Frequently Asked Questions About Commercial Law

Buying or selling a business is a major transaction. A lawyer will be able to advise you on important legal issues to protect your interests and ensure the process runs smoothly. Engaging a lawyer for this work is always recommended. 

Sometimes contracts need to be written. In general, though, a legally binding contract can be:

• Oral
• In writing
• Partly oral and partly in writing
• Made by people’s actions

A contract may be made up of several different documents, emails and conversations.

Most contracts are enforced in court. If the other party breaches the contract, you can go to court to try to collect damages or obtain ‘specific performance’. However, some contracts have other alternative dispute resolution clauses which include arbitration and/or mediation as the first point of call.

Specific performance is where a court will order one party to undertake its obligations under a contract. This is an alternative to a claim for damages. A remedy of damages is more common than seeking specific performance.

• Be sure you have read and understood the entire contract. If you do not understand it, don’t sign it until you do understand it.
• Be sure everyone signs & dates the contract
• Contract pages should have the numbering “1 of xx pages”.
• Be sure all warranties etc that are incorporated by reference are attached to the basic contract.
• If the contract is a form contract, *all* entries must be filled out (if the space does not apply use “NA” etc).

The Corporations Act 2001 does contain provisions that may result in the director of a company becoming personally liable for some or all of the debts of the company. A lawyer can assist you with how to protect yourself against potential liability.

Under Australian taxation law, every company carrying on business or deriving property income in Australia must have a public officer (unless the company is specifically exempted).

The company must appoint a public officer within 3 months of the company:

1. Commencing to carry on business; or
2. First earning income in Australia.

The public officer must be at least 18 and must live in Australia.

The public officer is responsible for ensuring that the company pays the correct amount of tax.

If a company is in default, then the public officer is liable to pay any penalties. However, the public officer is not personally liable for the payment of tax due by the company.

The initial director or directors can appoint more directors in the future – as follows:

1. The new director must be at least 18 years old.
2. The new director must consent to their appointment before they are appointed.
3. The current directors must appoint the new director by recording the appointment and signing the record.
4. The company must then notify ASIC of the appointment by lodging an ASIC Form 484 within 28 days after the appointment. You can download the form from the ASIC website and lodge it with ASIC.

No (but see the next two questions). A trust cannot own shares in a company because the law says a trust is not a separate legal person. For example, the ‘John Smith Family Trust’ cannot own shares or any other property.

Even so, the trustee of a trust, in his, her or its capacity as trustee, is capable of owning shares and other property – see next question.

Yes, a trustee can own shares in a company – as long as you include the trustee’s name and their capacity. For example: ‘John Smith in his capacity as the trustee of the John Smith Family Trust’.

In this case, the trustee holds the shares in the company on trust for the beneficiaries of the trustee’s own trust.

Yes, a corporate trustee can own shares in a company – as long as you include the trustee’s name and their capacity. For example: ‘ABC Pty Ltd in its capacity as the trustee of the ABC Family Trust’.

In this case, the trustee holds the shares in the company on trust for the beneficiaries of the trustee’s own trust.

The number of shares the company should issue depends on your individual circumstances. However, if you intend to incorporate a simple company, with you and maybe one or two others as directors, then generally a company will issue a nominal amount of shares, say 100 shares at $1.00 each.

The company can issue more shares to others as time progresses.

We recommend consulting your accountant for specific advice in this regard. 

Under the Corporations Act 2001, a director of a company who has an interest (perhaps a conflict of interest) in a matter that concerns the company, may give the other directors notice of the nature and extent of the interest.

The notice must state the nature and extent of the director’s interest and be given at a director’s meeting or to the other directors individually in writing.

Interest must be disclosed to the other directors.

ABNs are not compulsory. However, there are many good reasons to have one, for example, ABNs:

1. Help you to deal with the ATO.
2. Help you in dealing with other businesses when supplying goods or services to them, or when purchasing goods and services.

Also, you need an ABN to register for GST. Entities carrying on an enterprise in Australia with a GST turnover of $75,000 must register for GST. We recommend discussing this further with your accountant. 

A company is an ultimate holding company of a wholly owned group if it has a subsidiary and the company is not a subsidiary of another company. This means, the ultimate holding company owns or controls more than 50% of the shares in the subsidiary and can be referred to as the ‘controlling entity’. Simply put, it is a company that owns other companies as assets.

The key element is control. One company controls a second company if it has the capacity to determine the outcome of the decisions of the second company’s financial and operating policies.

The ultimate holding company may have several subsidiaries.

A special purpose company is a company that, as its name suggests, is set up for a particular purpose. A special purpose company might be set up solely to be the trustee of an SMSF. Or it might be set up solely to pursue certain charitable purposes.

This product is a not-for-profit special purpose company. The requirements for a not-for-profit special purpose proprietary limited company are set out in the Corporations (Review Fees) Regulations 2003. These regulations provide the constitution of a special purpose company:

• Requires the company to pursue charitable purposes only and to apply its income to promoting those purposes.
• Prohibits the company from making distributions to its members and paying fees to its directors.
• Requires its directors to approve all other payments the company makes to them.

ASIC has confirmed that the key requirement for creating a not-for-profit proprietary limited company is that the constitution of that company states that it has been created for a specific purpose – pursuing charitable purposes.

On a winding-up of a not-for-profit proprietary limited company, any assets which are left over after the company has paid its debts must be distributed to another entity with similar objectives to the not-for-profit company. The assets must not be distributed to the shareholders.

The Australian Consumer Law (ACL) is a single, national consumer law that provides guarantees and warranties to protect consumers, Australia-wide.

The ACL includes:

• A national scheme for unfair contract terms law covering standard form contracts.
• A national scheme for guaranteeing consumer rights when buying goods and services, which replaces existing laws on conditions and warranties.
• National product safety laws and enforcement system.
• A national law for unsolicited consumer agreements, which replaces existing state and territory laws on door-to-door sales and other direct marketing.
• Simple national rules for lay-by agreements.
• New penalties, enforcement powers and consumer redress.

The ACL applies nationally and in all states and territories, and to all Australian businesses.

The ACL commenced on 1 January 2011. Transactions for goods and services made before then will continue to be covered by previous consumer laws. For example, goods sold on 24 December 2010 will be covered by the implied conditions and warranties of existing consumer laws, not the new consumer guarantees law in the ACL.

The ACL will be enforced and administered by the Australian Competition and Consumer Commission (ACCC), each state and territory’s consumer agency, and, in respect of financial services, the Australian Securities and Investments Commission (ASIC).

Among the points which Franchise Council of Australia (FCA) recommends for investigation are:

1. The type of experience required in the franchised business.
2. A complete understanding of the business.
3. The hours and personal commitment necessary to run the business.
4. Who the franchisor is, what its track record has been, and the business experience of its officers and directors.
5. How other franchisees in the same system are doing.
6. How much it’s going to cost to get into the franchise.
7. How much you’re going to pay for the continuing right to operate the business.
8. If there are any products or services you must buy from the franchisor and how and by whom they are supplied.
9. The terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years.
10. The financial condition of the franchisor and its system.

It is also recommended that you ask a competent accountant to examine your anticipated expenses, your financing needs, and your prospects for achieving your desired level of profitability before you sign any agreement.

Investment requirements differ tremendously. It all depends on the industry and the type of business. Total start-up costs can range from $20,000 or less, to over $1,000,000, depending on the franchise selected, and whether it is necessary to own or lease real estate to operate the business.

Moreover, the initial franchise fee for most franchisors is between $10,000 and $30,000. Seventy percent of franchisors charge an initial franchise fee of $40,000 or less. The average investment, excluding real estate costs, is between $350,000 -$400,000.  You must discuss the initial fees and opening costs with individual companies.

• Term – How long does the franchise last? Will you have the option to renew it, and on what terms?
• Territory – What area does your franchise cover? Do you have exclusive rights to sell within it?
• Fees – What initial fee will you pay? What percentage of sales revenue will you pay? Will you pay a regular management fee – and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
• Support – How much help will you get starting the business? What continuing support will you get?
• Restrictions – What restrictions are there on what you’re allowed to do and how you must run the business?
• Exit – What happens if you can’t continue in the business for some reason – perhaps due to ill health? What happens if you want to sell your franchise?

If your business is a creditor, equipment lessor, or consignor, provides goods on retention of title terms or purchases accounts receivable, you need to immediately address the impact the PPSA will have on your business. If you provide supply good on retention of title and or leased goods you need to know how it affects you.

For example:

a) Goods supplied on retention of title terms:

If a business supplies goods to a customer on retention of title basis, it needs to perfect its security interest by registration on the PPSR.

If the business does not perfect its security interest and the customer goes into liquidation, the business stands to lose its asset as title is no longer relevant: i.e. the liquidator may seize the business’ goods and sell them as part of the customer’s asset pool.

b) Leased goods

The consequences of failing to register a security interest on the PPSR in relation to leased goods are best illustrated by the landmark New Zealand case, Waller v New Zealand Bloodstock Finance Ltd.

New Zealand Bloodstock Finance Ltd (‘NZBF’) leased a stallion (valued at approximately NZ$2.5m) to a company known as Glenmorgan. NZBF did not register its security interest in the lease on the NZ PPSR. Glenmorgan’s financier had a security interest that was registered on the PPSR.

Glenmorgan defaulted in its payments to its financier and the financier appointed a receiver. Even though NZBF had reclaimed possession of the leased stallion, NZBF lost its title and rights of ownership to the stallion as it did not have a registered, perfected security interest. The stallion was ultimately sold by the liquidator and the sale proceeds passed to Glenmorgan’s financier.

Once you have determined what security interests may apply to your business, you should establish a system to register the security interests and retain all relevant records. For example, the financing and verification statements generated in the registration process on the PPSR are valuable records and should be kept on file.

It is also likely that you will need to amend your terms and conditions of trade and other related paperwork.

During administration, a company is protected from its creditors whilst the various alternatives are considered by the administration.

In instances of administration, if there is a proposal put forward for the business to continue and creditors to be paid, the company and its directors execute a deed of company arrangement.  At the time of considering the proposal, the creditors consider a report from the insolvency practitioner as to their recommendations.

Eventually, the decision as to whether a deed of company arrangements is entered into is made by the creditors of the company.

Yes.  If a director of a company receives a notice from the tax office in relation to tax due by a company, then it may be that the director will become personally liable if he/she does not take urgent action.