregnant. The laws also forbid indirect discrimination, for instance, imposing height and weight requirements that are not essential to the job and have the effect of discriminating against women. Sexual harassment is unsolicited, persistent and unwelcome conduct of a sexual nature. It is unlawful and the employer of someone who engages in sexual harassment is likely to be heavily fined. Sexual harassment may include (although it is not limited to): touching another person telling offensive jokes making rude comments to another person repeatedly asking another person to go out when they don't wish to implying that another person will receive some advantage by having a sexual relationship.
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There is an obligation on a person complaining of sexual harassment to make known the fact that the behaviour is unwelcome. There is also an obligation on the employer to act on complaints that are made.
HEALTH AND SAFETY You have a legal obligation to provide a healthy and safe workplace. Your duty is to: provide a safe place of work select competent staff maintain a safe system of work provide safe plant, tools and equipment. If you fail in your obligations with regard to health and safety, you can be sued for damages by an injured employee. This is different from workers compensation, and involves establishing that the accident or health problem is due to your negligence or lack of care. The High Court has made it clear that employers have a very wide-ranging responsibility for ensuring the good health of their employees. In a case involving repetitive strain injury, the court found Australia Post negligent because its failure to provide adequate supervision and a proper system of work led to one of its mail coders developing the condition known as `tennis elbow'.
Apart from this general obligation, there are extensive and detailed provisions in awards and laws relating to various jobs. It is essential to find out what regulations apply to the business you are running, and ensure that the workplace you are responsible for complies with them. If you allow smoking in the workplace you risk legal action from employees affected by passive smoking.
WORKERS COMPENSATION An employee who suffers injury or disease arising out of or in the course of their employment is entitled to workers compensation. Effectively, this means that if an injury happens at work the employee will be entitled to compensation. This is so whether or
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not the accident is the employee's fault. If an employee is killed, compensation is payable to their dependents. Workers compensation is State law and may not be overridden by an AWA. The type of compensation varies from State to State. However, it typically includes recompense for medical, hospital and pharmaceutical expenses and pay for time off work, sometimes up to a specified weekly amount. Workers compensation insurance is compulsory for all employers in Australia and anyone with even one employee must take out workers compensation insurance. If you are employed by a company, even a small family company, and even if you are the only employee, the company must have workers compensation insurance to cover you. In most States, workers compensation insurance is obtained from the State insurance commissioner or an approved insurer. In some States employers pay a levy. Insurance premiums or levies are calculated on the basis of salary and wages paid, with rates varying from industry to industry according to the risk involved.
Who is an employee? For a person to be eligible for compensation, they must be an employee. Usually it is obvious who your employees are, but sometimes it is open to question. As a general rule, an employee is someone you pay and over whom you exercise control with respect to: the place where the work is carried out when the work is carried out what work is to be carried out the way the work is to be carried out supervision and control of the work as it is carried out. Sometimes there are other factors, such as whether or not fixed hours or times of work apply, but the above tests are the main ones. Generally, workers compensation requirements do not apply to people who are either partners (as distinct from the employees of the partnership) or principal and agent (see chapter 11). A question sometimes arises with regard to independent contractors. Strictly, they do not have an employer/employee
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relationship but, in general, if they are injured in the course of the job they are entitled to workers compensation. Remember that workers compensation applies to employees, not employers. You will need to make separate arrangements in case you are injured. For example, you may organise accident and disability insurance for yourself. (If you operate through a company which employs you, then you are covered by workers compensation).
Course of employment For compensation to be paid, the injury or disease must have occurred in the course of employment. This may include: travel to and from work rest or recreation periods at work, or even away from work if they pertain to the job attendance at seminars, conventions, conferences, trade schools and so on being `on call' at home. Some States are now restricting the extent to which journeys to and from work are covered. For example, if an employee deviates significantly from the normal journey, compensation may not be payable.
When compensation will not be paid About the only time an employee who is injured at work cannot claim compensation is if the accident is due to his or her own serious and wilful misconduct — that is, behaviour that is carried out recklessly and with indifference to its consequences. This does not include behaviour that is merely careless or even negligent. But even in the case of serious and wilful misconduct, if the employee dies as a result of the accident their dependants can claim compensation.
A workers compensation claim Normally, an employee who is injured must notify you, and both you and the employee must lodge your own claim forms. You may have an obligation to report serious injuries in the workplace within a specified period. Make sure you comply with
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any rules in this regard, as the penalties can be severe. You should keep a register of injuries.
Rehabilitation Depending on State law, under some circumstances you may be required to establish rehabilitation programs for injured employees. If you are unsure, check with the Industrial Relations Department.
EMPLOYMENT RECORDS AND INSPECTIONS The law requires you to keep proper employment records of such matters as wages and deductions from wages, hours worked and leave entitlements both taken and accrued. Government officials may have the right to inspect your business to ensure that your records are in order and that you are complying with safety requirements.
TERMINATING EMPLOYMENT A job comes to an end when an employee resigns, is dismissed, made redundant or retires.
Dismissal If an employee is to be dismissed, you must treat them fairly. If an employee brings an unfair dismissal claim before the Australian Industrial Relations Commission (AIRC), it will consider: whether there was a valid reason for the dismissal concerning the capacity or conduct of the employee or the operational requirements of the business whether the reason for the dismissal had been given to the employee whether the employee was given an opportunity to respond to any accusations of misconduct or lack of capacity whether there was any warning of unsatisfactory performance. The law now provides that issues of procedural fairness should not be all-important but nevertheless they will be one factor to be considered in determining whether the dismissal was harsh, unjust or unreasonable and you should ensure that proper processes are in place for disciplining employees. In general, you
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should tell an employee if their performance is unsatisfactory, either in terms of the way they are doing their job or their behaviour, and give them an opportunity to respond. They are usually entitled to be warned that they may be dismissed if there is no improvement. Except in cases of clear misconduct, an employee is entitled to be given proper notice before being dismissed. The required notice is normally set down in an award or AWA and for routine employees is often one pay period. You can insist that an employee leaves immediately provided you pay them for the required period of notice. Sometimes a long-serving employee is entitled to more notice. In the case of highly paid executives, this might be many months or even a year. Small businesses with only a few employees may not be overly vulnerable in this regard, but some fast-growing ones might be. If you sack someone from a senior position who would find it hard to get another job immediately at the same seniority and pay, they may successfully sue for quite substantial damages. If you are contemplating sacking someone at this level, get legal advice first. Terminating employment is not always out-and-out dismissal. Making it difficult for employees to continue in their job, for example, by demoting them, might amount to the same thing and in this case you may be open to an action for unfair dismissal.
Summary dismissal You are only entitled summarily to dismiss an employee (that is, insist that he or she leave instantly without warning and pay in lieu of notice) if the employee is guilty of serious misconduct such as stealing or assaulting another member of staff. If there is any doubt as to whether serious misconduct has occurred, mostly it is better to follow the appropriate procedures, pay out the notice and avoid a possible dispute. If you know of misconduct and ignore it for a time, you may be considered to have condoned the conduct and lose the right of summary dismissal.
Retrenchment Special laws apply to employees who are retrenched. In particular, they may be entitled to more notice and extra severance pay.
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Make sure you check with the employment department as to what applies to your business.
When an employee resigns Employees who resign are also required to give proper notice — similarly, this will probably be set down in the award or AWA and will probably be equal to one pay period. If an employee walks out without giving you notice, there probably is not much of a practical nature that you can do. Theoretically, you can sue for damages resulting from breach of contract, but if the due notice is only a couple of weeks it will hardly be worth it, and the courts are sometimes reluctant to penalise someone for leaving a job. You are not legally entitled to take the matter into your own hands by withholding money due to the employee — unless the particular award or AWA says that you can do this. Sometimes legal action is successful. Harry B was an actor who terminated his employment with a theatre company when the play in which he acted the lead role still had several months left to run. The show had to continue with an understudy, and lost money. The theatre successfully sued Harry for breach of contract.
Remedies An employee who brings a successful claim for unfair dismissal may be granted an order for reinstatement or, if this is not appropriate, for damages. A person who has been sacked has a duty to `mitigate their loss', that is, keep the damages as low as possible. For example, if the person can find another equivalent job, they must take it. Mr Y was employed by a manufacturing company as a joint manager. His appointment was for five years. After two years, he was informed that someone else was to become sole manager and that he would become assistant manager, albeit on the same salary and benefits. Mr Y refused the new position and made numerous attempts to find other employment at equivalent salary and status. When this proved unsuccessful
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he tried to find employment at a lower level, but was still unsuccessful. He sued the company for wrongful dismissal. The company admitted that it was in breach of contract, but argued that the loss Mr Y had suffered was of his own making — he had refused its offer of a job at an equivalent salary and had not acted reasonably in searching for another job. The court held that it was reasonable for Mr Y to refuse the company's offer of a lower status job and that he had acted reasonably in seeking other employment. Among other things, the court observed that, in view of the company's behaviour, Mr Y was entitled to view its offer with some scepticism. Mr Y was awarded damages for the remaining three years of his contract, the damages being assessed as the difference between his likely salary level in a new job and the salary he would have earned had he stayed with the company.
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11 Principal and agent Sooner or later, most people running a business will find themselves acting through an agent. Or, indeed, they may act as agents themselves on behalf of some other business.
WHAT IS AN AGENT? The term `agent' is used in an everyday sense to cover a great many operators — there are business agents, real estate agents, travel agents, literary agents, importing agents, manufacturers' agents, interstate agents and innumerable others. Used in this way, the term usually means a representative or distributor. Sometimes an agent is simply a person who introduces one business to another. In a legal sense, however, the word `agent' has a quite specific meaning. It refers to someone who acts, with clearly defined responsibilities, as a go-between or intermediary on behalf of one of the parties. Agency law evolved as a matter of convenience, because businesspeople often wanted to give authority to someone else to act on their behalf. Obviously this may have wide-ranging ramifications: When is a business bound by what someone else does? How far does the authority extend?
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When is an agency created? How and when is it ended? What are the rights and responsibilities of the various parties? Agency law covers all these factors in a detailed way. An agency typically involves three people — a principal, an agent and a third party. In broad terms, an agent is a person who is authorised to act for another person, the principal. Provided the agent acts within their authority, the principal is bound by what the agent does. In other words, if you appoint an agent who enters into a contract on your behalf with someone else, you are bound by the contract just as if you had made it yourself. The authority given to the agent may be written or oral, or it may sometimes be implied from actions or behaviour. The authority may be very specific (for example, for one contract only), or more general (for example, to manage a business), or (rarely) it may be unlimited. In a partnership, each partner is a principal in his or her own right and an agent of all the other partners in the firm. An agency may sometimes be created by circumstances, without the knowledge or even the wishes of the parties. For example, in an emergency it is possible for someone on the spot to assume the power to act as an agent to save another person's property (in which case the agent has a legal duty to act in the interests of the principal). For example, it has been held that a ship's captain has the right, in an emergency, to enter into a contract (for example, to raise funds by selling cargo or even the ship) that is binding on the owners. The same principle applies to a land carrier of perishable goods or livestock who are without feed, provided an emergency exists and it is impossible to contact the owner. For example, a truck driver whose freezer unit breaks down crossing the Nullarbor could bind his employer if the only way to save the cargo is to have emergency repairs carried out on the freezer. In these circumstances, there is said to be an agency of necessity. Sometimes an agency is presumed by law. For example, a spouse or de facto spouse is presumed to have authority to enter into a credit arrangement to buy necessities such as food and clothing. Similarly, the general manager of a large company would be presumed to have the authority to act on behalf of the company in most circumstances. On the other hand, a cleaner employed by
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the same company would be presumed to have very little authority, perhaps just enough to buy cleaning materials for use by the company. A shop assistant is presumed to have the authority to sell the company's goods, but it has been held that a counter clerk did not have the authority to bind Telstra to install a phone by a certain date. Thus an employee is not an agent simply by virtue of being an employee, but only within the (possibly very narrow) scope of their job. An independent contractor is not an agent, unless the particular circumstances warrant it. For instance, a theatrical agent is authorised to make bookings on behalf of an entertainer. A person who acquires goods from a manufacturer and resells the goods is also not an agent, but a principal in their own right. However, if the goods were sold on behalf of the manufacturer, with the intermediary acquiring no interest in the goods, then an agency would usually exist. Sometimes the courts will say that an agency exists if it appears to others that it does and they act on this basis. Mr P was a company secretary for a furnishing company, and hired expensive cars from a car-hire firm, telling them this was for company purposes. In fact, the cars were used for Mr P's own purposes, and he had no authority from the company to hire the cars. The court ordered the company to pay the hiring charges, saying that where a person was appointed to such a position it was reasonable for outsiders to assume that he had the authority appropriate to such a position.
The company, of course, could terminate Mr P's position on the basis that he had overstepped his authority, but the court would not allow a third party to suffer because of his misconduct.
CREATING AN AGENCY An agency may be created if by the behaviour of the parties a reasonable person would assume that it exists. However, an agent is usually appointed by a specific agreement or contract. An agency agreement generally provides that the principal must pay the agent for his or her services, and that the agent must exercise reasonable skill and diligence in performing their duties.
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For an agency to be valid, the principal must exist at the time the agreement is made. This may seen obvious, but it is a question that often arises in the context of contracts made by companies before their incorporation. An agency agreement made before incorporation must be ratified once the company is formed, or agents might find themselves personally liable for contracts they have made during the pre-incorporation period. Although many agency agreements are written, they do not have to be, and can be verbal in the same way as any other contract. However, some agreements must be written — especially in some States, where the sale of land or a business is involved, or if the agency agreement will not come into effect within a year. A written agency agreement may also be necessary for the sale of goods above a certain value. If it is intended that agents will sign documents under seal (deeds) on behalf of the principal, the agents themselves must be appointed by way of deed, called a power of attorney. Depending on the proposed activities of the agents, the document may need to be registered at the Registrar General's Department or the Land Titles Office. Sometimes, for example, in the case of real estate agents, agents may only sue for their commission if the agreement is in writing. Any contracts with third parties will be valid, however, and will bind the principal.
RIGHTS AND DUTIES OF AN AGENT Unless the agency agreement provides to the contrary, agents must use reasonable care and diligence in carrying out their tasks and must perform the work personally unless the principal agrees that it may be delegated. Agents must follow all instructions, and most seek instructions where necessary. Agents have a legal duty to act in the interests of the principal and, for example, not to accept a secret commission. The principal's affairs must be treated as confidential. The principal's money and property must be kept separate and accounted for. Agents are entitled to pay for their services and to recoup any out-of-pocket expenses. They are entitled to retain the principal's goods pending the payment of any money due.
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LIABILITY OF AN AGENT An agent cannot be made liable for things done on behalf of the principal as long as: the agent makes it known that they are acting as an agent the agent discloses the name of the principal on whose behalf they are acting what is done by the agent falls within the scope of their authority what is done is lawful (a principal cannot authorise an agent to break the law). Therefore, an agent must sign documents in the proper way, and should have a clear statement of what they are authorised to do. The agent should make sure they know the correct name of the principal. If you are a principal, be aware that your agent will have the power to bind you and make you liable on a contract. Make sure you give your agent clear instructions, preferably in writing, as to the scope of their authority. If you are an agent, always sign any written documents as agent and specify the name of your principal (for example, Amelia Jones, agent for XYZ Importers). If the contract is an oral one, make sure the same information is quite clear. Always get precise instructions as to the scope of your authority, and never act outside that authority. Remember that an agent can be held liable if the principal does not exist. Therefore, if you enter into an arrangement on behalf of a company yet to be formed, ensure that the contract is confirmed when the company comes into being.
ENDING AN AGENCY An agency can be ended by mutual agreement or by either party. The principal can revoke the agent's authority at any time but, if this happens before the agreement has come to an end, the agent may have an action for wrongful dismissal (see chapter 10, `Employing staff'). A principal who revokes an agent's authority should always be sure to notify any third parties who may be affected. If
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notification is not made, the principal may still be bound by the actions of the agent. For example, if A acts as agent for B in dealings with C, and B then terminates A's agency, unless B notifies C, B will be bound if A continues to purport to C that he is B's agent — since C would have no way of knowing that it was not true. In the same way, a principal may not limit the powers granted to an agent without notifying third parties. A common situation in which the need for notification arises is the retirement of a partner from a business. Unless customers are notified of the retirement, the retired partner will continue to be responsible for the actions of other partners. An agent can renounce an agency at any time, provided any loss the principal incurs as a result is made good. This does not apply if the agent is not receiving any remuneration. Revoking an agency can be quite tricky and getting legal advice is usually a sensible precaution. An agency may also come to an end because either party dies or goes bankrupt, or the time of the agreement elapses.
12 Protecting business ideas and information If you develop a product or service during the course of your business, you will obviously want to exploit it yourself, and as far as possible stop your competitors from using it. Intellectual property, which is the result of creative thought, is just as entitled to protection as something tangible, created as a result of physical effort. Depending on the type of product or service it relates to, there are various ways to protect intellectual property. The main types of protection are: copyright — for literary, artistic, dramatic or musical creations patents — for inventions designs — for the shape or appearance of an article trademarks — for words, symbols, pictures, sounds, smells trade secrets — for technical knowledge and experience gained in the course of your business.
COPYRIGHT Copyright protects original creative works from being copied by anyone other than the creator unless the creator authorises the copying, the right to copy is paid for, and/or the creator is acknowledged. The fee for use of a copyright work is usually a percentage of the revenue generated by the sale of the work. This percentage is called a royalty. Sometimes a straight fee is negotiated instead.
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There is no need to take any formal steps to acquire copyright. It exists automatically from the time the work is created, and normally lasts for 50 years after the creator's death. Usually the owner of the copyright is the creator of the work. However, if the work is created in the course of employment, then copyright belongs to the employer. For example, if one of your staff produces a manual at your suggestion during work hours, the copyright belongs to you, not to the staff member. Computer software is protected by copyright, although this is a complex area which is giving rise to increasing litigation. As a basic rule, if you copy a computer program without permission, even within your own office, you are breaching copyright and may be subject to legal action. It sometimes happens that copyright is infringed inadvertently. This happens especially in advertising and marketing campaigns, and businesses should make sure they are aware of the relevant aspects of the law. It is usually unwise for a copyright owner to give up copyright or assign it to anyone else. If you want to give someone the right to publish or use work that you have created, as a general rule it is sufficient to grant a right to publish.
PATENTS If you invent something, taking out a patent is the way to ensure that someone else cannot steal the idea and exploit it commercially before you do. A patent is taken out with the Patent Office in the Australian Industrial Property Organisation (AIPO), and gives you the exclusive right to use, make or sell the invention. You will have to show that the invention is significantly different from anything that has been patented before. You must also establish that the invention can actually be used. You cannot patent an idea or a discovery, it must be an actual invention. Patents are only granted for inventions that are new and not obvious to people who understand the technology. This means that if you demonstrate, sell or publicly discuss your invention before applying for a patent, you will lose your right to patent protection. An Australian patent is effective for twenty years. It is a good idea to do a search of existing inventions before applying for a patent in case your invention is already known.
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As with artistic works, the right to an invention belongs to the inventor — unless the invention is created in the course of employment, in which case the right belongs to the employer. Unlike copyright, which automatically exists throughout much of the world, including the main Western nations, a patent is only valid in the country in which it is taken out. If you have a brilliant invention that you think will make you millions on the American market, make sure you patent it in the United States before discussing it with American manufacturers or distributors. Mr F, a small manufacturer and refrigerator repairer, designed and built a machine that would make homemade ice-cream in half the time and at half the cost of existing machines. He took out an Australian patent, but could not find an Australian company with enough capital or expertise to develop the machine to its full potential. He went to the United States and approached a large manufacturer of industrial cooling systems. The company expressed interest, but after five weeks of testing returned the prototype, saying that it would not be sufficiently profitable. A year later the company brought onto the market an almost identical machine, and made millions. Legal threats by Mr F proved useless.
Taking out a patent is expensive, possibly costing several thousand dollars, and you will need access to considerable funds if you think your idea has international potential and needs protection in several countries. As a general rule, once you have applied for a patent in Australia you must apply in other countries within twelve months, or manufacturers overseas can go ahead and develop your design. Obviously there is not much point in outlaying considerable sums of money on patents unless you are reasonably likely to make a profit from your invention. You will need to give realistic consideration to matters such as: how much production costs are likely to be the possible market how you are going to get in there how the product will be manufactured how it will be financed.
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DESIGNS If you want to protect a design, for example, a pattern to decorate T-shirts or a particular shape for a bottle, you can register it with the Design Office in AIPO. The process is similar to applying for a patent, but is neither as lengthy nor as costly. You must register not only the design but also the item it is intended for. For example, if your design is registered for use on T-shirts, someone else could use the same design on mugs unless you register it for mugs as well. Remember that an original artistic work will be covered by copyright so, for example, your flower paintings cannot be copied and used as a design without your consent. However, if an artistic work is to be used industrially it may need to be registered as a design, otherwise copyright may be lost once it has been reproduced and offered for sale. A design will only be registered if it is new and original, and you must be able to establish to the satisfaction of AIPO that this is so. Designs are protected for sixteen years.
TRADEMARKS A trademark is a means of protecting the use of a particular name or emblem. Obviously, a name, logo or other emblem can be very valuable to a business, and it can be important to ensure that it is protected. Some of the better-known trademarks are Aspro, Kleenex, Coca-Cola, Hoover and Vaseline. A trademark does not have to be new or especially creative but it may not copy an existing trademark and should be distinctive to the particular goods or services it names. Registration of a trademark is not compulsory but if it is not registered and another person uses it, you may have to take `passing off' action under the common law if you want to stop them. In this case, you will have to prove that you developed a reputation in the trademark and that use of the other trademark would be likely to confuse or deceive the public. This can be difficult and expensive. If you own a registered trademark you can simply sue another person who uses it on the same or similar goods and services for infringement, a much easier course of action.
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To be registrable, a trademark must distinguish your goods or services from others in the marketplace. It is difficult to register a trademark which: describes some aspect of the goods or service conflicts with an earlier trademark would mislead the public about the nature of the goods or services denotes the kind, quality, intended purpose or value of the goods or services is a common surname or geographical name. Before applying to register a trademark, you should search the trademark records. If there is a similar trademark it may block your application. Even if you don't intend to register your trademark, you should search the records, since if there is a similar trademark you may face legal action from the owner of that trademark. It may take several months from the date of application to the granting of registration. You can use your trademark in the intervening period, if no one else is using it on similar goods or services. Once registration is granted, the trademark is protected from the date you applied. A trademark is registered for ten years but can be renewed simply by paying the required fee, so that provided the fee is paid, it can last indefinitely.
PASSING OFF `Passing off' is when someone tries to cash in on a competitor's name or emblem so as to create an impression that goods or services are supplied by the (invariably well-known and successful) competitor.
TRADE SECRETS Trade secrets, technical know-how, business information particular to your business and so on can all be protected. You may take legal action against people, including employees or ex-employees, who make use of such information without your knowledge and
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consent. You will need to satisfy the court that the information was restricted and not freely available. You do not expressly have to impose on an employee the obligation to keep secret information confidential, as this is implied in the employer/employee relationship. Nevertheless, if you have particular information that you want kept secret, it is sound business practice to tell your employee this, preferably by letter or memorandum, as it may be a timely reminder and deterrent, and puts the matter beyond doubt. You should make proper arrangements to safeguard confidential information such as marking it `Confidential' and ensuring that it is kept in a secure place with restricted access. It is difficult to argue successfully that information is confidential if it has been left around the office for everyone to see. The use of customer or client lists by an ex-employee is often the source of some anguish to a business. Obviously most businesses regard their customer lists as valuable but, for the most part, the courts have not regarded them as truly confidential. If a former employee departs with a copy of a customer list, the court may order the return of the unauthorised copy, but will usually regard the identity of customers as part of the employee's general stock of knowledge gained while in the job. If you want to have a real chance of preventing former employees from using your customer or client lists, you should take steps to ensure that the information is restricted. This may include marking copies, keeping a record of the number of copies made and limiting their access to senior employees. The same principles apply to prices and selling methods. These will only be protected by the courts in rare circumstances.
13 Negligence and liability Actions arising out of negligence are the cases most commonly brought before the courts today. It is worth being familiar with the broad principles of negligence since it is reasonably likely that at some stage someone will be injured on your premises and you will need a basic idea of where you stand regarding a possible claim. Negligence claims are civil claims, not criminal prosecutions. They are not intended to punish, but to compensate someone who has been injured by the actions of another person.
WHAT IS NEGLIGENCE? Broadly speaking, negligence is carelessness — the failure of one person to take reasonable care for the safety or interests of another. Hence, the mere fact that a person has been injured or suffered loss does not entitle them to compensation — the injury or loss must be due to someone else's carelessness. For example, if a person trips over a step that is well-lit and easy to see, they cannot usually claim compensation for any injury suffered. However, if the step is in a darkened doorway or hidden by some obstacle, then that person may have a claim. To establish negligence, it is necessary to prove three things:
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that there is a legal duty of care owed by one person to the other that the duty of care has been breached that damage (injury or loss) has been caused by the breach.
Duty of care The first question is, to whom do you owe a duty of care? Nowadays the courts interpret the duty of care very broadly. Virtually all people owe a duty of care to the people with whom they interact, or with whom they might be expected to interact in the normal course of events. For example, if you are a shopkeeper, you owe a duty of care to all your customers. The basic rule of law is that you owe a duty of care to `anybody who can reasonably be foreseen as likely to be affected injuriously by an act or failure to act'. This principle covers almost every area of activity, including road accidents, factory and work accidents, and injuries caused by defective products and dangerous premises. In more recent times, it has been held to exist even in the giving of advice. If you give advice and the person receiving it reasonably believes that you are competent to give that advice, you may be liable if the advice is wrong.
Breach of duty The second question is, how careful are you expected to be? The answer is that you are expected to exercise the degree of care that a reasonable person could be expected to observe. In reaching a decision as to whether you have been sufficiently careful, the courts will take certain basic principles into account. You are expected to exercise more care if injury is likely rather than unlikely, and you are expected to exercise more care if serious rather than minor injury is likely. Also, the easier it is to avoid an injury occurring, the more reasonable it is to expect that appropriate safety measures will be taken. Usually a higher standard of care will be expected of someone who has a special skill. For example, doctors or lawyers or accountants doing work in the course of their professions will be judged on the standards of a reasonable competent member of that profession. Someone who operates a toyshop or other business directed at children would be expected to take extra care to prevent
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customers being injured, since children are not expected to be as alert to danger as adults.
Damage For compensation to be awarded, damage or loss must have been suffered. For example, if a person slips and falls over on a shop floor, is not hurt and needs no medical attention or time off work, and does not incur any other expense as a result, this person could not make a successful claim for damages. Furthermore, the damage must be caused by the negligent act. If it is too remote from the negligent act or is caused by an intervening factor, an action will not succeed. The heel broke off Mrs T's new shoe, causing her to fall off the pavement into the path of an oncoming car. Mrs T sued the shoe shop for damages for the extensive injuries she suffered. However, the court held that, while she was entitled to a new pair of shoes (they were clearly not of merchantable quality) the shop could not reasonably be held liable for the injuries inflicted by the car.
The main case establishing that damage must be reasonably connected with a negligent act involved an oil tanker in Sydney Harbour. A tanker, the `Wagon Mound', spilled oil in Sydney Harbour. The oil slick extended to water under the wharf of a nearby dockyard, where repairs to another vessel were being carried out. Molten metal dropped from the repairs onto a piece of cotton waste floating underneath. The cotton waste ignited, and on making contact with the oil started a fire which damaged the wharf. The wharf-owner sued the tanker-owner, but the case eventually failed in the Privy Council on the basis that the damage was too remote. The possibility of the wharf catching fire could not reasonably have been foreseen by the tanker-owner, even though spilling the oil was negligent.
Damages for negligence are payable even if the injured person was unduly vulnerable, and even if this was not apparent. For example, if a packet of soap powder placed insecurely on a shelf falls off and injures a customer with a particularly thin skull, the
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customer is entitled to damages even though the skull of a normal person would not have been injured by such a blow. Sometimes negligence is presumed, even though the person injured cannot prove the carelessness. In one case, a barrel of flour rolled out of an opening in an upper floor of a warehouse and injured a man walking along the street below. Even though the victim could not prove what action had caused the accident, and therefore whether it was careless or not, he successfully sued for damages since accidents of this kind do not normally happen unless carelessness is involved. If the injury is partly the fault of the person who is injured, then there is said to be contributory negligence, and an award of damages will be reduced by the proportion of blame attached to the injured person. For example, if the injured person was held to be 30 per cent to blame, the amount of damages would be assessed and then reduced by 30 per cent. An example might be if a customer slipped on a wet floor in a shop on a rainy day. Obviously it would depend on the circumstances, but it is possible that the shop would be held partly to blame for not keeping the floor mopped, and the customer would be partly to blame for not taking extra care in such weather. An action for negligence will not succeed if the person knew about the risk and accepted it. For example, a participant in a boxing match would normally be held to have accepted that there is a risk of injury involved, and would find it difficult to sue an opponent for damages. Certain types of negligence are especially relevant to small businesses. These are product liability and occupier's liability.
PRODUCT LIABILITY A manufacturer of goods or a repairer of goods has a duty of care to people who use the goods. Anyone who is injured by faulty or dangerous goods (or services) can sue the manufacturer or repairer for negligence. It should be noted that the principle of negligence in this regard has been enlarged by the consumer protection laws, which provide an automatic warranty that goods are of merchantable quality. Unsafe goods per se are not of merchantable quality. However, the consumer protection laws (which provide a much
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easier means of action) apply only to the owner of the goods. If a person other than the owner is injured, they must prove negligence. This can be difficult, time-consuming and expensive and moves are currently afoot to broaden the scope of liability of manufacturers (and sellers) of defective and unsafe goods.
OCCUPIER'S LIABILITY The occupier of premises has a duty to take reasonable care for the safety of people using the premises. It needs to be remembered that an occupier may not be an owner, and is often a tenant. Sometimes an occupier is not a tenant either, or there may be more than one occupier — for example, in building work, the owner and the builder may both be occupiers. The test is who has control of the premises? Insurance against someone being injured on property you occupy is one of the most essential forms of business insurance you can have. You may be bankrupted without it. A man went to a milk bar one night, intending to buy something. As it happened the shop was closed, but was lit internally by fluorescent lights; the owner and another person were inside, examining a faulty refrigerator. The front door of the shop was made of plate glass, and had recently been cleaned. There was a `Closed' sign on the door, but it was not large — 30 cm long and 7.5 cm high — and was located to the extreme left of the door, just above the handle. The customer thought the shop was open, did not see the sign and walked into the door. The glass shattered, and he was very badly injured. He sued the shopowner on the basis that the closed door represented an unusual danger that the owner knew or ought to have known about, and had failed adequately to warn customers about. The court agreed that the internal illumination of the shop, together with an apparently open door, constituted an implied invitation which a reasonable person could accept. It said that the `Closed' sign was not sufficiently prominent. The customer was awarded substantial damages.
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In 1993, the High Court held that the Rottnest Island Authority was negligent in the case of Mr Nagle, who was badly injured when he dived from a ledge into a swimming area, known as the Basin, on the island, and struck his head on a submerged rock. There was no warning sign. The Basin was promoted by the Authority as a swimming area and facilities were provided for swimmers. The court said that a risk may be foreseeable even though it is unlikely to occur — it is enough that the risk is not far-fetched or fanciful. Further, there had been a breach of the duty of care — it was reasonable to expect that there should be warning that diving was unsafe from the ledge.
Occupiers have always been held to have a very high duty indeed to prevent harm to children who venture onto their premises. Children are not expected to have the same sense of responsibility as adults, and may be entitled to damages even if they are trespassing, if something on the premises is likely to attract them. An 11-year-old boy climbed an electric power pole and was burnt when he accidentally touched a powerline carrying electricity. The pole had been constructed by the electricity authority on privately owned land. There was a metal guard around the base of the pole, but it was not sufficient to stop people from climbing up. Neighbourhood children, including the injured boy, were in the habit of playing on the land, and no one had ever stopped them. The boy sued the authority, which defended the claim on the basis that he was trespassing. The court held that this was not important. The authority was held to be negligent because it should have taken more care with regard to the safety of a dangerous electrical transmission system on land frequented by children.
14 Insurance One of the most important aspects involved in the running of any small business is insurance. Not only might you be burgled or lose your stock, for example, because of fire or water damage; there are also a great many things for which you can be sued, and if you are not insured you may find yourself staring bankruptcy in the face, even though your business is otherwise successful. In essence, insurance means that the insurer promises to pay compensation if a particular event occurs and causes loss or damage. In return for this promise, you pay a yearly premium. The insurance policy is the contract between you and the insurance company. Principles of insurance are evident from as long ago in history as the time of the Babylonians and Phoenicians and later the Romans. Insurance as we know it emerged during the eighteenth century in England when merchants and financiers began writing insurance contracts. These people used to meet regularly at various London inns and coffee houses, the most famous of which was Lloyd's. A set of rules gradually evolved at Lloyd's which is the basis of present-day contracts. The law of insurance largely developed as a matter of common law (that is, determined by the courts). However, over the last fifteen years or so legislation has been enacted to redress what was seen as an unfair bias against the consumer and, for example, insurance companies are now required to ensure that policy-holders are
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treated fairly and produce policies in language which can be readily understood.
TYPES OF INSURANCE Insurance can conveniently be divided into three categories: material damage insurance liability insurance promised benefit insurance. Basically, material damage insurance insures your property against loss or damage, for example, through fire or burglary. Liability insurance protects you in the case of a claim for negligence, for example, because of an accident on your premises. Promised benefit insurance provides protection for you and your family against loss of income if you are prevented from working because of injury or illness, or because you die. Sound business practice dictates that you will need some insurance in all three categories. Some of the more common types of insurance are detailed below.
Life insurance There are two basic forms of life insurance: policies that pay out only on the death of the policy holder (generally called permanent life insurance), and those that pay out either at death or once the insured reaches a specified age, whichever occurs first (called term insurance). Term insurance is generally cheaper than permanent life insurance. Permanent life insurance means that a person nominated in the policy will receive a specified sum of money if the insured person dies. A premium is paid each year, calculated on the number of years the insured is expected to live (the calculation is based on population and life-expectancy figures maintained by the company). Premiums usually stay the same for the duration of the policy and unlike term insurance, permanent life accumulates what is called a cash value. This means that part of each premium goes into a fund that is a type of savings. This amount or cash value grows with each premium payment and earns interest at a rate set by the company. The cash value is available to you,
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usually two years after the policy has commenced, if you want to borrow all or part of it (you will be charged interest) or if you cancel the policy. A person taking out insurance on someone else's life must have an insurable interest in that person's life — usually this means a person whose death will cause them financial loss. Businesses often take out `key executive' or `key employee' insurance on the life of an owner or employee to cover the business against the loss of their services and the need to replace the person if they die. Term insurance gives death cover for a specified period. If you die during the specified term your beneficiary receives the payout. If not, the policy terminates and you must renew it or buy a new policy. The premiums for term insurance are usually low, although they may increase as you get older. Term insurance, for example, may be useful for ensuring that in the event of your death your family will continue to receive an adequate income while your children are still at school. When arranging life insurance you are entitled to a fourteen-day free look period which runs from the date you receive the policy and during which time you can cancel it and have the premium returned in full.
Disability insurance Insurance to cover you if are prevented from working because you become ill or are injured is something that all small business owners should consider carefully. Generally, insurance is available for between two-thirds and the total amount of your gross salary. Disability insurance tends to be expensive but should be considered as part of the cost of running the business. Even more than with most insurance it pays to shop around as the definition of disability varies according to the company, as do premiums, waiting periods before benefits become payable, and the period during which benefits are payable (usually varying between age 65 and life).
Property insurance The most common types of property insurance cover you against fire, theft and burglary. As well, property insurance may cover fraud, goods in transit, plate glass, engineering breakdown (for
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example, for a boiler or pressure vessel) and monetary loss (for example, loss of profit and the default of a debtor). An all risks policy covers accidental damage from a wide range of causes, including acts of a third party. If you provide credit, credit insurance covers you against the possibility of debtors failing to pay their debts. Cash-in-transit insurance covers you against the loss of cash in transit between specified locations, for example, your business premises and the bank. It will not cover you if cash is lost somewhere else. Business interruption or consequential loss insurance covers you against loss that flows from but is additional to a claim; for example, if your premises are damaged by fire, this type of insurance will allow you to claim loss of profits as well as the direct cost of the fire damage. Fidelity guarantee insurance provides you with protection against stealing or fraud by your employees. You will also need compulsory third party insurance for any motor vehicles used in the course of your business.
Liability insurance It is foolhardy not to have adequate insurance to protect yourself in the event of a legal action being brought against you. The legal concept of negligence is much broader than you may think and may include a simple oversight or slight error (see `What is negligence?' in chapter 13). Public liability insurance is a must for anyone in business, no matter how small the business. A person injured as a result of your business operation can sue you for damages. This includes someone who does something as simple as trip over a broken step. If you operate your business from home you are just as liable as if you have separate business premises. Product liability insurance will protect you against losses arising as a result of defective goods. Remember that even people selling goods can be liable if the goods cause injury or damage. Professional indemnity insurance should be regarded as essential and may be compulsory for people in the business of giving advice and acting on behalf of others, such as lawyers, doctors, accountants, stockbrokers and insurance brokers. Directors and officers insurance is somewhat similar to professional indemnity insurance and protects directors and other officers of a company against claims brought against them personally for
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their management of the company. It is important to remember that the directors of a small family company are just as much at risk from such actions as the directors of a large public company. According to the report of one large insurance company, of about 100 claims in a year, 88 involved proprietary companies. Often a claim is the result of a petty argument and is brought by someone such as a disgruntled former employee, a fellow director, a competitor, or an ex-spouse. The courts are showing an increasing tendency to hold directors responsible for the actions of the company, even if they have little involvement in the day-to-day operation (see chapter 14).
Workers compensation insurance Workers compensation insurance is compulsory for anyone who has even one employee. Even if you have casual employees or work with independent contractors, it is still possible for you to be liable for workers compensation, and you should make absolutely sure you are adequately covered (see chapter 10, `Employing staff'). Note that even if you run your own company and are the only employee of the company, you must have workers compensation insurance — and in any event it makes good sense to have it since it is a relatively cheap form of insurance and provides some protection if you are injured on the job.
Legalcare Legalcare is a new form of insurance which is tailored specifically for small business. Essentially, it provides cover in the case of a dispute and means that you agree to do your best to solve the dispute through mediation, but if this fails you are then covered for subsequent legal fees, usually up to a certain amount.
BASIC RULES OF INSURANCE Irrespective of the type of insurance you have, there are certain basic rules which apply and with which you should be familiar. If you do not comply with these rules, the insurance company may refuse to pay a claim or, in some circumstances, treat the policy as though it had never existed.
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Good faith and disclosure Insurance contracts are based on the principle of the utmost good faith existing between the parties. This means that both parties must tell each other anything relevant to the risk, called a `material fact'. Material facts might include the fact that you have been refused insurance by another insurer, or that you have insured the same item elsewhere. You must disclose a material fact even if it is not covered by the questions on the proposal form for the insurance and not only when you arrange the policy but also at any time while the policy is in effect, especially when you renew it. So, if conditions change and the change would affect the risk, you must tell the insurance company. You are excused from the duty of disclosure if the fact is one that you could not reasonably have known about when the policy was granted, or the fact reduces the risk, or it is common knowledge. The company must tell you of your duty of disclosure. If it does not, it may be prevented from denying a claim on the basis of non-disclosure. Also, if you accidentally leave out an answer on the proposal form, or give an obviously incomplete or incorrect answer, the company must accept the obligation of clarifying the matter, and cannot later deny a claim on these grounds. If the proposal form implies the information is not necessary, then the company cannot refuse to pay a claim on the basis that you did not disclose it. For example, if you are asked if you have had any criminal convictions in the past year, you are entitled to assume that earlier convictions are irrelevant. The meaning of questions on the proposal form should be clear and unambiguous. If a question is ambiguous and you interpret it in a particular way, provided your interpretation is reasonable in the circumstances the company cannot argue that you gave incorrect information. A company cannot refuse to pay a claim on the ground of misrepresentation if, had it had the correct information, it would still have agreed to the insurance on the same terms and conditions.
Insurable interest You can only insure something in which you have an insurable interest. This means that you cannot profit by insurance from someone else's misfortune.
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As far as business is concerned, this means that one person can insure another person's life if the first person has a financial interest in the second person's staying alive. People who have such an interest in others include a partner in the lives of other partners, a creditor in the life of a debtor, and a person in their own life. It should be noted that an unsecured creditor does not have an insurable interest in the property of their debtor. For other insurance, insurable interest includes: property in which you have an interest, as a trustee, beneficiary, mortgagee, mortgagor, hirer, carrier, landlord, tenant and so on contracts to sell — provided the transaction is a genuine commercial transaction.
COVER NOTES A cover note is usually taken out when a company has been approached for insurance and covers the period before the policy is issued. A cover note is a binding contract and may be sued upon in the same way as the policy. Generally the main policy, if it is granted, will take effect from the commencement of the cover note.
SUBROGATION Once the insurance company pays a claim, the company acquires any rights you have to sue the person who caused the loss. For example, the company may pay you and then try to recover the money from the person who caused the accident, if that person was negligent. This is called the principle of subrogation since the company `steps into the shoes' of the policy holder. You have an obligation to cooperate with the company in its attempts to recover the money, and must not do anything that may prejudice the claim. The action will usually be taken in your name. If the insurer recovers more than the amount of your claim, the insurer may keep the extra amount.
INDEMNITY You can only recover from insurance what you have lost; you are not permitted to make a profit. The purpose of insurance is to
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place you in a pre-loss situation. (This does not apply to life insurance or sickness and accident policies, where a fixed amount is agreed in advance.)
AVERAGING If you under-insure, you may be subjected to averaging. Broadly, the application of average means that when property is insured for only part of its value, only part of the claim will be met if the property is damaged. The amount is worked out according to a precise formula, but broadly if something is insured for 50 per cent of its value, only 50 per cent of a claim for loss of damage will be paid. An example would be if you insure your factory for $100 000 when it is worth $200 000; if a fire causes $100 000 worth of damage and there is an averaging clause in your policy you will only be paid about $50 000. The insurance company must draw particular attention to an averaging clause in its policies. In the case of a home building or contents, the average provision can only be applied to 80 per cent of the value of the property. Any amount insured that is greater than 80 per cent will not be affected by averaging.
RENEWAL Most insurance policies are renewed annually. The insurance company must give fourteen days notice that the policy is due to expire. If the company fails in this regard, the policy continues at no cost to the policy-holder until a claim arises, when the policyholder only has to pay the premium from the date of the claim.
CANCELLATION OF A POLICY An insurance company can cancel (void) a policy only under certain limited circumstances, including: if you fail to comply with the duty of utmost good faith if you fail to comply with your obligations as to disclosure if you break a condition of the contract if you make a fraudulent claim. Before
cancelling,
the
company
must
give
three
business
days
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notice in the case of general insurance and twenty business days notice in the case of life insurance. If you cancel a policy you must notify the company in writing and the company is then allowed to charge a (higher) short-term rate for the time they have carried the risk.
COMPLAINTS Complaints procedures for insurance have significantly improved in recent years. If you have a complaint about a general insurance matter you should contact Insurance Enquiries and Complaints (IEC), which is an independent dispute resolution body offering its services at no charge. A disputed claim is heard by a claims review panel which then hands down a `determination'; this is binding on the insurer but not on the complainant, who may take legal action if dissatisfied with the determination.
15 The bank Very few small businesses do not rely heavily on their relationship with their bank or another financial institution. It helps to know precisely what you are entitled to expect from that relationship.
THE BANK-CUSTOMER RELATIONSHIP Once you open an account with a bank, or borrow money, or otherwise enter into a contract with it, you become a customer of the bank, and the bank has certain duties towards you. These duties include advice, management, collecting payment of cheques and payment orders made out by you on the bank. Once you become a customer of a bank, a contract with certain implied conditions comes into being, even though it is unlikely you will be handed a written agreement. Some of the more important aspects of the contract are: the bank will meet your cheques, provided there is money in your account (assuming there are no court orders or other legal reasons why it should not) the bank will only pay out of your account when you instruct it to (unless there is a court order to the contrary) the bank will treat your affairs as confidential and will not reveal information to other people without your permission
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(except in the case of the Tax Office, or if the bank owes a duty to someone else involved with you in a business transaction, for example, a guarantor, or is subpoenaed by a court to produce your financial records) if you operate more than one account the bank will keep these accounts separate you will exercise reasonable care in drawing cheques so that forgery is not made easy either you or the bank will notify the other if you discover that a cheque has been forged the bank will supply you with statements of your account, or a passbook the bank has the right to charge you a reasonable fee for its services.
The Code of Banking Practice The Code of Banking Practice produced by the Australian Bankers Association in 1993, and periodically reviewed, confirms these and other legal obligations and formalises standards of disclosure and conduct between banks and their customers. The Code is intended to: describe standards of good practice and service promote disclosure of relevant and useful information to customers promote informed and effective relationships between banks and customers require banks to have procedures for the resolution of disputes between banks and customers. In particular, the Code provides that a bank should disclose the terms and conditions applying to its dealings, and any subsequent variation to the terms and conditions; the cost of credit, fees and charges; account opening procedures; the time it takes to clear a cheque and how a cheque may be specially cleared; and the correct way to write a cheque, especially so as to reduce the chance of unauthorised alteration. The Code also emphasises privacy and confidentiality obligations, deals with the bank's duty to guarantors, and the need to ensure that advertising is not deceptive or misleading. Most of the matters dealt with in the Code are also a matter of law but the Code sets them out clearly and you may wish to
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acquire a copy to keep as a reference in your dealings with your bank.
ADVICE FROM THE BANK The law says that banks owe their customers a wide duty of care. If your bank gives you advice that you rely on, and it is bad advice, you may be able to sue the bank for negligence. This would not apply if an investment which the bank recommended in good faith merely proved unsuccessful but, if, for example, the bank should have known the company was in financial difficulties, then it may be liable for any losses you suffer as a result of the advice.
OPENING A BANK ACCOUNT Before opening an account, the bank is required to establish your identity and ensure that the account will not be used for improper purposes. You will be asked to supply identification documents which add up to 100 points. Your birth certificate, citizenship certificate or passport are worth 70 points and a driver's licence is worth 40 points so if you can supply these, it will be sufficient. Other means of identification such as cards from another bank are worth less, depending on the source, and in this case you will need more of them. If you are opening a company account, you must provide a copy of the certificate of incorporation and all signatories to the account will be required to supply identification. Special rules apply to trust accounts. For any kind of account, the relevant tax file number must be supplied or you risk a tax penalty on any interest earned. Once the formalities have been completed, the bank will record a specimen signature. It is then expected to `know' your signature and to be able to detect a forgery. A bank is under no obligation to accept an account, and may close an existing account if it becomes dissatisfied with the way a customer is using it. Banks, however, are bound by anti-discrimination laws, and may not refuse an account on any of the grounds covered by these, for example, because you are a woman.
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JOINT ACCOUNTS If you intend to operate a joint bank account, for example, with a partner, make sure that you have adequate safeguards, even if you trust the other person implicitly. Even the best relationships may sour, and business relationships are particularly prone to disenchantment. As a general rule, you should stipulate that more than one signature is required on the account, or have a clearly specified limit on how much can be withdrawn on one signature. If there is an overdraft facility and one signatory disappears with all the funds, the bank has the right to sue any other account-holders to retrieve the money.
CHEQUES A cheque is simply a convenient means of transferring money from one person to another. Effectively, a cheque is an instruction to a bank to pay money to a third party. Sometimes a cheque can pass through several people and, provided proper procedures are followed, the bank will pay the person who finally presents it. For example, if A pays B with a cheque, B can in turn use A's cheque to meet a debt to C, provided the cheque is properly signed and endorsed. Despite its simplicity, remember that a cheque is a legal document. It should be drawn with care.
Types of cheques A cheque can be crossed with two parallel lines from top to bottom, or left uncrossed. In the latter case, it is said to be an open cheque. It may be payable to `bearer' or `order'. An open bearer cheque simply has on it the name of the person to whom it is made out, followed by `or bearer', which is often pre-printed on the cheque. Sometimes it merely says `pay cash'. This kind of cheque instructs the bank to pay the stated amount of money to anyone who presents the cheque. Obviously there are very few safeguards if the cheque falls into the wrong hands. If you give a person an open bearer cheque and they lose it, there is nothing to stop the person who finds the cheque from cashing it.
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You can cross out the words `or bearer' and substitute `or order', which makes it an open order cheque. This means that the cheque can only be paid to the payee or someone authorised by the payee, usually by an instruction to the bank with the payee's signature. If an endorsed cheque is dishonoured by the bank, the bank is generally not liable. If you have been paid with such a cheque, it is up to you to pursue the payment with the person who drew the cheque, or the person from whom you received it. In most circumstances, a crossed cheque must be paid into a bank account and not cashed over the counter. This means that if the cheque falls into the wrong hands the person presenting it can usually be traced. The safest cheques are crossed, with the words `not negotiable' between the lines. This does not mean that the cheque cannot be passed to a third person. However, any person who received the cheque has no better right to the money it represents than the person who gave it to them. If a cheque is stolen and the bank pays on the cheque, the bank can be held responsible for the money. There is an increasing tendency to mark cheques `account payee only'. This means the cheque should only be paid into the account of the person to whom it is made out.
Clearing cheques A cheque is cleared when the bank on which it has been drawn pays the money to the bank at which it has been presented. Clearing a cheque usually takes several days, however, if necessary it can be expedited.
Stopping a cheque If you issue a cheque by mistake, a cheque has been lost or stolen, or you want to cancel it for some other reason, you can instruct the bank to stop the cheque. Generally, only the person who drew the cheque can stop it, since this is the only person on whose behalf the bank is authorised to act. In some circumstances other people, such as an agent of the drawer or a partner, can stop a cheque, but not the person to whom the cheque was made out. This person may, however, ask the bank to hold the cheque pending instructions from the drawer.
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Most banks require that an instruction to stop a cheque be in writing: if the bank dishonours the cheque and is wrong, it may be open to legal action. Sometimes a bank will accept a verbal instruction, provided it is confirmed in writing as soon as possible. Whether written or verbal, instructions must clearly identify the details of the cheque. A customer of a bank drew a cheque on the weekend as a deposit on a car. By the Monday morning, he had changed his mind, and asked his wife to ring the bank and stop payment. His wife asked the receptionist to hold the cheque pending her husband's confirmation that it was to be stopped. The receptionist forgot to pass the message on, and as it turned out the cheque was presented and paid before the customer confirmed that payment was to be stopped. Efforts to recover the money from the car-dealer failed, and the customer then sought to recover the money from the bank. The court held that no effective countermand had been given.
This decision has attracted some criticism, but it illustrates the need for stop-payment instructions to be clear and definite. A bank can only pay out on a cheque during business hours, although a degree of commonsense will be applied. A bank was sued by a customer who tried to stop a cheque at the start of a day's trading, only to find that it had been paid five minutes after closing time the previous day. The court held that the bank had acted reasonably.
When you open an account, the Code of Banking Practice stipulates that the bank should tell you what its particular procedures for stopping a cheque are.
Post-dated cheques In theory, a cheque should not be paid until the date written on it. It is not uncommon for someone to write a cheque for some future liability, using the appropriate date. In practice, this is risky, since a computer will not be able to read the date and the cheque is usually paid when it is presented, unless the bank's staff have become aware of the later date and put it aside.
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Stale cheques A cheque is `stale', that is, no longer valid, after fifteen months.
Bounced cheques The most common reason for a cheque to be dishonoured or `bounced' is that there is not enough money in the customer's account to meet it. When a cheque bounces, it is returned to the person who presented it, usually marked `refer to drawer'. It is then up to the presenter to pursue the money with the person who gave them the cheque as payment. A bank must pay a cheque in full, or not at all. For example, if a cheque for $1000 is presented and there is only $950 in the account, the bank will not pay $950 and leave $50 unpaid. If a cheque is wrongfully dishonoured, the bank can be sued for any resultant loss. For example, if one of your customers pays you with a cheque that is wrongly dishonoured and you lose interest on the money, the bank may be liable. The bank can also be sued for defamation. John D operated as a bookmaker. He issued a cheque drawn on Barclay's Bank to Simon M. The bank dishonoured the cheque and returned it to Simon M marked `not sufficient'. It emerged that the bank had made a clerical error in its assessment of the account. John D sued the bank for defamation, claiming that it had been implied that he was unable to pay the money and was not safe to do business with. The court decided that John D's creditworthiness had indeed been put into question, and awarded him damages.
Forged cheques If a cheque is forged and the bank pays out on it, the bank will usually be liable. The bank is under an obligation to `know' an account holder's signature, and will be held responsible if it meets a cheque that does not have the correct signature. However, if you know that your signature has been forged or is being forged, then you cannot claim against the bank. Furthermore, when you write a cheque you have a duty not to do so in a way that makes forgery or alteration easy. When you open an account, the bank should tell you the correct way
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to write a cheque so as to reduce the risk of unauthorised alteration. A discount company, Sydney Wide, drew cheques to pay Computer Accounting Services. The cheques were drawn `Pay CAS or order'. An employee of Sydney Wide added an `H' to `CAS' so that it read `CASH', and cashed the cheques at the bank. Sydney Wide sued the bank and lost. The court said that the customer had a duty to take precautions to prevent the fraudulent alteration of cheques that might cause loss to the bank.
Bank cheques A bank cheque is a cheque drawn by the bank on itself and, depending on the amount, usually signed by two bank officers, so that it is effectively guaranteed by the bank. Bank cheques will not bounce because there is insufficient money in an account, but like other cheques, they can be forged and you should verify a bank cheque with the bank before accepting it. If a bank cheque passes through a number of people before being presented, there are circumstances in which the bank is entitled to dishonour it, for example, if its face is altered. In this situation, the only person with any legal entitlement to the cheque is the person to whom it was originally made out. If you are given a bank cheque made out to anyone other than you, it is wise to check carefully before accepting it.
CASH TRANSACTION REPORTS Except in certain specified circumstances, all financial institutions are required to report cash transactions over $10 000 to the Cash Transaction Report Agency (CTRA). This is to make it easier for the authorities to trace money used for criminal purposes. If you have been a customer of the bank for more than twelve months this may not apply. Similarly, if the amount involved is reasonable in the context of your normal business, or if the account is a retail business account, the bank may be excused from its reporting obligations. However, irrespective of the amount of money involved, if a bank officer considers that a transaction
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is doubtful or suspicious, they have a legal duty to report it to the CTRA.
COMPLAINTS AGAINST BANKS If you have a complaint against a bank that cannot be resolved, you may be able to refer the matter to the banking ombudsman. The service is free and independent. Banks must abide by the ombudsman's decision. The ombudsman will consider complaints which: are about a specific banking service that has been provided to you personally are made by an individual and not a company have caused actual financial loss the amount of the loss is less than $150 000. Note that the banking ombudsman does not deal with non-financial services or matters of bank policy. The first step with any complaint about a bank should be to bring the matter to the attention of the branch manager. If this proves unsatisfactory, you can phone, fax, e-mail or write to the banking ombudsman who will tell you what to do. If you write, the letter does not have to follow any particular form, but you should try to be as specific as possible about what the bank has done and what damage it has caused you. Make sure you include: your name, address and telephone number the bank's name your bank account number. If you are complaining about a loan or cheque or other document, it is helpful if you can supply copies of the documents. On receiving your complaint, the banking ombudsman will write telling you whether the complaint is one the office can consider and the case number assigned to it. Your complaint will be sent to the relevant bank, which may try to contact you. If the banking ombudsman can't help, the office will try to give you the phone numbers or other contact details of people who can. The bank should reply to the banking ombudsman within 30 days, unless it is a particularly complex matter, when the bank may request an extension. If you are unhappy with the bank's
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response, the banking ombudsman will review the matter and decide whether the bank has acted reasonably. If the complaint is still unresolved, a case manager within the banking ombudsman's office will conduct a full investigation.
16 Tax As a business-owner, you are required to pay tax on your income, and to deduct tax for your employees. You are liable for other taxes too. This chapter gives you a broad outline of some of the tax issues you may be confronted with in your business life.
TAX YOU PAY INCOME TAX Income tax must be paid by both individuals and companies. Individuals pay tax on all income above (currently) $5400 and the rate of tax is progressive, that is, it increases as income increases. Companies are taxed at a flat rate from the first dollar they earn. Expenses incurred in the process of earning an income can be deducted from income received, and tax is assessed on the net amount, known as taxable income. Each year, you must submit a tax return to the Tax Office setting out how much you have earned and what deductions you are claiming. The Tax Office will then send you a Tax Assessment saying how much tax is due. If, during the year, you have paid more tax than is due, you will get a refund cheque. Under the current system of `self-assessment', tax returns are generally accepted with only a cursory check to identify obvious errors and incorrect claims. However, detailed checks may be
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carried out after the assessment has been issued, including cross-checks with banks and other financial institutions. An audit may also be conducted either by calling for documents or by inspections at your place of business. The Tax Office aims to audit everyone periodically and if you are found to have understated the tax payable, penalties may be very severe. The tax year ends on 30 June and you must usually lodge your return by 31 October, unless you have an extension from the Tax Commissioner (you will need a good reason for an extension to be granted). Accountants and other registered tax agents are granted immediate extensions for most of their clients, often up to March the following year. There are different tax return forms depending on the business structure. Sole traders, partnerships, companies and trusts have separate forms. Make sure you complete the form that is appropriate for your business. You are entitled to arrange your business so that you pay as little tax as possible within the law. Tax evasion, however, in which you illegally avoid paying tax, is a serious offence, and subject to heavy penalties. The tax laws are complicated, and change constantly. They are currently being simplified and the first Tax Law Simplification Acts have been passed. However, it is estimated that the project will take several years to complete. Tax affects every area of business, and anyone in business should take advice from a tax expert. Sole traders If you are a sole trader, you will file one return for both business and personal tax. Partnerships A partnership must lodge a separate return, Form P, showing the income derived and any deductions claimed. The partnership does not itself pay tax, but each partner's share of the profit or loss is transferred to his or her personal return. Companies Because a company, unlike a sole trader or partnership, is a separate entity, it must pay tax in its own right. A company uses
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a different form (Form C) from that used by individual taxpayers. Companies must pay most of their tax five months after the end of the financial year. Once a company has paid tax on its profits, under the imputation system dividends on which tax has been paid are `franked', indicating that shareholders can claim a credit on their personal tax return for the amount of tax paid by the company. The company must tell shareholders the extent to which a dividend is franked and what credit they are entitled to claim. The imputation system is complicated, and an accountant's advice is generally necessary.
TAX DEDUCTIONS Most expenses met in the course of running a business may be deducted from the income on which tax is otherwise payable. For example, if your gross income is $40 000 a year and you have business expenses of $10 000 in the year, your taxable income will be $30 000. Some of the deductions you may claim are: lease or rental payments on your business premises rates electricity telephone hire or lease payments on plant and equipment the purchase cost of stock tools of trade business stationery subscriptions to professional magazines and associations advertising and marketing expenses, e.g. Yellow Pages listing, business cards, media, brochures and the like employee expenses, e.g. Salary or wages, workers compensation, superannuation, payroll tax insurance superannuation interest on borrowed money — where it is used for producing assessable income motor vehicle expenses repairs and maintenance registered tax agent fees.
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Note that capital expenditure is treated differently from operating expenditure. For example, if you buy a computer or fax machine, these are assets involving capital expenditure, and must be depreciated over a period of years, rather than claimed as a full deduction in the year they are purchased. However, the Tax Office will allow a full deduction for the cost of an asset where the cost of the asset is less than $300 or the useful life of the asset is less than three years. With certain limited exceptions, unless fringe benefits tax (FBT) is paid on them, you can no longer claim entertainment expenses as a deduction. The exceptions include reasonable expenditure on food and drink when you are attending a business conference or seminar, and the cost of in-house dining facilities for staff. There are various other exceptions when entertainment is being provided to the general public. You can also claim the cost of meals if you are away from home on business. However, taking a business contact out to lunch or inviting them home to dinner is no longer an allowable tax deduction. Nor can you claim fees for or subscriptions to clubs, such as sporting and business clubs. You cannot claim private or domestic expenses as deductions. If you claim payments to a relative as a deduction, this person must be genuinely involved in the running of the business, and the amount must be roughly what anyone else would earn for performing the same duties. You must be able to substantiate expenses for which you claim a deduction, unless the expense is individually under $10 and the total claimed in a year is less than $200, in which case a diary entry will be accepted. Substantiation means having a receipt from the supplier of the item — a cheque butt is not sufficient. The rules with regard to substantiation are applied very strictly. You do not have to send documentary evidence of deductions with your tax return, but it must be available if the Tax Office asks for it. If you are claiming your car as a business expense, you may have to keep a detailed log book identifying your business and personal mileage. A claim for business car expenses was disallowed because, although the log book had been completed in the claimant's handwriting, each individual entry had not been signed in the required way.
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There are various ways of claiming car expenses which do not involve a log book, but you will need to decide at the beginning of the year which method you propose to follow. You should get good advice as to what is best for your particular business.
DEPRECIATION Depreciation is a deduction you can claim in relation to equipment used to gain income, for example, computers, wordprocessors, fax machines, photocopiers and office furniture, as well as large industrial machinery and equipment. The amount of depreciation each year is worked out according to a table provided by the Tax Office, and is based on the cost of the item, and its likely useful life. You cannot claim depreciation on expenditure that is private or domestic in nature or on leisure facilities, for example, a boat or holiday home. Depreciation can be claimed in different ways, and you should ask your accountant which is best for you.
TAX REBATES A rebate is an amount subtracted from your tax bill (as distinct from a deduction, which is subtracted from your income). For instance, if the tax on your income should be $10 000 and you can claim rebates of $1000, your tax bill can be reduced to $9000. Rebates are mostly for domestic expenses, for example, for dependants, or if you are a sole parent, or incur large medical expenses, live in a remote area, and so on. Consequently, they usually relate to your personal return rather than to a business return. Primary producers who average their income may be entitled to a rebate if they have an unusually low income in a particular year.
LOSSES If your business makes a loss in one year, the loss can be carried forward and deducted from your income in later years. A company can only claim the loss from a previous year if it is at least half-owned by the same owners, or if it is carrying on
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the same business as it was when the loss was incurred. Sometimes losses can be transferred to another company in the same group, although this is rarely relevant to small businesses. A partnership loss is carried to the individual partner's return, and is not carried forward in a partnership. If the proprietor of a business dies, any loss not recouped at the date of death will lapse. It cannot be carried forward to the estate of the deceased person.
SAVING TAX You are entitled to arrange your affairs so that you pay as little tax as possible, provided it is within the law. There is a saying that `tax deferred is tax saved' and the most common way to defer some tax traditionally has been by means of real estate. Investment property is purchased with mostly borrowed money and the rental income is largely offset by the interest so that no tax is payable, until the property is sold (it is hoped) at a profit. Negative gearing is a legitimate tax saving device and means that if interest on borrowings used to finance an investment property, and other expenses of maintaining the property, exceed rental from the property, the difference is claimed as a deduction against income from other sources, thereby protecting that other income from tax. Negative gearing can apply to shares and other investments as well as to real estate. Superannuation is another means of saving tax, where, provided certain conditions are fulfilled, contributions can be claimed as a deduction. The eventual payout may be subjected to lower concessional rates of tax. If you receive a superannuation payout before you retire, perhaps because you have left your job, you can defer the tax by `rolling it over' into an approved fund within 90 days and it should then be taxed at the concessional rate when you retire. Under some circumstances, it is possible to `split' your income with your spouse so that, overall, a lesser rate of tax is paid. As an example, if your business pays you $60 000, a proportion of that sum will be taxed at the top rate; if, on the other hand, you pay yourself $30 000 and your spouse $30 000, it will be taxed at a lower rate. However, your spouse must be genuinely involved in the business and the remuneration must be reasonable in the
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circumstances. At one time, it was common to divert income to children as a means of saving tax but the law now discourages this and currently `unearned income' over $416 received by a child is taxed at the top rate or even higher (66 per cent) in some circumstances. Tax saving is a complex area and you will need expert advice.
PROVISIONAL TAX If you are self-employed or have income of $1000 a year or more from private investments, or partnership or trust distributions, you will usually be liable for provisional tax. You are also liable for provisional tax if you receive a wage or salary and sufficient PAYE (pay as you earn) tax deductions were not made and: the tax payable on your income was $3000 or more, and the shortfall in tax instalments deducted was $3000 or more. In effect, provisional tax means that you pay tax in the year you earn the income rather than the following year. Companies do not pay provisional tax. The Tax Office will determine if you are liable for provisional tax, based on your previous year's tax return, and send you a notification, usually with your assessment. Provisional tax is calculated according to the tax you paid in the previous year, with a percentage added to allow for increased income and inflation. If your income is likely to drop in the ensuing year, you may apply for your provisional tax to be varied. However, if you are wrong by more than 10 per cent you will be penalised. If you pay more provisional tax than is finally assessed for that year, the difference will be refunded. If your provisional tax is less than $8000, an assessment will be made as to when it must be paid, but this will be no earlier than 31 March in the year following the end of the tax year. If it is more than $8000 it will generally be paid in four instalments, due on 1 September, 1 December, 1 March and 1 June. If you have just set up business, you are likely to find provisional tax a burden unless you plan carefully. In the first year you are, in effect, paying two years' tax in one year. In certain situations, structures may be put in place so that provisional tax will not be payable — ask your accountant.
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FRINGE BENEFITS TAX Fringe benefits tax (FBT) is levied on any remuneration or benefit which an employee receives over and above their wage or salary and other than superannuation. For example, if an employee has a car as part of a salary package, FBT is payable on the value of the benefit provided. Some of the common fringe benefits provided by employers are: cars interest-free or low-interest loans payment of private expenses such as children's school fees heavily discounted goods or services. Note that if an employee provides a meal or entertainment for a client at your expense, you may be liable to pay FBT on the cost of the meal or entertainment allocated to the employee. FBT applies to all businesses, irrespective of their size and structure and, if you provide fringe benefits to your employees, you should register with the Tax Office. Even if you are the only employee of your own private company, and the company is the owner of your car, the company must pay FBT on the car. FBT is payable by the employer. If FBT is less than $3000, it may be paid annually rather than quarterly.
CAPITAL GAINS TAX Capital gains tax (CGT) is levied on the profits from the sale of assets at the same rate as income tax except that there is an allowance made for inflation. If you sell an asset, such as a piece of real estate, you will pay tax more or less at your normal rate (there is a particular averaging calculation applied), with a deduction to allow for inflation in each year you have owned the property. Capital gains tax applies to the sale of goodwill as well as to tangible assets. Capital losses can be offset against capital profits, but not against income. If you have an asset to which CGT will apply (anything purchased after 19 September 1985, when the tax was introduced), you are required by law to keep certain records. These must show:
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the date you acquired the asset how much you paid for it the cost and date of any capital improvements the date you sold it how much you sold it for. Note that records must be retained for seven years after the property is sold, so if an asset is held for fifteen years, records need to be kept for 22 years.
TAX FILE NUMBER All taxpayers have a tax file number (TFN). Partnerships and companies must have their own tax file number, separate from the individuals who comprise them. As a small business, you will need a tax file number if your business: is lodging its first tax return makes or receives payments under the prescribed payments system (see page 180) is a fringe benefits taxpayer. If your business has interest bearing accounts, such as a savings or cheque account, you will be asked to supply the TFN to the institution where the account is held; otherwise you will have tax deducted from any interest earned at the highest marginal rate, plus the Medicare levy.
SUPERANNUATION GUARANTEE Since 1 July 1992, all employers are required to contribute a certain minimum amount on behalf of their employees to an approved superannuation fund. Up to a specified limit, these contributions can be claimed as a tax deduction. If you choose not to pay the required super contributions, you must pay a Superannuation Guarantee Charge, which in effect is additional tax. You do not have to make contributions for employees who are: paid less than $450 per month 65 years of age or over under 18 years of age and working 30 hours a week or less doing work of a domestic or private nature for 30 hours a week or less.
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There are also some exemptions for work done outside Australia or by foreign executives — check with your accountant if you think this may apply to you. The Superannuation Guarantee does not replace award super contributions, however, it only has to top these up to the required minimum; if an employee's award superannuation meets the minimum level set out in the Superannuation Guarantee, you do not have to make any further contributions. If employees make their own super contributions, this does not count towards the Superannuation Guarantee; you still have to make the contributions required of you. Your Superannuation Guarantee contributions are based on an individual employee's earnings base and a charge percentage, which is calculated on your payroll. The Tax Office provides the information for you to work this out.
SALES TAX Sales tax is a federal tax that applies to most (although not all) goods sold in Australia, whether they are manufactured here or imported. It is levied at the last point of sale to a retail trader by a manufacturer, wholesaler or importer. The rates of sales tax vary for different classes of goods, and some very small manufacturers and some classes of goods are exempt. So also are some purchasers, such as most government institutions, public benevolent institutions and some industries, such as mining and agriculture. Unless they are exempt, manufacturers, wholesalers and importers must register with the Tax Office and maintain certain records. If your business is liable for $50 000 or less a year in sales tax, you may pay quarterly. Businesses paying over $50 000 pay monthly.
PAYROLL TAX Payroll tax is a State tax, and is payable by every employer who pays wages, salaries, commissions, bonuses and allowances over a certain minimum, depending on the State and currently ranging from $456 000 in South Australia to $800 000 in Queensland. Also
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depending on the State, some small businesses may be able to avoid liability for payroll tax. Be aware that you may be liable for payroll tax even in relation to people who are not, strictly speaking, employees, but are independent contractors or sub-contractors. Obviously, this is to prevent businesses from entering into contractual arrangements with workers which are designed to avoid payroll tax obligations. The rules are quite detailed, and you should ensure that you comply with them. Payroll tax also extends to the taxable value of fringe benefits provided to employees, such as luxury cars and, in some States, superannuation.
LAND TAX Land tax is an annual State tax based on the unimproved capital value of certain land. In most States your home will be partly or completely exempt from land tax, and primary producers are normally also granted some degree of relief. However, businesses that own their own premises will usually have to pay land tax. You may also have to pay land tax as a tenant in leased premises, as many leases provide that this is the tenant's responsibility.
WORKING FROM HOME If you operate your business from home, certain expenses incurred in running the business may be claimed as a tax deduction. You will need proper advice before making a claim, as this is a complex area. In particular, note that if you acquired your home after 19 September 1985, and you claim the costs of working from home, it may affect your exemption from capital gains tax liability when you sell the home — that is, the Tax Office may consider that if, for example, a fifth of the floor area is being used for business, then a fifth of the capital gain is subject to CGT. Get good advice. There are three main ways people work from home: home is the principal place of business home is not the principal place of business but there is a room set aside as an office, which is used primarily or exclusively for work
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home is not the principal place of business and there is no room set aside as an office but work is carried out in one of the living areas. Home is the principal place of business If you work primarily from home, you may be able to claim as a deduction: rent, mortgage interest, insurance, council rates — you can claim a proportion of these, usually calculated according to floor area utilities (gas, electricity, etc.) — again you can claim a proportion of the overall household costs telephone — if you use the phone exclusively for business, you can claim for the rental and the calls but not the installation. If the phone is used for both business and private, you can claim the business calls office plant and equipment — for example, a computer, office furniture, curtains, light fittings, bookshelves, may be depreciated. You have a home office This usually applies to someone who works somewhere else but has a study or office set aside in which to work at home after hours. In this case, you can claim deductions for utilities (gas, electricity), telephone and office plant and equipment depreciation. However, you cannot claim a portion of rent, mortgage interest or insurance. You work at home but there is no office In this case, you can usually claim for business use of the telephone and office plant and equipment depreciation but you can't normally claim depreciation for curtains, carpet, light fittings, etc. As with all other expenses, you must be able to substantiate your claims. In particular, unless you have a separate business telephone line, you should keep a log of business calls for three months, or at any time when telephone usage varies — if, for example, your business has undergone a sudden increase.
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BUYING OR SELLING A BUSINESS The tax implications of buying or selling a business are enormous, and you should never attempt to do either without discussing it fully with your accountant and lawyer. Among other things, you will need to consider the tax liability of both buyer and seller for trading stock, depreciable assets, bad debts, repairs, employee entitlements if they will be continuing under the new owner, and goodwill.
KEEPING RECORDS Keeping proper records is not only sound business practice, it is essential from a tax point of view. If your records are complete, you will save money when your accountant prepares your end-of-year financial statements and tax return, and if you are audited by the Tax Office you are more likely to escape unscathed if you have appropriate documents to support any claims. The tax law requires you to keep records sufficient to explain all financial transactions. In particular, you must be able to substantiate almost all expenditure with receipts. Records must be kept for five years in the case of wage and salary earners and self-employed people or seven years if you are a company. The main records to keep are: journals ledgers invoices/sales stock sheets cheque butts full details of all payments to sub-contractors, including the name and address of each sub-contractor and the amounts paid. To be valid for tax purposes, receipts must show: the date of the receipt the date of the expense the name of the supplier the amount a description of the goods or services purchased.
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Note that the normal cash register receipt does not show all this information and so you may need to ask for a separate receipt. Credit card vouchers will be accepted provided they show enough detail to identify the purchase. If it is not possible to get a receipt, you should record the claim in a diary entry. This will be accepted if: each expense is no more than $10 together they add up to no more than $200 it was unreasonable to expect to get a receipt. Travel expenses of more than five successive nights must also be substantiated with proper receipts, together with a travel diary showing the date of each business activity, and the duration and nature of the activity. You cannot usually claim travel expenses for a spouse or de facto spouse or other relative. If you claim the expenses of running your car as a tax deduction, you must keep a vehicle log book. There are various ways of doing this and you should ask your tax adviser which is most suitable for your business.
OBJECTING TO A TAX ASSESSMENT If you consider that your tax assessment is wrong, you can lodge a formal written objection with the Tax Office, saying that you disagree with the assessment and giving your reasons. The most common reason for an objection is that a claim for a deduction or a rebate has been disallowed. It is possible to lodge an objection if a mistake has been made in the preparation of your return, for example, if a deduction was omitted and you now wish to claim it. The only requirement for an objection is that it must be in writing. There is no special form but the objection should be as clear and concise as possible. Generally, it is sensible to get expert advice. The tax assessed must be paid by the due date, even if you have made an objection. If there has been an obvious mistake, you can apply for a deferment of the tax, but if you are wrong, you will be penalised. In any event, the Tax Office will rarely agree to a deferment. If your objection is allowed, you will receive a refund together with a set rate of interest for the relevant period.
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If your objection is disallowed you can appeal, usually to the Administrative Appeals Tribunal, which has a special Taxation Appeals Division. Under some circumstances appeals are heard by the Federal Court. You will need expert advice. An appeal must normally be made within 60 days. Note that objections are very costly and it is better to ensure that your tax return is correct by getting professional advice before you lodge it.
TAX AUDITS AND INVESTIGATIONS Now that the tax system is based on self-assessment, the Tax Office selects returns for audit at random or because some matter has come to the attention of the Office. There is a comparatively high incidence of desk audits for business, in particular to check substantiation documents for expenses. An investigation can be a complete examination of your affairs, or a more limited enquiry into specific areas. The Tax Office has wide powers and generally an investigating officer can insist on access to any books or records they may consider necessary for the investigation. However, you do not have to answer questions verbally and can require them to be put in writing. In addition, you are usually allowed to have your accountant or tax agent in attendance — and it is wise to do so. As a general rule, it is sensible to cooperate with investigating officers. The Tax Office usually has the power eventually to get the information it needs, and is likely to react more reasonably to a taxpayer who is not obstructive. If, as a result of an investigation, your return is found to be wrong, the Tax Office will adjust it. You will normally be given the opportunity to comment on the adjustments and point out any inaccuracies. However, the onus of proof is on you to show that the Tax Office is wrong, and you will need good documentary evidence to back up your argument. Penalties for tax evasion can be very high — as much as double the amount of tax evaded, or even more. However, the Tax Commissioner has the power to impose lower penalties and is likely to be less harsh with a taxpayer who acknowledges the mistake and is willing to rectify it. Of course, taxpayers are entitled
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to defend their rights and not admit to mistakes that do not, in fact, exist.
TAX AGENTS A tax agent is a person who is registered by the Tax Agents Board as qualified to help taxpayers with their taxation affairs. By law, tax agents are the only people allowed to charge for the preparation of a tax return. Most tax agents are qualified accountants or solicitors who will prepare your tax return, check the assessment, prepare an objection if one is called for and handle disputes with the Tax Office. They can also advise on ways of saving tax and on tax matters generally, for example, on buying and selling a business, as well as sales tax, payroll tax and stamp duty. Any person who is in business should use a tax agent to prepare a tax return. An agent may be able to reduce the amount of tax payable, and in any event will be able to ensure that you are operating properly within the tax laws. These are so complicated that they are virtually impossible for non-professionals to find their way around. If you have an objection to your assessment, or a dispute with the Tax Office, it is advisable to have the matter handled by a tax agent. Also, you should consult a tax agent before taking any major business decision, including buying or leasing property, to ensure that it takes account of the tax laws. A tax agent's fee is an allowable income tax deduction.
TAX YOU DEDUCT FOR EMPLOYEES GROUP TAX All employers must deduct PAYE (pay as you earn) or group tax from the wages of their employees and remit it to the Tax Office at regular intervals, depending on the size of the payroll. You will need to register as a group employer with the Tax Office which will give you a group number and supply a Group Employers Payment book with tearout forms which must accompany each payment. You should register even if you only have one employee (who may be you). The procedures for group tax are to:
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have each employee fill in an Employment Declaration Form (obtainable from the Tax Office), send the original to the Tax Office and keep the duplicate for your records deduct tax from the salary or wage of each employee (the Tax Office publishes schedules which tell you how much tax to take out) pay the tax to the Tax Office, either by the 7th of each month or quarterly if your annual group tax is less than $10 000 give each employee a group certificate at the end of the financial year or when they leave (the Tax Office will send you the certificates for completion) complete the reconciliation statement and send it, together with copies of the group certificates, to the Tax Office by 14 August. If an employee does not provide you with their tax file number, you are required to deduct tax from their wages at the top marginal rate, plus the Medicare levy. This applies to any other payment as well, such as a termination payment. If an employee has provided their tax file number, you must show it on the employee's group certificate. Similar rules apply to independent contractors who are subject to the prescribed payments system. If you do not deduct tax as you should on behalf of your employees, you may be liable for severe penalties, even a possible prison sentence. As well, you may be personally liable for the tax you should have collected.
MEDICARE LEVY Australia funds its health scheme, Medicare, by means of a percentage levy (currently 1.5 per cent) on income. The levy is collected by employers in the same way as tax.
HIGHER EDUCATION CONTRIBUTION SCHEME (HECS) Most higher education students are required to contribute to the cost of their education. They may do this as they study or payment may be deferred until they are working and earning sufficient income. Deferred HECS payments are made through the tax system and, in this case, you will be required to deduct the appropriate
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amount and remit it to the Tax Office with the normal group tax payments.
CHILD SUPPORT The Tax Office is responsible for collecting money due to the Child Support Agency and you may be required to deduct this from an employee's pay. If so, you will receive a written notice from the Child Support Agency and you are then required to inform the employee that the deductions are being made. You will receive detailed instructions from the Child Support Agency as to how deductions are to be processed and what to do in various situations, such as when the employee leaves. You may not dismiss, or otherwise penalise, an employee because child support must be deducted and the fact of the deduction may not be disclosed to other members of staff (except of course the pay officer).
PRESCRIBED PAYMENTS TAX If you employ contractors from certain industries in your business and they are not covered by the PAYE system, you may be required to deduct prescribed payments tax. This means that you must deduct the tax from payments made to the contractor, and send it to the Tax Office. The amount is then claimed by the contractor as a credit against their tax assessment.
OTHER TAXES AND CHARGES CUSTOMS DUTY If you are involved in importing goods of any kind, you will need to be aware of the customs duties that are levied on many goods coming into the country. The main reason for customs duty, unlike other taxes which raise revenue, is to protect Australian goods from having to compete with goods produced more cheaply
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overseas. The main source of advice on customs duty is the Industries Commission.
STAMP DUTY Stamp duty is one of the main ways the States raise revenue and in general is payable on any legal document between two parties, including transfer documents in the sale of real estate, leases, partnership deeds, powers of attorney, trust deeds, and instalment purchase documents. If a document subject to stamp duty is not stamped it has no legal effect and really amounts to nothing more than a blank sheet of paper. Not stamping a document may also have tax ramifications. In a recent case, because stamp duty had not been paid on a joint venture agreement certain tax exemptions which had been claimed were disallowed by the Tax Office. Certain documents need to be drafted with great care to ensure that stamp duty obligations are not unwittingly incurred. For example, in some circumstances the alteration of a trust deed or the changing of trustees may amount to a resettlement and attract stamp duty at a high rate. Similarly, stamp duty can be payable on minutes of a meeting, if the meeting of itself evidences a meeting of the minds of contracting parties. You should always get expert legal advice in situations such as these.
BANK CHARGES Both the federal and State governments impose charges on customer transactions in most bank and non-bank financial institutions — some are exempt, depending on the State. The charges are normally deducted from your account by the institution concerned and remitted direct to the government.
17 Bankruptcy and insolvency If your business fails and you are unable to pay your debts, if you are a sole trader or a partner you may be declared bankrupt, or, if you operate through a company, the company may go into liquidation. In either case, since December 1996, the procedures have been substantially simplified and are now largely dealt with administratively rather than through the courts (although the Federal Court still has a role to play). The Insolvency and Trustee Service of Australia (ITSA) deals with bankruptcy and the Australian Securities Commission (ASC) deals with corporate insolvencies.
BANKRUPTCY Bankruptcy is a legal status and not just a financial condition. It means that certain laws will come into play which are intended to provide an orderly means by which your creditors can be dealt with as fairly as possible while at the same time enabling you to escape from a hopeless financial situation. You can go bankrupt voluntarily or be made bankrupt by one or more creditors if you owe $2000 or more. Depending on the circumstances, there may be other alternatives to going bankrupt. In particular, you may enter into: an informal arrangement with your creditors a debt agreement a Part X agreement under the Bankruptcy Act, which includes:
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(a) a deed of assignment (b) a composition (c) a deed of arrangement.
AN INFORMAL ARRANGEMENT WITH YOUR CREDITORS An informal arrangement with your creditors is just that. You contact your creditors directly, explain your circumstances to them and suggest a course of action that may be acceptable to them. For example, they may be prepared to accept a suspension of debt repayments for an agreed period to give you time to get back on your feet, or they may agree to your paying off your debts by instalments. If you prefer, you can seek the advice of a financial counsellor, accountant or solicitor and they may do the negotiations for you. This procedure has the advantage that there is no publicity and your financial difficulties can remain confidential between you and your creditors. It has the disadvantage that it is not binding on your creditors and if there is a change of mind by one of them, or you cannot keep up the repayments, they are then entitled to pursue their money in the normal way.
A DEBT AGREEMENT You can enter into a debt agreement if your level of debt is low, and you have a low income and few assets. You cannot enter into a debt agreement if: during the last ten years you have been bankrupt, entered into a debt agreement or have appointed a controlling trustee for the purposes of entering into an arrangement under Part X of the Bankruptcy Act your unsecured debts total more than the threshold amount or whatever the Regulations prescribe in the particular circumstances the value of your property to be divided among your creditors if you were bankrupt is more than the threshold amount your after-tax income in the following year is likely to be more than half the threshold amount.
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The threshold amount is calculated at any particular time according to a formula and can be obtained from ITSA. A debt agreement is binding on both you and your creditors and may relate to any aspect of your financial affairs. It may provide for: a payment of less than the full amount you owe a moratorium on payment a transfer of property from you to one or more creditors in full or part payment periodic payments from your income to creditors, either collectively or individually an undertaking by you to take advice about your financial affairs, including advice from a creditor willing and able to provide it amounts payable to creditors to be worked out on a basis other than the proportions of their debts relative to the total amount owing to all creditors arranging for the transfer of assets to satisfy some creditors and the payment of others over a period of time. For example, you could arrange for an asset such as your car to be transferred to one creditor and for another creditor to be paid a fixed monthly sum over a period of time. If you decide to enter into a debt agreement you should put your proposal to the official receiver or authorised registered trustee, who will contact your creditors or possibly call a meeting of your creditors to find out if the proposal is acceptable. In either case, the proposal must be agreed to by a majority of creditors who must also make up 75 per cent in value of creditors. Once a debt agreement proposal is accepted for processing and recorded on the National Personal Insolvency Index, a creditor may not: present a creditor's petition against you proceed further with a creditor's petition that has already been presented enforce a remedy against your property in respect of a frozen debt. A frozen debt means a debt that: (a) is owed by a debtor who has had a debt agreement proposal accepted for processing by the official trustee or authorised registered trustee
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(b) would be provable in bankruptcy if you had become bankrupt when the debt agreement proposal was accepted for processing by the official trustee or authorised registered trustee. If there is a court order, the sheriff must not take action to sell property to enforce payment of a frozen debt until: the deadline set down in the debt agreement arrives, or the debt agreement proposal lapses. Note that a creditor is not prevented from taking legal proceedings in relation to a frozen debt except that they may not enforce a judgment, that is, they may not garnishee your wages, issue a writ of execution for the sheriff, or sell your assets. Debts arising from a maintenance agreement or order, or owing to the child support registrar, are not frozen debts. A debt agreement proposal lapses if: creditors do not pass a special resolution accepting the proposal before the deadline, or the debtor dies after giving the debt agreement proposal to the official trustee but before a debt agreement is made. Note that by giving a debt agreement proposal to the official trustee, you commit an act of bankruptcy which will enable someone who wants to make you bankrupt to apply to the court at a later date. This may happen if you do not adhere to the terms of the agreement.
A PART X AGREEMENT As an alternative you can make an agreement with your creditors under Part X of the Bankruptcy Act. This will be binding on you and your creditors and be administered by a registered trustee or the official trustee. You will have to pay the fees and costs of the trustee and these can be expensive. Part X agreements are generally less restrictive than bankruptcy and take a shorter time to administer, so that your creditors will be paid sooner. Depending on the agreement, you may be able to retain some of your assets or continue to operate your business. To enter into a Part X agreement you will need to complete
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a Statement of Affairs form containing details of your assets and liabilities and to draw up a proposal that you wish to put to creditors. The trustee or a solicitor can help you with this. The trustee will report to your creditors about your affairs and advise them whether, in the opinion of the trustee, they will be better served by accepting your proposal or by your bankruptcy. A meeting of creditors will be called to consider your proposal. If a majority of creditors and 75 per cent in value among those present accept your proposal, you must sign a deed binding you to the agreement. The trustee will then administer the agreement, which may include selling your assets or receiving cash payments from you for distribution among your creditors. If the creditors do not accept your proposal, they may suggest that you make another proposal or that you should become bankrupt. In the latter case, you will become bankrupt on the fifteenth day after you were first informed of the resolution. The various types of Part X agreements are: deed of assignment composition deed of arrangement. Deed of assignment In a deed of assignment, you assign all of the property that would be available to your creditors if you were made bankrupt. This includes your home and any other real estate, motor vehicles, cash in the bank, stocks, shares and any other investments, in fact all your assets except: normal household furniture and effects assets of cash which you hold in trust for someone else tools of trade to the value of $2600 (indexed) any pending damages for personal injury, or injury or death relating to your spouse or family certain types of life assurance, annuity, endowment policies or some superannuation funds any property you acquire after you enter into the deed. A deed of assignment does not require you to make contributions from your income. Once your proposal is accepted by your creditors, you sign a deed and the trustee then sells your assets and divides the
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proceeds between your creditors. Once the deed of assignment has been carried out, you are released from your debts. Composition A composition is where you offer your creditors a sum of money, which they agree to accept in full payment of their debts. The payment can be made in a lump sum or by instalments or both. For creditors to accept a composition, they will normally want to receive more than they would if you went bankrupt and receive it more quickly. Once you have paid the money, you are released from your debts. Deed of arrangement A deed of arrangement is the most flexible of the Part X options. It allows you to make some or all of your assets available to creditors, even those that would not be available if you were to become bankrupt. You can also undertake to make a lump sum payment or payments by instalments. Generally creditors will want to receive a higher payout more quickly than they would if you went bankrupt. Once the payments have been made, you are released from your debts.
VOLUNTARY BANKRUPTCY To enter into voluntary bankruptcy you simply complete a Statement of Affairs and Debtor's Petition and lodge them with ITSA. In the Statement of Affairs you will be asked to supply details of your assets and liabilities. It is an offence not to disclose these or to try to conceal or dispose of assets to prevent their being available to creditors. Once the documents are accepted you are automatically bankrupt. If you want time to consider your options before declaring yourself bankrupt you can sign a Declaration of Intent at ITSA. This provides a seven-day cooling-off period during which you can examine your financial affairs thoroughly and decide whether one of the options above may be preferable. You may want to seek advice from ITSA, a debt counsellor, solicitor, accountant or trustee. Once you are declared bankrupt, your affairs will be administered
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by ITSA or a registered trustee (the choice is yours). Most of your assets will be sold by the trustee and distributed to your creditors. Any assets you acquire while you are bankrupt are also available to the trustee to pay off your debts. Assets that may not be sold include: normal household furniture and effects a motor vehicle that is your primary means of transport and worth $5000 or less. If it is worth more than $5000, the vehicle will be sold and $5000 of the proceeds given to you to buy another vehicle worth no more than $5000 (indexed) assets of cash which you hold in trust for someone else tools of trade to the value of $2600 (indexed) any right to damages for personal injury, or injury or death relating to your spouse or family certain types of life assurance, annuity, endowment policies or some superannuation funds. Note that your home is not exempt and may be sold to pay your debts. If you own your home jointly with your spouse, your share will be sold. In this case, either your spouse will be paid a share of the proceeds of the sale, or your spouse can buy out your share of the home. Note also that if you fail to keep up your mortgage payments, the mortgagee, as a secured creditor, can enter into possession and sell your home even though you have declared yourself bankrupt. You may also have to pay part of your after-tax income to the trustee, depending on how much it is and how many dependants you have. Your income includes your salary or wage, commissions, bonuses and non-cash benefits as well as superannuation, life and endowment policies and termination payments. Each year on the anniversary of your bankruptcy you will be asked for details of your income and dependants so that the amount you must pay for the following year can be assessed. You will be given the choice of making your contributions periodically or by lump sum, whichever you find most convenient. If you do not make the contributions, your wages may be garnisheed and the money sent to the trustee. Once you become bankrupt, certain things apply: you must give your passport to the trustee you must get permission from
the
Federal
Court
to
travel
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overseas if you have been assessed as having to make contributions to the trustee if you do not have to make contributions to the trustee, you must still get the trustee's permission to travel overseas and for the release of your passport you may not obtain credit for more than $3000 without telling the credit provider that you are bankrupt you may not manage a company you must advise the trustee if you change your address you must provide the trustee with information about your income and dependants as required. If you do not comply with these matters, you may be fined, imprisoned or both. Under normal circumstances, your bankruptcy will end after three years. However, this may be extended to five or eight years if you fail to comply with the Bankruptcy Act, for example, by not disclosing your assets, the deliberate obtaining of credit when you know you cannot pay, operating a business under an assumed name without advising your real name and the fact that you are bankrupt, or not complying with any other conditions of the bankruptcy. Even after the bankruptcy has ended you must still continue to give any necessary assistance to the trustee, or the discharge may be revoked. It is possible to offer your creditors a composition after you are made bankrupt. This means that money is made available to pay your debts by a third party (if it is your money, it automatically becomes the property of the trustee, who will use it to pay creditors). If the creditors accept the composition, your bankruptcy will be annulled. If you pay your creditors in full at any time, either before or after your discharge from bankruptcy, the bankruptcy will be annulled. Even after the bankruptcy has ended you must still continue to give any necessary assistance to the trustee, or the discharge may be revoked.
PAYMENT OF CREDITORS Creditors are paid in order of preference. The first people to be paid are the secured creditors, that is, those who lent you money
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with a particular asset as security. For example, if you financed the business by mortgaging your home, the mortgagee will be paid from the proceeds of the sale of the home before other creditors have a claim on the money. Once the secured creditors and the costs of the bankruptcy proceedings have been paid, certain other debts have priority. These include employees' wages, income tax, rates and various costs. The remainder is then divided between the other creditors.
PROPERTY OWNED BY YOUR SPOUSE Any property owned by your spouse is theirs, and cannot be used to pay your debts. However, anything given to a spouse within two years of the bankruptcy can be taken back by the trustee. Sometimes gifts given to a spouse within five years may be revoked.
ADVANTAGES OF BANKRUPTCY Although bankruptcy has always borne a certain stigma, sometimes there can be some advantages to it. The main advantage is that you no longer have the threat of legal action by your creditors hanging over your head and, provided you have not behaved fraudulently, can make a fresh start. Bankruptcy also means you are allowed to keep some possessions, which might be seized by the sheriff if creditors simply followed the normal procedures for debt recovery. You will be allowed to keep your wages, unless there is a court order saying part must be paid to the trustee. The court is unlikely to make such an order unless your income is considerably more than you and your family need to live on.
DISADVANTAGES OF BANKRUPTCY The main disadvantage of bankruptcy is that you will lose nearly all of your assets. Apart from this, and the restrictions to your actions outlined above, there are various other disadvantages which you will need to consider if bankruptcy is something over which you have any control. Your bankruptcy will become part of the permanent records on the National Personal Insolvency Index. It will also be recorded
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on your credit reference file, possibly making it hard for you to get finance at some future time, even after the bankruptcy has ended. Bankruptcy may affect your future work chances, especially if you need a commercial licence to carry out your job. It may also affect your ability to keep a job — some employers regard bankruptcy as evidence of lack of character and of irresponsibility. The anti-discrimination laws do not cover bankruptcy.
CREDITORS' PETITIONS Your creditors can send you bankrupt if your debts total $2000. A creditor must apply to the Federal Court for a bankruptcy order. However, the options available to you to reach agreement with your creditors are much the same as with voluntary bankruptcy.
CORPORATE INSOLVENCY If a company cannot pay its debts when they fall due, it is said to be insolvent. The procedures for dealing with an insolvent company are much the same as those for bankruptcy, although the terms used to describe them are different and the matter is dealt with by the Australian Securities Commission (ASC).
EXTERNAL ADMINISTRATION A company unable to pay its debts is normally placed under the control of an external adminstrator. External administration includes the situation where the company: has a controller appointed to it is under voluntary administration enters into a deed of arrangement is being wound up. Controller Four types of separate role come under the term `controller':
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receiver receiver and manager controller (other than a receiver) managing controller (other than a receiver and manager). A receiver is someone who is given the authority (either by the Corporations Law or court order) to take over a company's property and use it to pay the debts of the company. If the receiver is also asked to manage the affairs of the company, they become a receiver and manager. The concept of a controller other than a receiver was introduced in 1993 and gave legal recognition to a person who is not a receiver but who assumes control of a company's property for the purposes of paying debts. A managing controller is a person who is not a receiver but has a management role. Voluntary administration Every company director should be aware of the amendments to the Corporations Law enacted in 1993 which allow for voluntary administration. This is a comparatively simple procedure and was introduced to create an efficient and effective alternative to schemes of arrangement and applications to the court for a liquidator to be appointed. Voluntary administration means that the business of a company is conducted for a period by an external administrator. During this period the company is protected by a general moratorium on dealings with its property and proceedings against it. The administrator investigates the affairs of the company and if it can be saved the creditors are asked to enter into a Deed of Company Arrangement which is acceptable to them and which allows the company to trade out of its difficulties. The deed must be approved by the court. If the administrator reaches the conclusion that the company cannot be saved, it is put into liquidation without the need for an application to the court. The procedure for appointing an administrator is that a person with the status of an official liquidator signs a consent to act as administrator of the company and the board of directors then passes a minute making the appointment. The administrator must lodge a notice of appointment with the ASC by the end of the next business day and within three days publish a notice in national newspapers. The administrator must then convene a
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meeting of the company's creditors within five business days of the commencement of the administration.
LIQUIDATION Liquidation is the process by which a company's affairs are brought to an end, its assets are converted into cash, its debts are paid, and anything left over is distributed to the owners. There are three types of liquidation: members' voluntary winding-up creditors' voluntary winding-up compulsory winding-up. Members' voluntary winding-up Members' voluntary winding-up occurs when the company is solvent but, for whatever reason, the owners of the company decide that it is no longer required and it should be brought to an end. In this case there is an extraordinary general meeting of members to consider a special resolution that the company be wound up. Prior to the meeting, the directors must make a declaration to the Australian Securities Commission that the company is solvent. The company's creditors are not involved in this type of winding-up. Creditors' voluntary winding-up Creditors' voluntary winding-up occurs when it is apparent that the company cannot pay its debts, and members resolve to wind it up and appoint a liquidator. A meeting of the company's creditors must be held within 24 hours of the passing of the winding-up resolution to confirm (or change) appointment of the liquidator and consider other statutory matters. Compulsory winding-up Compulsory winding-up or liquidation is brought about by a court order. Various people can apply to the court for the winding-up, including the company itself, any creditor, and an official manager or liquidator. There are various grounds for winding up a company but by far the most common ground is that the company is unable to pay its debts.
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If the court agrees to the winding-up, it will appoint a liquidator and the company will normally stop trading. Once the order has been made, the company cannot dispose of any of its property, transfer any of its shares or alter the status of any of its members without first getting the court's permission. When the liquidator has received a statement of the company's assets, debts and liabilities, and particulars of its creditors, a report is made to the court on the financial state of the company and the reason for its failure. The liquidator must advertise in the Government Gazette and at least one appropriate newspaper saying that the company is being wound up, and inviting creditors to submit details of their claims. Once the assets have been realised and distributed, the liquidator then applies to the court for an order dissolving the company.
PART 3 The legal system
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18 How the legal system operates If you become involved in a business argument, legal action may result. Although matters are sometimes settled quickly and do not actually reach a court hearing, the court process is fundamental to any legal dispute. The way your lawyer handles the matter will be based on the assumption that it will ultimately be argued in court before a judge who will have to decide on the merit or otherwise of your case. The law is divided into civil and criminal law. Criminal law is aimed at punishing wrongdoers, and is conducted by the State on behalf of the community. It deals with offences such as robbery, fraud, murder and whatever actions the community considers to be opposed to the good order of the society in which we live. This section of the law is increasingly dealing with white-collar crime. Civil law is intended to provide redress for citizens in disputes with one another, and is initiated by citizens on their own behalf. Civil law covers such matters as contracts, the sale of goods and consumer protection, agency, insurance, negligence and matters involving the sale or leasing of land.
THE COURT SYSTEM Most courts in Australia are State courts. These operate at three levels. They sometimes have different names in different States, but the basic structure is the same.
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The authority given to a court to hear and adjudicate on matters is called its jurisdiction. The jurisdiction of a court may depend on how much money is involved, or how serious the crime is. If it is a court where matters can be originated, that is, where cases can have their first hearing, it is said to have original jurisdiction. If the court can hear appeals from other courts, it is said to have appellate jurisdiction. The Australian court system is illustrated in figure 18.1. All levels of courts have both civil and criminal jurisdiction, each of which has a different procedure. As most business involvement is at a civil level, that is what is dealt with here.
Lower courts The courts that deal with the great bulk of everyday matters, from traffic offences and minor criminal matters through to civil claims and some family law matters, are the magistrates courts. They are presided over by a magistrate, and variously called magistrates courts, local courts or courts of petty sessions. All matters are heard by the magistrate alone, without a jury. Magistrates courts hear about three-quarters of all cases. There is an upper limit to the amount of money they can award as compensation, which varies from State to State. Most debt-recovery proceedings are undertaken in the magistrates courts.
Intermediate courts Intermediate courts are presided over by a judge, and deal with more complex and expensive cases. They also hear appeals from the lower courts. Intermediate courts sometimes have a jury, depending on the type of matter. Like the magistrates courts, intermediate courts are also called by different names in different States, sometimes according to whether they are sitting on civil or criminal cases. Most States call them District Courts; Victoria calls them County Courts.
Supreme Courts The Supreme Court is the highest court in each State, and hears the major and most complex cases. Sometimes the jurisdiction of
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the Supreme Court overlaps with an intermediate court and the case may be heard in either court. A major function of the Supreme Court is to hear appeals from lower courts. An appeal may be heard by one judge and then, if one of the parties is still unhappy with the decision, by three or even five judges. The majority view prevails. A matter that started in the Supreme Court in front of one judge can go on appeal to more than one judge, sometimes two, sometimes three or five. New South Wales has a special Court of Appeal within the Supreme Court. In most cases, the avenues of appeal come to an end with the Supreme Court. Appeals can only go further, to the High Court, if the case is of general legal or constitutional importance.
High Court of Australia The High Court is the highest court in Australia. There are seven High Court judges and they may all sit on a case, although it is more common for three or five judges to sit. The majority view prevails. In most cases, you do not automatically have a right to appeal to the High Court, but must be granted special leave by the court itself. Special leave will be granted if a matter of general legal significance is involved. The bulk of cases in the High Court are appeals. The High Court is based in Canberra, where it hears most cases. Once the High Court has decided a case, that is the end of the matter; there is no further avenue of appeal.
The Federal Court The Federal Court of Australia was established in 1976 to deal with federal laws, specifically industrial laws and bankruptcy. The Federal Court sometimes hears appeals from State Supreme Courts on federal matters such as taxation, patents and trademarks. Some administrative appeals also go to the Federal Court.
The Family Court The other main court in Australia is the Family Court, with the special task of hearing family law matters.
Tribunals In
addition
to
the
main
court
system,
there
are
various
specialist
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tribunals. Tribunals not only provide expertise on particular subjects, but may also offer a quicker and less expensive way of dealing with a matter. A particularly important tribunal from the point of view of business is the Administrative Appeals Tribunal, which provides an avenue of appeal for administrative decisions such as those made by the Tax Office. Other tribunals are small claims or consumer claims tribunals, the Commercial Tribunal, which can hear disputes over credit contracts, and the Trade Practices Tribunal. Small businesses often find a small claims tribunal a practical way of settling a claim against a supplier. Generally the use of lawyers is restricted so that costs are minimised, and each side argues its own case in front of a referee.
THE COURT PROCESS Terminology Court action in general is called litigation, and the parties are called the litigants. In a civil case, the person who believes he or she has been wronged and who brings the action is called the plaintiff. The person against whom the action is brought is called the defendant. The plaintiff sues the defendant. The result of the case will be a verdict for either the plaintiff or defendant. If the verdict is for the plaintiff, this person will usually be awarded a judgment against the defendant, which entitles the plaintiff to compensation and to some of the costs of bringing the action.
Bringing a case before the court Various procedures have to be followed to bring a matter before a court. The form of these procedures will differ according to the rules of the particular court. The most common first step is for a writ, summons or statement of claim to be issued by the court ordering the person named on it to appear before the court at a specified place and time to answer a complaint. The document is normally prepared by the plaintiff's solicitor, although in minor matters, such as small-debt recovery, it may be prepared by the plaintiff personally. Once the document has been accepted by the court, it is said to have issued from that court. It will normally be served on
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Figure 18.1 The Australian court system
(officially given to) the defendant by a court official or a licensed process server. Sometimes the writ has attached to it a statement of claim, setting out the cause of action and the remedy sought. A statement of claim is the usual way of starting proceedings in higher courts.
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A writ or statement of claim must be issued within a certain time of the event complained of taking place. The time limits are set down by law, and vary depending on the type of matter and possibly the State. As an example, the time limit in which an action for breach of contract must begin is usually six years from the date of alleged breach. If proceedings are not begun within the specified time, the right to take action is lost, unless very special circumstances exist. The recipient of a summons to a magistrates court is required to respond by filing a defence. Usually, although not always, a lawyer will be engaged to do this. If the defendant does not file a defence a default judgment may be made against them. In the case of actions in the higher courts, the defendant is similarly required to give the court written notice of defence. Lawyers for each side then exchange pleadings, which enable the real issues in the dispute to be identified so that the time spent in court can be minimised. There may sometimes be other steps as well, such as interrogatories — questions to the other side about the case, which must be answered on oath — and discovery — a requirement that the other side produce relevant documents. All these procedures are intended to ensure that each party knows precisely what the issues being contested are. They are also aimed at encouraging the parties to extract facts and matters that are not in dispute, and thus save the time of the court.
The hearing Most civil proceedings will be held in court by a judge or magistrate alone, without a jury. The hearing begins with an opening statement by the lawyer for the plaintiff, followed by an opening statement from the lawyer for the defence. The statements summarise what each hopes to establish during the case. Witnesses are called by the plaintiff, followed by witnesses for the defendant. The lawyers for each side first examine their own witnesses and then cross-examine the opposing witnesses. When the evidence from all the witnesses is complete, closing submissions are made by the lawyers on both sides, summarising the facts of the case and the issues of law in dispute. The judge then gives the decision. In complex cases, the judge may `reserve' judgment for a period of time so that all aspects of the case can be considered fully. In some cases, however, the
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judgment is given immediately. Included in the judgment will probably be various orders requiring one or other of the parties to do certain things. For example, if the plaintiff has successfully established their case, the defendant may be required to pay a sum of money.
The outcome The outcome of a civil case may be: an award of money (damages) as compensation for loss suffered by the plaintiff an injunction (an order) to stop doing something an order for specific performance, for example, to complete a contract. Specific performance orders are relatively rare. The court is usually reluctant to compel a person to do something they no longer want to do, but will more commonly award damages as compensation for the loss caused. For example, if a supplier fails to deliver according to a contract, the court will not usually order the delivery be made, but rather that the supplier pay a sum of money as compensation for the loss caused by the failure to deliver. This compensation may cover the costs of obtaining new supplies and any loss in profit.
ENFORCING A COURT ORDER If a person fails to obey a court order, they are in contempt of court. The court has various ways of enforcing the order. If money is involved, the court can require that goods be seized by a court officer, for example, a bailiff. If necessary, the goods will be sold to pay the party entitled to the money out of the proceeds. Alternatively, the court may order that a sum of money be deducted from the person's wages to pay money owing. If money is not involved, but one party is required to do something or is prohibited from doing something, and does not comply with the order, this party may be gaoled for contempt of court. If the order involves the transfer of property and it is not complied with, the court can direct someone else, for example, the registrar of titles, to record the transfer and issue a new certificate of title to the appropriate person.
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ALTERNATIVE DISPUTE RESOLUTION Dispute resolution outside the traditional court system is becoming increasingly common. Such methods are known as alternative dispute resolution (ADR) and they are less adversarial, quicker and often cheaper than going to court. ADR encourages the disputing parties to reach their own mutually acceptable resolution of the conflict in the presence of a neutral third party whose role is to facilitate the resolution. There is generally a panel of experienced experts, mediators and arbitrators from which the parties may choose, in areas such as construction, industrial relations, insurance, accounting, environment, land rights issues, law and franchising. The parties meet at a mutually convenient time and elect whether or not to have legal representation. Because the process is less adversarial, business relationships may be preserved. Settlements are mutually agreed and not imposed. Various methods of dispute resolution are used, including negotiation, independent expert appraisal and mediation. Arbitration is usually included as a method of ADR as well, although strictly speaking it is incorrect to do so since it involves a decision imposed on the parties by an arbitrator, and not arrived at between the parties themselves.
Mediation Mediation is a structured, assisted negotiation aimed at enabling the parties to resolve their dispute by agreement. The mediator is generally someone agreed to by both parties, but there is no undertaking to accept the decision of the mediator — and indeed the mediator will not seek to impose a decision, since the purpose is to reach a solution that is mutually acceptable to both parties. Proceedings are conducted on a `without prejudice' basis, so that views expressed, suggestions made, offers or proposals, and admissions may not be used in any subsequent proceedings. In mediation the parties may talk separately and in confidence to the mediator. In general, the process is confidential and so privacy can be preserved. Some industry groups maintain a panel of mediators to be used as a first step in any dispute, to try to settle the dispute at minimal cost with no legal representation.
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Mediation sessions are usually informal, with few rules. There is, however, a basic requirement that mediators should be fair and unbiased. Mediation is voluntary but once the parties reach agreement, they sign an agreement which is binding. If mediation fails, the parties can try formal arbitration and after that, the courts or a tribunal.
Commercial arbitration Most States have specific legislation providing for commercial arbitration. A common clause in a contract is something like this: If any difference shall arise between the parties about the meaning of this agreement or the rights and liabilities of the parties, it shall be referred to the arbitration of two persons (one to be nominated by each party) or their umpire in accordance with the provisions of the Commercial Arbitration Act.
Unlike mediation, the decision of an arbitrator can be enforced. Its purpose is to obtain a final result while avoiding the costs and delays inherent in the court system. Often arbitration is particularly suitable if the matter is complicated and technical, since the arbitrator can be someone expert in the field, such as an engineer, architect or accountant. The Institute of Arbitrators Australia maintains a graded list of members who have undertaken the Institute's training program. The arbitrator has a wide discretion as to how the arbitration is conducted, provided that it is within the law. In most cases an arbitrator's decision is final. It can be appealed against only on certain grounds. Many States have special commercial arbitration centres.
WHAT TO EXPECT FROM A LAWYER A great many relationships between lawyers and their clients come under strain because each side has a different expectation of the other. It is especially important for a businessperson to realise that a lawyer is trained to give legal advice and this is not necessarily the same as commercial advice. Lawyers often have a reputation
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for being negative in business matters, and there can be no doubt that this is sometimes deserved. However, it is the lawyer's job to point out pitfalls. Ideally, the lawyer you engage will have some business acumen as well as legal expertise, and so will be able to take both legal and commercial aspects into account. Often, you will take a commercial decision to proceed with a transaction without having dotted all the `i's and crossed all the `t's from a legal point of view. For example, thousands of business agreements proceed on the basis of trust without a formal written contract. If you seek legal advice, you would almost certainly be warned not to act in this way because it involves a risk. Your lawyer will have seen the transactions that have gone wrong. You may decide that the risk is worth taking from a business point of view, but in most cases this will have to be your decision rather than your lawyer's. When you consult a lawyer, have your facts marshalled as far as you can and know what questions you want answered. The lawyer will almost always be charging on the basis of time, and if you turn up for an appointment without any real idea of what you want to know it will cost you money. Always take any relevant documents with you. Do not be afraid to ask questions and make suggestions. You are paying for the advice, and are entitled to understand it. Lawyers do not always think of everything, and if you can think of an alternative, ask about it. Try to find a lawyer who has some experience in advising small business. If you do not know what fields of work a lawyer undertakes, ask. Most law societies maintain lists of lawyers who practise in particular areas and in some States there are accredited specialists in business law. Ring the law society or law institute in your State. You are entitled to expect your lawyer to give you courteous and attentive service. For example, if your lawyer is in the habit of not returning your phone calls and not giving satisfactory explanation for this, find another lawyer. Access to competent legal advice is essential for most small businesses. You should have a lawyer you trust and with whom you feel comfortable. It is worth putting some effort into achieving that.
Index
abuse of market power, 92 accident insurance, 121 accountant, and tax returns, 164 act of bankruptcy, 185 Administrative Appeals Tribunal, 177, 200 administrator, 191, 192-3 advertising, 9, 84; bait advertising, 87-8; free gifts/prizes, 87; goods on credit, 102-3; price advertising, 86; price reductions, 86-7; truth in advertising, 85-6 affidavit, 75 Affidavit of Debt, 106 Affidavit of Service, 106 agency, 127; creation of, 127-9; ending the agreement, 130-1; of necessity, 127; see also agent; principal agency law, 126-7 agent, 120, 126, 127, 128; liability, 130; real estate agents, 129; rights/duties, 129; stopping cheques, 157; tax agents, 164, 178; see also agency; principal agreements: agency, 128-9, 130; franchise, 46, 47-9; hire-purchase, 99; lease, 12, 54-5, 56-7, 91; partnership, 15-16; purchase of business, 12; unfair trading, 92-3, 93-4 all risks insurance policy, 147
alternative dispute resolution (ADR), 204; mediation, 204-5 annual general meeting, 31 annual leave, 113 anti-discrimination laws, 118; and banks, 155; inapplicable to bankruptcy, 191 appeals, 198, 199 appellate jurisdiction, 198 arbitration, 204, 205; commercial, 205 arbitrator, 205 assignment: of copyright, 133; of lease, 58 attachment of earnings order, 106 Australian Company Number (ACN), 29, 38-9 Australian Competition and Consumer Commission (ACCC), 89, 91 Australian Industrial Property Organisation (AIPO), 47, 50, 133, 135 Australian Industrial Relations Commission (AIRC), 109, 122 Australian Institute of Land Administrators and Valuers, 11 Australian Securities Commission (ASC), 4, 27, 38, 182, 191, 193 Australian Workplace Agreements (AWAs), 107-8, 108-9; awards, 107, 108, 110; bargaining agents, 109-10; checklist for making,
YOUR BUSINESS AND THE LAW 110-11; no-disadvantage test, 108; term of, 109; voluntary nature, 109 authorised capital, 25 awards, 107, 108, 110 bailiff, 106, 203 bait advertising, 87-8 bank cheque, 160 bank-customer relationship, 153-4; advice from bank, 155; Code of Banking Practice, 154-5, 158; specimen signature, 155; see also banks banking ombudsman, 161-2 bankruptcy, 106, 182, 188-9; act of, 185; advantages, 190; alternatives to, 182-3; alternatives to debt agreement, 183-5; alternatives to informal arrangement with creditors, 183; alternatives to Part X agreements, 182-3, 185-7; and contracts, 68; annulled, 189; creditors' petitions, 191; disadvantages, 190-1; payment of creditors, 189-90; spouse's property, 190; voluntary, 187-9 banks: anti-discrimination laws, 155; bank cheque, 160; bounced cheque, 159; cleared cheque, 157; complaints against, 161-2; crossed cheque, 157; forged cheque, 159-60; government charges, 181; joint account, 156; open cheque, 156-7; opening an account, 155; post-dated cheque, 158; stale cheque, 159; stopping a cheque, 157-8; see also bank-customer relationship bargaining agents, 109-10 barrister, sole trader, 19 breach of contract, 72, 73, 124; actual loss, 72-3; loss mitigation, 73; timing, 202 breach of duty of care, 139-40, 143 business considerations, 6; financial, 7-8; growth, 9; legal, 8; location, 7; marketing, 8-9; personal, 6-7; tax implications of buying/selling, 175 business interruption insurance, 147 business name: of franchise, 50; registration, 3-4, 5, 29 business, purchase of, 9-10; assets, 11; costs, 10-11; legal issues, 12-13;
208
profits, 10, 11; purchase agreement, 12; sales, 10; tax implications, 175; the seller and you, 12 business structures, 13; company, 4, 22-3, 36, 43; partnership, 4, 14-21, 42; sole trader, 4, 5-6, 24, 41 capital expenditure, 166 capital gains tax (CGT), 170-1; working from home, 173 Cash Transaction Report Agency (CTRA), 160, 161 cash transaction reporting, 160-1 cash value, of insurance, 145-6 cash-in-transit insurance, 147 casual workers, 117 caveat emptor, 15, 70 cheques, 156; bank, 160; bounced, 159; cleared, 157; crossed, 157; forged, 159-60; open bearer cheque, 156; open order cheque, 157; post-dated, 158; stale, 159; stopped, 157-8 Child Support Agency, 180 child support payments, 112, 180 children, standard of care, 139-40, 143 civil law, 197 clearance sale, 87 closing-down sale, 87, 88 Code of Banking Practice, 154-5, 158 common seal, 29 community title, 60 company, 22-3, 36, 43; annual return, 38; articles of association, 27-8, 31, 37; capital, 25-7, 38; common seal, 29; continuity of life, 35-6; cost of, 36; deregistration, 38-9; directors, 30, 314, 148; financial records, 34-5, 38; income tax, 164-5; incorporation, 4; insolvency, 191-4; limited liability, 15, 23-4, 28-9; liquidation, 182; losses, 167-8; meetings, 37-8; memorandum, 27-8, 37; name, 28-9; no-liability, 23, 37; opening a bank account, 155; operation, 30-1; proprietary (private), 24-5, 27-9, 34-5, 37; public, 4, 24; registered office, 29-30; registers, 35; secretary, 34; shelf company,
INDEX 27; tax, 169; tax file number, 171; unlimited, 23 company title, 59 compensation, 203 competition: and franchisors, 51; and unfair trading, 89, 93 complaints, against banks, 161-2 composition, 187, 189 computer software, copyright, 133 confidentiality, 137; banks, 153-4; company secretary, 34; employees, 115, 137; mediation, 204 consequential loss, 82; insurance, 147 consideration, 67-8; options, 68; promise under seal, 67; value, 67 Consumer Affairs offices, 13 Consumer Credit Code, 95-6; account statements, 100-1; advertising credit, 103; changes to contract/lease, 100; consumer leases, 98-9; credit contracts, 97; exceptions, 97-8; guarantees, 99; hire-purchase, 99; penalties, 102; personal hardship, 100; repossession, 101-2 consumer leases, 98-9 consumer protection, 50, 70, 76, 89; advertising laws, 84-8; product liability, 141-2; warranties on goods for sale, 76-80; warranties on services, 81-2 contempt of court, 203 contracts, 63-4, 68; ability to enter into, 68; broken, 72-3, 124; electronic, 66-7; false and misleading information, 70; in writing, 68-9; intention to create legal relations, 64; offer and acceptance, 64-7; options, 68; terms, 69-70; unfair, 70-2; see also consideration contributory negligence, 141 controller, 191-2 conveyancing, 60 copyright, 132, 134; computer software, 133; duration, 133; right to publish, 133; royalties, 132 corporate insolvency, 191; external administration, 191-3; liquidation, 1934 Corporations Act, 28, 192 County Court (Vic), 198 court of petty sessions, 198
209
court order, to enforce, 203 court process, 200; appeals, 198; bringing a case before court, 200-2; enforcing a court order, 203; hearing, 202-3; judge, 198, 202; judgment, 202-3; jury, 198, 202; outcome, 203; plaintiff/defendant, 200 court system, 197-8, 201, 205; Family Court, 199; Federal Court, 199; High Court of Australia, 199; intermediate courts, 198; lower courts, 198; Supreme Courts, 198-9; tribunals, 199200 covenant, 74 cover note, 150 credit, 95; advertising goods on credit, 1023; debt recovery, 104-6; insurance as condition for, 103; lay-bys, 103-4; see also Consumer Credit Code credit cards, 95 credit contracts, 97 credit insurance, 147 Credit Reference Association of Australia (CRAA), 104 credit transactions, 95 creditors: and bankruptcy, 182, 186; and debt agreements, 183-5; and frozen debts, 185; and Part X agreements, 186-7; informal arrangement with, 183, 184; payment of, 189-90; petitions, 191; voluntary winding-up, of company, 193 creditworthiness, how to check, 104 criminal law, 197 customer accounts, 95 customer/client lists, 115, 137 customs duty, 180-1 damages, 203 debenture, 26 debenture-holder, 26 debt, frozen, 184-5 debt agreement, 183-5 debt collection agency, 105 debt recovery, 104-6, 190, 198; bankruptcy proceedings, 106; garnishee order, 106, 112, 188; issuing a summons, 105; judgment debt, 106; letter of demand, 105; writ of execution, 106 Debtor's Petition, 187
YOUR BUSINESS AND THE LAW Declaration of Intent, 187 deed of arrangement, 74, 187 deed of assignment, 74, 186-7 Deed of Company Arrangement, 192 deed of covenant, 74 deed of gift, 74 deed poll, 74 deeds, 67, 73-4, 129; and stamp duty, 181 default judgment, 202 defendant, 200 demotion, 123 depreciation, 167 designs, 132, 135; duration of protection, 135; registration, 135 directors and officers insurance, 147-8 directors, of company, 30; duties, 31-2; liability, 32-4, 148 disability insurance, 121, 146 discipline procedures, 115, 122-3 disclosure statement (lease), 54 discovery (legal), 202 dismissal, 122-3; summary, 123; unfair, 122, 123, 124 dispute resolution, outside court, 204-5 District Court, 198 diversification, 9, 54 duty of care, 139 employees, 107; as agents, 128; casual, 117; confidentiality, 115, 137; deductions from pay, 112-13; defined, 120-1; discipline process, 115, 122-3; dismissal, 122-3; duties, 114-15; employer's right to search, 115; leave, 113-14; misconduct, 123; part-time, 117; rates of pay, 111-12; resignation, 124; retrenchment, 123-4; right to expenses, 115; workplace agreements, 107-11 employers: equal employment opportunity, 117-19; health and safety, 119; restraint of trade, 116-17; right to search employees, 115; vicarious liability for employees, 116; workers compensation, 119-22 Employment Advocate, 108 employment records, 122 employment, termination of, 122-5
210
equal employment opportunity, 117-18; anti-discrimination laws, 118; sexual harassment, 118-19 exclusive dealing, 91-2 expert appraisal, independent, 204 express terms (contract), 69 Fair Trading Acts (State), 50, 89, 102 Fair Trading offices, 13 Family Court, 199 faulty goods, remedies, 80 Federal Court, 199 fidelity guarantee insurance, 147 First Corporate Law Reform Act (`First Act'), 24-5 First Corporate Law Simplification Act, 36 fixed-term lease, 54 forgery, 155; cheques, 159-60 franchising, 44-6, 49, 50; franchise agreement, 46, 47-9; goodwill, 48-9; laws applying, 49-52; location of outlet, 47-8; operations manual, 46; support services, 47; termination of agreement, 48; training, 48 Franchising Code of Practice, 46 fraud, 18, 32, 151; insurance against, 147 fringe benefits tax (FBT), 170, 171 frozen debt, 184-5 garnishee order, 106, 112, 188 goods: advertising, on credit, 102-3; faulty, consequential loss, 82; faulty, remedies for, 80; seizure of, 203; unsafe, 141-2, 147; warranties on, 76-80 goodwill, 48-9, 54; sale of, 170 group tax, 178-9 guarantees, 99 health and safety, 119 health insurance, 112 hearing, in court, 202-3 High Court of Australia, 199 Higher Education Contribution Scheme (HECS), 179-80; deducted from tax, 113 hire-purchase, 99; legislation, 99 home office, 174 home working, and tax deductions, 173-4
INDEX identification documents, 155 implied terms (contract), 69-70 imputation system (tax), 165 income splitting, 168-9 income tax, 112, 163; assessment, 163-4; assessment, objecting to, 176-7, 178; audit, 164; capital expenditure, 166; car expenses, 166-7, 176; company, 164-5; deductions, 165-7; deductions, working from home, 173-4; depreciation, 167; how to save, 168-9; losses, 167-8; partnership, 164; rebates, 167; self-assessment, 163, 177; sole trader, 164; substantiation, 166, 177; see also tax incorporation, 4, 27 independent contractor, 120-1, 128 injunction, 203 Insolvency and Trustee Service of Australia (ITSA), 182 instalment order, 106 Institute of Arbitrators Australia, 205 insurance, 144, 145, 148; averaging, 151; cancellation of policy, 151-2; complaints, 152; cover note, 150; disability insurance, 121, 146; duty of disclosure, 149, 151; indemnity, 150-1; insurable interest, 149-50; Legalcare, 148; liability insurance, 145, 147-8; life insurance, 145; life insurance, permanent, 145-6; life insurance, term, 145, 146; material damage insurance, 145; material facts, 149; occupier's liability, 142; promised benefit insurance, 145; property insurance, 146-7; renewal of policy, 151; subrogation, 150; utmost good faith, 149, 151; workers compensation, 148 Insurance Enquiries and Complaints (IEC), 152 insurance law, 144-5 intellectual property, protection of, 132 intention to create legal relations, 64 Internet, 66-7 interrogatories, 202 invention: profit from, 134; to patent, 133-4 investment property, 168 invitation to treat, 65 issued capital, 25 joint bank account, 156
211
joint tenancy, 60 joint venture, 39-40 judge, 198, 202 judgment debt, 106 judgment (legal), 202-3 jurisdiction, 198 jury, 198, 202 jury service, 114 justice of the peace, 74 key executive insurance, 146 land tax, 173 lawyer, 202; how to consult effectively, 205-6 lay-bys, 103-4 leases, 7, 8, 11, 12 leases, commercial, 53-5, 56-7; assignment of lease, 58; ending the lease, 58-9; options, 54-5; permitted uses, 56; rent, 55; repairs, 57-8 leave entitlements, 113-14 legal system, 197; civil law, 197; court process, 200-3; court system, 197-200, 201; criminal law, 197; litigation, 200 Legalcare insurance, 148 letter of demand, 105 liability: exclusion clauses, 83-4; insurance, 145, 147-8 licences, 3, 5, 8 life insurance: free look period, 146; permanent, 145-6; term insurance, 145, 146 limited partnership see partnership liquidation, 182, 192, 193; compulsory, 193-4 liquidation sale, 87 litigation, 200 loan capital, 26 local court, 198 location, of business, 7, 10 long-service leave, 114 loss mitigation, 73, 124-5 magistrates court, 198 managing director, 31 marketing, 8-9 material damage insurance, 145 maternity leave, 114 mediation, 204-5 Medicare levy, 112, 179
YOUR BUSINESSAND THE LAW minutes, of meeting, 34; stamp duty, 181 misconduct, 123 misleading/deceptive conduct, 89-91; and franchises, 51-2 monopoly, 93-4 National Personal Insolvency Index, 184, 190 negative gearing, 168 negligence, 138-9, 147; and children, 13940, 143; causation, 140; contributory negligence, 141; duty of care, 139; duty of care, breach of, 139-40, 143; foreseeable risk, 141; loss/damage suffered from breach, 139, 140-1; occupier's liability, 141, 142-3; presumption of carelessness, 141; product liability, 141-2; standard of care, 139-40; unduly vulnerable plaintiff, 140-1 negotiation, 204 no-disadvantage test, 108 notary public, 74 occupier's liability, 141, 142-3 offer and acceptance, 64-7 old system title, 59 open cheques, 156-7 opening sale, 87 ordinary shares, 26 original jurisdiction, 198 overtime, 112 parental leave, 114 Part X agreements, 182-3, 185-6; composition, 187, 189; deed of arrangement, 187; deed of assignment, 186-7 part-time workers, 117 partnership, 4, 14-15, 19, 40, 42; agreement, 15-16; and workers compensation, 120; bankruptcy, 182; existence, 20-1; income tax, 164; law of, 16-17; liability of partners, 17-18; limited, 1819; losses, 168; name, 19; number of partners, 19; personal assets, 24; tax file number, 171 Partnership Act, 40 passing off, 135, 136 patents, 132, 133; duration, 133; international protection, 134
212
pay: deductions from, 112-13; overtime, 112; rates of, 111-12 PAYE see group tax payroll tax, 172-3 periodic lease, 54 permits, 3 plaintiff, 200 pleadings, 202 power of attorney, 74, 129 preference shares, 26 premises, for business: buying, 59-60; leasing, 53-9 prescribed payments system, 171, 179, 180 price advertising, 86 price discrimination, 93 price fixing, 92 price reductions, 86-7 principal, 120, 127, 128; liability, 130; see also agency; agent product liability, 141-2; insurance, 80, 147 professional indemnity insurance, 147 profit, 10, 11; from inventions, 134 promised benefit insurance, 145 promotion, 9 property: conveyancing, 60; insurance, 1467; methods of ownership, 60; types of title, 59-60 property, intellectual, 132 proprietary (private) company, 24-5; formation, 27 provisional tax, 169 public company, 24 public holidays, 113 public liability insurance, 116 purchase agreement, 12 receiver, 192 register of injuries, 122 registration, 8; of business name, 3-4, 5; of designs, 135; of trademark, 135-6 rehabilitation, 122 reinstatement, 124 repossession, of goods, 101-2 resale price maintenance, 92-3 residential tenancy, 53 resignation, 124 restraint of trade, 116-17 Retail Leases Act 1994 (NSW), 53 retail tenancy code, 54 retrenchment, 123-4 royalties, 132
INDEX sale of goods: remedies for faulty goods, 80; warranties, 76-80 sales (price reductions), 87, 88 sales tax, 172 Second Corporate Law Simplification Bill, 37 services, dangerous, 83; limiting liability/exclusion clauses, 83-4 services, unsatisfactory: consequential loss, 82; remedies for, 82 sexual harassment, 118-19 share capital, 25-6 shareholders, 23, 26 shares, 25-6, 38; buy-back, 26-7 shelf company, 27 sheriff, 185, 190 sick leave, 113 small claims tribunal, 200 smoking, 119 sole trader, 4, 5, 41; bankruptcy, 182; income tax, 164; legal liability, 6; personal assets, 24; registration, 5 solicitor, 74, 200 specific performance order, 203 specimen signature, 155 stamp duty, 74, 181 standard of care, with children, 139-40, 143 Statement of Affairs, 185-6, 187 statement of claim, 200-1; timing, 202 statutory declaration, 74-5 Statutory Declarations Act (Cth), 75 stealing: by employees, 115; insurance, 147 strata title, 59 Strata Titles Act (NSW), 59-60 sub-contracting, 175 subrogation, 150 substantiation, 166, 177 summary dismissal, 123 summons, 200, 202; to issue, 105 superannuation, 112, 168 Superannuation Guarantee, 171-2 Supreme Court, 198-9 survival rate, of small business, 44 tax, 163; agents, 164, 178; audit, 164, 1778; capital gains, 170-1, 173; evasion, 164, 177-8; file number, 171, 179; fringe benefits, 170, 171; group, 178-9;
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HECS payments, 179-80; land, 173; Medicare levy, 179; on income see income tax; payroll, 172-3; prescribed payments system, 171, 179, 180; provisional, 169; record keeping, 1756; record keeping, capital gains, 170-1; sales, 172; Superannuation Guarantee Charge, 171-2 Tax Law Simplification Acts, 164 tenancy: in common, 60; joint, 60 term insurance, 145, 146 terms, of a contract, 69-70 time payment, 95 Torrens title, 59 Trade Practices Act 1974 (Cth), 50, 89, 102 trade secrets, 132, 136-7 trademarks, 50, 132, 135; duration of protection, 136; registration, 135-6 trading trust see trust travel expenses, 176 tribunals, 199-200, 205 trust, 39; opening a bank account, 155 trustee, 39, 181 truth in advertising, 84-6 unconscionable conduct, 91 unfair dismissal, 122, 123; remedies, 124-5 unfair trading, 89; abuse of market power, 92; exclusive dealing, 91-2; marketsharing arrangements, 93-4; misleading/deceptive conduct, 89-91; price discrimination, 93; price fixing, 92; resale price maintenance, 92-3; unconscionable conduct, 91 vicarious liability, 116 voluntary administration, of insolvent company, 192-3 warrant of distress see writ of execution warranties, on goods for sale, 76-7; as described, 79; fit for the purpose, 77-9; merchantable quality, 77; safety, 80; title, 80 warranties, on services, 81; due care and skill, 81; materials fit for purpose, 81; services fit for purpose, 81-2 witnesses, 202
YOUR BUSINESS AND THE LAW workers compensation, 119-20; claim, 1212; employee, defined, 120-1; insurance, 120, 148; rehabilitation, 122 workplace agreements see Australian
214
Workplace Agreements (AWAs) Workplace Relations Act 1997 (Cth), 107, 109 writ of execution, 106, 200-1; timing, 202
