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Business Matters

Business Matters

Business Buyers Guide
Business Stamp Duty
Business Structure
Debt Collection
Employee & Sub-Contractor
Enduring Power of Attorney
Starting a Franchise

Business Buyers Guide

A guide to issues a buyer should be aware of and the tasks they should perform prior to settling a business purchase.

It is very important that the proper procedures are followed when buying a business, in order to protect both you and the seller.

The following are some useful information in this area:

  • Settlement is the process of arranging the exchange and stamping of contracts, payment of all monies, all adjustments of rates and taxes etc.
  • Your solicitor or settlement agent will help you in finalising the purchase, ensuring that the title to the business and the property passes to you.
  • The contract should be made subject to arranging suitable finance (if required), inspection of records, receiving the required licenses and any other transfers.
  • The business will have assets (eg. stock, fixtures, vehicles, equipment, trade marks, patents, copyrights, business names, leases, etc.), the titles to which must be properly transferred to you. These assets should be itemised in the agreement.
  • You should be fully aware of the current and future liabilities (what the business owes) that you will be taking on. These liabilities should be itemised in the contract. The contract should state that liabilities not detailed will be met by the seller. It is far more preferable that the business is transferred free of liabilities.
  • The contract should specify the date which you will take over the business (settlement date) and who will be paying the various fees.
  • If appropriate, your solicitor can negotiate a covenant for you which will prohibit the seller from starting up a similar business to compete with yours. This covenant cannot be unreasonable and must meet the requirements of the Trade Practices Act.
  • You can negotiate to work in the business for a trial period before settlement, to ensure that the accounting records and performance reflect the actual situation. You can also ask the vendor to train and assist you after the purchase.
  • All business records should be handed over, eg. sales records, customer mailing lists, client histories, etc.

Prepared by Goodwin Mitchell O’Hehir & Associates with acknowledgement to Westpac and Business Enterprise Centres

Once your offer has been accepted and you are now awaiting the date when you can officially take over, there are numerous issues which you must attend to.

THE GMO 21 POINT CHECKLIST

  1. Check contract with your solicitor or settlement agent.
  2. Has the settlement date been confirmed in writing?
  3. Check that the business structure (eg. partnership, company) will be in place by this date.
  4. Will all licences, permits, etc. to operate the business be transferred by the settlement date?
  5. Do you have a bank account in place and cheque books, deposit slips, etc, printed?
  6. Have you arranged insurance cover?
  7. Have you contacted the suppliers and advised them of the change of ownership? Will they be prepared to extend to you the same terms of credit as the former owner?
  8. Will you need to contact your business’s customers to advise of a change of ownership eg. through a letter drop, personalised letters, personal visit or sign?
  9. Have you advised the appropriate service companies that there will be a change of ownership eg. power, phone, freight, equipment maintenance, printing, cleaning etc?
  10. Has your accountant set up or approved the accounting systems? Do you understand how they work?
  11. Have you contacted the Taxation Office to ensure that you comply with all their requirements?
  12. Do you require any training which will assist you in your business?
  13. Have staff arrangements been met?If the business is changing name:
  14. Have you registered the new business name and/or trademarks?
  15. Have you arranged new signage?
  16. Have you arranged stationery such as letterheads, business cards, compliments slips, invoices, statements, order forms, etc.?
  17. Do you need to prepare promotional material (eg. press releases, brochures, radio commercials etc.)?
  18. Have you and the Vendor jointly appointed a professional stocktaker?
  19. Are you aware of how much stamp duty you must pay on the purchase contract? Check with your settlement agent.
  20. Remember to check that on settlement day, all the plant and equipment is accounted for and is in sound working order.
  21. Confer with your solicitor as to whether you should lodge a caveat on the lease of the premises to protect your interests.

By ensuring all 21 tasks have been considered you will be in a far more secure position on settlement day!

ABOUT GMO

The directors of Goodwin Mitchell O’Hehir & Associates have been actively involved in business sales and consultation since 1983. During that time Owen Mitchell, Jim Goodwin and Graham O’Hehir have negotiated the sale of businesses to a total value exceeding $420 million dollars.

The mix of businesses sold ranges from companies sold into public float on the Australian Stock Exchange, to quality retail outlets, smaller wholesale and manufacturing ventures, plus many service and franchise based businesses.

Contact: Graham O’Hehir on 9481 4422 or graham@buyabusiness.com.au

Some thoughts from Tan and Tan Lawyers on Business purchases

I believe one of the first issues to consider before buying a business is the question of whether you are suitable for the running of the business. For example, if you are not the type of personality that like to socialise with customers on a daily basis, then a restaurant business may not be a suitable type of business to get involved in.

Or imagine buying a mechanic workshop when you have no idea about vehicle maintenance. Everything can be learnt, but at the end of the day, the question is whether you will be happy in running such a business.

It is advisable that before you place an offer to purchase a business, an appointment be made with your lawyers. Tan and Tan Lawyers will be more than pleased to accept instructions from you if you have purchased a business. We charge our services on the same rate as settlement agents when it comes to business settlements.

However, in most business settlements, considerations also have to be made for perusing and advising on leases and possibly franchise documents. We charge for those services as per our standard legal charges.

The lawyer should assist you in drafting special conditions that may be necessary to ensure that you purchase the business properly. I include some of the special conditions that I may include in a contract. Each case is different and each business may have certain peculiarities that require consideration when drafting the special conditions.

An example of some special conditions that may be included:

SPECIAL CONDITIONS

The contract is conditional upon the following:

  1. The Purchaser’s solicitors approving the terms of the current lease of the premises within 10 days from the receipt of the said lease by the Purchaser.
  2. The Purchaser’s accountant approving the business records which are to be handed over to the Purchaser within 8 days of the acceptance of the offer. The accountant is to provide his approval in writing within 15 days of the receipt of the business accounts at the purchasers’ expense.
  3. Transfers or assignments of all supply contracts pertaining to the business.
  4. A due diligence trial by the Purchaser 2 weeks before settlement to evidence the turnover of the business is not less than $__0,000.00 per week +/- a variation of 10%.
  5. This offer is also subject to and conditional upon approval by the Director of Liquor Licensing of the application for transfer of the liquor licence No. _____________from the licensee, ___________ to the Purchaser.
  6. Settlement shall take place :
    1. Settlement shall take place on _______ 2003 after the Liquor Licensing approval for the transfer to the Purchaser of the liquor licence No. ________.
  7. The settlement shall only be arranged after the Lessor has signed the lease to be granted to the Purchaser.
  8. The lease and the liquor licence application is to be approved within 45 days from the acceptance of this offer failing which the Parties shall be entitled not to proceed with the Purchase and all rights pursuant to the usual conditions of settlement are to apply.
  9. The Vendor is to warrant that all liabilities for the business are paid up at the date of settlement and that there are no encumbrances on the business.
  10. The Vendor will at the settlement transfer all up to date and valid licences applicable for the business and the premises.
  11. The Vendor warrants that all title to the chattels and equipment (except the following items listed in paragraph _____ of the contract) included in purchase price belong solely to the Vendor prior to settlement and that the same is unencumbered. all equipment included in purchase price are to be in good working order at the date of settlement.
  12. The sale includes all plant and equipment as detailed in the schedule. The make & model of chattels and equipment are to be detailed. All chattels and equipment to be same at date of settlement as inspected after the receipt of the deposit by the Vendor. An inventory of all fixtures and plant and equipment is to be provided by the Vendor within 5 working days of the acceptance of THIS offer.
  13. The Vendor agrees to answer the Purchaser’s requisition on title prior to settlement.
  14. Upon settlement taking place, the Vendor and all directors and shareholders of the Vendor company undertake not to set up a competing business for a period of 2 years within a radius of 5 kms from the business premises. The restriction applies to any spouses and family members of the said Vendors if any.
  15. The sale price does not include stock estimated at $_____________, which will be valued by an independent stock take firm appointed by the vendor and the purchaser on the day of settlement. The Purchaser will within 3 working days from settlement pay the vendor a fair price decided by the stock take firm for the stock. Provided that the Purchaser is not obliged to accept any stock which in the purchaser’s opinion is not sellable.
  16. All employees’ service contracts are to be terminated by the vendor prior to settlement.
  17. The Vendor will provide the Purchaser and his nominee training in the operation of the business from the date of the liquor licence approval until settlement such training to be free of charge to the purchaser.
  18. Following settlement, the Vendors will be responsible for collection of their own debtors and payment of their own creditors. The sale price is inclusive of GST. The Vendor confirms that the business is being sold as a going concern and any GST liability is a liability of the Vendor.
  19. Upon payment of the deposit which is to be held by Tan and Tan as the stakeholders, the Purchaser is to be given access to the premises for the purposes of measurements for renovations.
  20. The Purchaser will be a nominee company set up by the Purchaser and the name of the nominee company is to be _____________.
  21. If any part of this agreement is or becomes void or unenforceable then that part will be severed without affecting the remainder of this agreement.

On the lighter side

Terminating lawyers with extreme prejudice.

Q. If a lawyer and an Tax Department agent were both drowning, and you only had time to save one of them, would you go to lunch or read the newspaper?

A: Any of the above.

Q: How do you keep a lawyer from drowning?

A: Take your foot off his head.

Q: How many lawyers does it take to stop a cement truck traveling at 57.9 mph?

A: Never enough.

Q: You have a gun with only two bullets in it and you are in a room with Adolf Hitler, Ted Bundy and a lawyer, what do you do?

A: Shoot the lawyer twice.

Q: How do you get a lawyer down out of a tree?

A: You cut the rope.

Q: Why is it so hard to drown a lawyer?

A: Scum floats.

Business Stamp Duty

This article is based on information provided by the State Revenue Department.

person acquiring an existing business is required to pay Stamp Duty when goodwill and/or other certain property is acquired where:

(a) the acquisition is evidenced by a written contract for sale of business between parties; or

(b) there is no written agreement and the purchase includes any of the following items:

  • Business Assets
  • Land, buildings and all property thereon
  • Mining tenements and all property thereon
  • Business Licence
  • Chattels and other property
  • Fixed plant and equipment.

What do you need to do when a business is acquired?

(a) If you sign a contract to purchase a business or if you are taking over a business where the acquisition is dutiable property, the person liable for the duty must submit it for assessment of stamp duty within two months after the date of first execution.

There are some new rules in respect of conditional contracts. The new rules give a purchaser longer than 2 mths from the signing of the contract to stamp the contract if certain conditions are present.

(b) Where there is no such instrument, or where only some of the dutiable property is the subject of one or more dutiable instruments:-

  • (i) The person liable for the duty must submit for assessment of stamp duty, a statement detailing the dutiable property which is not covered by an instrument along with any instruments;
  • (ii) All other parties to the acquisition must also give notice that the acquisition has occurred;
  • (iii) The statement and the notice must be submitted within 2 months after the acquisition occurred. Again note that if the contract is subject to conditions, the date for submission of the agreement for stamp assessment may be later.

What is property?

For stamp duty purposes “property” comprises anything that:

(a) has a value; and

(b) is capable of being conveyed or transferred.

Pursuant to the State Revenue’s interpretation, ‘Property’ includes anything in the nature of proprietary rights and interests.

The following are considered as property and are dutiable when purchased:

  • Business Assets (eg. goodwill, a business identity, business licence, intellectual property and restraint of trade agreement)
  • Prescribed Licence (eg. fishing licence, liquor licence, taxi licence)
  • Chattels (plant and equipment) – dutiable when transferred with any “other property” (contracts executed on or after 01 January 2004)
  • Tenant’s fixtures and fittings
  • Land, buildings and all property thereon
  • Mining tenements and all property thereon

Are there any properties which are exempt from stamp duty?

Yes, the following properties are some examples of properties exempt from duty:

  • Trade debts
  • Cash or money in an account at call
  • Negotiable instruments and money on deposit with any person
  • Choses in action with respect to work in progress (non-physical part- completed work such as unbilled professional fees, etc.).
  • Ships or other local marine vessels
  • Stock-in-trade.

How much duty is payable?

The rates below are current as at October 2004.

Property Value ob
$0 – $ 80 000 $2.00 per $100 or part thereof
$ 80 001 – $100 000 $ 1 600 + $3.00 per $100 or part thereof in excess of $80 000
$100 001 – $250 000 $ 2 200 + $4.00 per $100 or part thereof in excess of $100 000
$250 001 – $500 000 $ 8 200 + $5.00 per $100 or part thereof in excess of $250 000
$500 001 and upwards $20 700 + $5.40 per $100 or part thereof in excess of $500 000

Who is responsible for payment of the duty?

(i) The person who purchases the dutiable property is liable for the payment of stamp duty

(ii) If the dutiable property is gifted, the donor is liable for the payment of the duty.

What if I do not lodge an instrument or statement on time?

There may be a penalty tax of up to 100% of the duty assessed if the instrument or statement is not lodged by the required lodgement date.

Generally instruments must be lodged, within two (2) months after the date of first execution.

Therefore any potential buyers of businesses should remember to include in their costing, the cost of stamp duty.

If a bank loan is being applied for , the purchaser should consider including the cost of the stamp duty in their loan applications.

The other issue that crops up sometimes is the cost of GST. Generally, if a business is being bought as a going concern, there is no GST payable. However be aware of situations where the vendor stops trading before the transfer of the business. You should always ensure that the business is still in operation before the settlement takes place.

Portfolio Settlements are able to assist you in any business purchase that you are considering. Any requirement for legal advice can be provided in house by Tan and Tan Lawyers.

Business Structure

Things To Consider

I often provide advice to clients who are just going into business. It is important to lay the right corporate foundation for your business before you actually start trading. There are many things to consider along that climb to successful trading.

Sole Proprietorship/Partnership And Business Names

Most businesses are operated as a sole proprietor arrangement or a partnership arrangement.

The first question will have to be ‘What business name do I register.’

When should I register a business name?

Carrying on a business or forming a partnership does not necessarily mean that the name or names must be registered as a business name. For example if you are John Smith and you just wish to trade as John Smith, then there is no need to register a business name. However if the business is not your usual name or if it involves any additional words, then a business name needs to be registered.

You have to be aware that when it comes to business names, each State and Territory has its own Business Names legislation. Names requiring registration must be registered in each State in which the business is carried on. Therefore if you register the name “ABC Traders” in Western Australia, it only allows you exclusive use of that trading name in Western Australia.

If you carry on business under a name that is not registered, you are in breach of the Business Names Act and will be liable for a $200 fine.

What name do I use?

You should always check carefully that the name you wish to use is original. The Registry of Businesses has a Computerised List of all names currently registered in Australia and is available for inspection at the Business Names Branch.

You should not incur expenses (print business cards, letterheads etc) with respect to a business name until such time as you have confirmed availability and booked the name.

How long is the registered business name valid for?

The registration of a business name remains in force for a period of three years. It may be renewed at any time within the period of one (1 ) month before and one (1 ) month after the expiration of the registration.

It is important that you keep tabs on the renewal date lines. Failure to re-register the name may result in some other persons registering the name for their own use.
What other alternatives are there to using a business name?

You should speak to a lawyer and an accountant to find out if just using a business name is the right business structure for your purposes.

Lawyers will look at it from a legal perspective. The biggest concern about trading under a business name is that you become personally liable for the debts of the business. That means if the business fails, the creditors can pursue you by getting court orders to sell your personal assets.

For this reason, it is sometimes safer to use a company structure. Your accountant’s advice should be sought before you register either a business name or a proprietary limited company (“Pty Ltd structure”).

Benefits Of Using A Proprietary Limited Company Structure.

It is now possible to incorporate a Pty Ltd structure with one shareholder and one director. It is basically a legal fiction allowed by the law that a Pty Ltd structure can operate with one director and one shareholder. We say it is a legal fiction in that the director holds a meeting with himself when decisions are made by the Board of the Pty Ltd Company.

One of the main benefits is that there is limited personal liability if you use the Pty Ltd structure. That means if the Pty Ltd company fails, the creditors usually cannot sue the shareholders or directors personally.

There are certain circumstances where the directors can be sued personally for the debts of a Pty Ltd company. For example:

  1. Where the directors give personal guarantees to the creditors.
  2. Where the creditors can show that the directors were trading while the Pty Ltd company was insolvent and was unable to pay its debts.
  3. Tax liabilities.

You should speak to your accountant or lawyer if you are considering changing over from a sole proprietorship or partnership using a business name to that of a Pty Ltd structure.

The duties of directors and or shareholders are numerous and should be carefully considered when a Pty Ltd company is set up. One of the most commonly overlooked requirement include:

The all important ACN

Under the Corporations Act 2001, every company in Australia is issued with a unique, nine-digit number, an Australian Company Number (ACN), which must be shown on a range of documents.

The purpose of the ACN is to ensure adequate identification of companies when transacting business. New companies are issued with numbers by the Australian Securities & Investments Commission (ASIC) upon registration.
Where the ACN must appear?

This is where I am often surprised by clients as the following requirements are often overlooked.

A company’s ACN should appear on all of its ‘public documents’ and ‘eligible negotiable instruments’ [s.153]. The items on which it should appear include:

  • all documents required to be lodged with ASIC;
  • statements of account, including invoices;
  • business letterheads;
  • official company notices;
  • cheques, promissory notes and bills of exchange; and
  • receipts which are not machine-produced;
  • all orders for goods and services;
  • any written advertisements making a specific offer which is capable of being accepted (such as by the completion of an order form).

If a company’s name appears on two or more pages of a document or instrument, the ACN must be shown on the first of those pages following the company’s name. Where a number of separate companies are listed on a document (eg, a letterhead) the ACN of each should appear and in such a way that makes clear the company to which each ACN relates.

While there are no specific requirements as to how an ACN should appear on a document, it should be clear, easily readable, and obvious as to the company to which it relates. The ACN should be identified by the words ‘Australian Company Number’, or by the abbreviations ‘ACN’ or ‘A.C.N.’.

Where the ACN is not required

The items on which the ACN is not required include:

  • packaging and labelling, including envelopes and transport documents;
  • credit cards and credit card vouchers;
  • machine-generated receipts, including cash-register receipts;
  • business cards and ‘with compliments’ slips; and advertisements which do not make a specific offer which is capable of being accepted (such as advertisements which only promote the company and its goods or services in general);
  • items which are not documents (eg, vehicles, television advertisements).

Penalties

The penalty for non-compliance with the ACN provision of the Corporations Act 2001 (section 153) is $1,100 or three months imprisonment, or both.

Common seal

Most Companies has a Common seal. However the law has now been changed so that there may not be a need for a Common seal. A Pty Ltd company may have a common seal, and then use it to execute documents in accordance with its constitution. If a company does have a common seal, it must set out the following information:

  1. for a company that has its Australian Company Number (ACN) as its name – the company’s ACN; or
  2. otherwise the company’s name, the expression “Australian Company Number” and the company’s – ACN.

Australian Business Number

Under current tax legislation, all businesses should have an Australian Business Number (ABN). You may use the ABN with your company’s name in place of the ACN on company documents and negotiable instruments, provided that:

  • your ABN includes your nine digit ACN; and
  • the quotation of the ABN is effected in the same manner in which quotation of the ACN would normally occur. (For example, a company is required to place its ACN with its name on the first page where that name appears in a document)

What Happens If I Register A Business Name Or A Pty Ltd Company?

What Rights Or Protection Do I Get?

The business name or the Pty Ltd company registration does not give you protection of your proprietary and intellectual property interest.

The Business Names legislation and the Australian Securities and Investment Commission is concerned with the establishment of a public register of business and Pty Ltd company names and their particulars. They are not concerned with conferring rights or protection in respect of such a name. You should, after deciding on a business name or a Pty Ltd company, conduct a thorough search of the Trade Marks register to make sure that the business name or the Pty Ltd Company name is not similar to any registered mark.

Business names and Pty Ltd company names are best protected from exploitation when they are registered trade marks. On the other hand, your new business name or Pty Ltd company name may infringe a registered trade mark. Be sure to search the trade mark database before registering a new business name or a Pty Ltd company name.

What Is A Trade Mark?

A trade mark can be a word, phrase, letter, number, sound, smell, shape, logo, picture, aspect of packaging or a combination of these. It is used to distinguish the goods and services of one trader from those of another.

A registered trade mark gives you the exclusive legal right to use, license or sell it within Australia for the goods and services for which it is registered.

Trade mark registration is not compulsory but it is advisable. There is protection against misrepresentation under the trade practices or fair trading legislation. It is also possible to take action under common law but this can be a time-consuming and expensive exercise.

Is there a difference between a trade mark and a business, Pty Ltd company or domain name?

Yes.

The difference between trade marks, business, Pty Ltd company and domain names sometimes causes confusion for both traders and the public.

A Pty Ltd company name or a registrable body must be registered under the national Corporations Law administered by the Australian Securities and Investments Commission. Once registered, it covers the whole of Australia. If a Pty Ltd company wishes to trade using a name other than the registered company name, it will be necessary for the company to register that name as a business name.

A business name is a name under which a business operates. Registration serves as a means of identifying the owners of the business and is obtained under state or territory legislation. Registration of a business name in any Australian state only gives you rights in respect of the particular state where the registration is made.

Where trading occurs in more than one state or territory, the business name must be registered under the laws of each one. Registration of a business name is compulsory and must be completed before the business starts trading.

A trade mark is used to distinguish the goods or services of one trader from those of other traders. Registration of a trade mark gives the registered owner exclusive use of the trade mark throughout Australia.

Registration Of A Business, Company Or Domain Name Does Not In Itself Give You Any Proprietary Rights-Only A Trade Mark Can Give You That Kind Of Protection.

The same word(s) may be registered by different people as business names and trade marks. However, the registered trade mark owner can sue the business owner for infringing the trade mark if the business name owner uses it on goods or services similar to those covered by the trade mark registration.

What About Domain Names?

In current times, besides deciding on the business name and the trade mark, a trader also has to consider the registration of a domain name to protect their intellectual property.

A domain name is a textual address for a location on the Internet that corresponds to the actual alpha numeric address which the Internet computers can read. The rules for registration of a dot.au domain used to be quite strict. Since 1st July 2002, the ability to register domain names under the dot.au category has been relaxed significantly. You should see http://www.melbourneit.com.au for the latest information on registration of domain names.

You can register your domain name as a trade mark as long as it meets the requirements of the Trade Marks Act 1995.

Currently, it is possible to register the following domains:

.com Available to any individuals, organisations or companies.
.net Available to any individuals, organisations or companies.
.org Available to any individuals, organisations or companies.
.info Available to any individuals, organisations or companies.
.biz Available to any individuals, organisations or companies.
.com.au For commercial purposes. Includes commercial entities, currently registered and trading in Australia, as well as commercial products and services.
.id.au For individuals.
.asn.au For ‘associations’. Includes associations incorporated under specific state legislation, some incorporated bodies, political parties, trade unions, sporting and special interest clubs and ‘partnerships’ between disparate organisations.
.net.au For commercial purposes. Includes commercial entities, currently registered and trading in Australia, as well as commercial products and services. Almost all of the domains in this domain type tend to be net/communications related.
.org.au For non-commercial purposes. Includes not-for-profit organisations, charities, churches, welfare groups etc.

You should consult an IT specialist and your lawyers regarding the protection of your internet intellectual properties. There are many cases where a trader forgets to register a domain name to protect their business names. There are cyber squatters in cyberspace. These cyber squatters check to see if your business name is registered as a domain name. If it is not, they quickly register the domain name and then offer the domain name to your business later at a price.

There are many things to consider when going into business. Always get legal advice to ensure you do not make an expensive mistake.

On the lighter side

  • An airliner was having engine trouble, and the pilot instructed the cabin crew to have the passengers take their seats and get prepared for an emergency landing.A few minutes later, the pilot asked the flight attendants if everyone was buckled in and ready.

    “All set back here, Captain,” came the reply, “except one lawyer who is still going around passing out business cards.”

  • A truck driver would amuse himself by running over lawyers. Whenever he saw a lawyer walking down the side of the road he would swerve to hit him, enjoy the load, satisfying “THUMP”, and then swerve back onto the road.

    (at this point some of you are probably wondering how the trucker could distinguish the lawyers from the humans. Obviously he saw the trail of slime they left!)

    One day, as the truck driver was driving along he saw a priest hitchhiking. He thought he would do a good turn and pulled the truck over.

    He asked the priest, “Where are you going, Father?”

    “I’m going to the church 5 miles down the road,” replied the priest.

    “No problem, Father! I’ll give you a lift. Climb in the truck.” The happy priest climbed into the passenger seat and the truck driver continued down the road.

    Suddenly the truck driver saw a lawyer walking down the road and instinctively he swerved to hit him. But then he remembered there was a priest in the truck with him, so at the last minute he swerved back away, narrowly missing the lawyer. However even though he was certain he missed the lawyer, he still heard a loud “THUD”. Not understanding where the noise came from he glanced in his mirrors and when he didn’t see anything, he turned to the priest and said, “I’m sorry Father. I almost hit that lawyer.”

    “That’s okay”, replied the priest. “I got him with the door!”

Debt Collection

You may have the best business in the world but if your clients are not paying your bills, your business will not survive. The old saying goes, cash is best. However if you have to give credit, there are a few things that should be remembered to protect yourself.

Things to consider before extending credit

Effective debt recovery begins with effective documentation of the transaction. This entails more than merely getting a signature on a piece of paper. Think about the information you will need if you have to sue to recover the debt. Here are some things to consider:

  • is the debtor a natural person, a company or some other type of entity?
  • have you confirmed the identity of the debtor by requesting proof from an individual or have you considered conducting a company or business name search?
  • have you confirmed the personal and business addresses of each of the debtors?
  • have you recorded all this information accurately in the contract?
  • have you conducted a credit check on the debtor and, if applicable, its directors or proprietors or promoters?
  • have you identified fully and precisely the money, goods or services to be provided?
  • have you specified precisely when payment is due?
  • have you specified precisely what will happen if payment is not made by the due date?
  • if you want to charge interest, have you specified precisely the rate to be charged, the method of calculation and the date from which interest will run?
  • if you are selling goods, have you made clear precisely when title to the goods passes to the purchaser and have you included a “Romalpa” or “retention of title” clause? For those not familiar with a “Romalpa” clause, it is a term in a contract that states that the title or ownership to the goods do not pass till payment is received.
  • if there is to be a course of trading, have you obtained the debtor’s agreement and signature to a comprehensive and well-drafted “Terms of Trading”?
  • if the debtor is a company, or if you have some doubts about ability to pay, should you get personal guarantees from third parties? Do you have a well-drafted form of Guarantee?

You should have the debtor’s agreement to your terms before you perform your part of the transaction. It may not be enough to rely on your terms of trading on the reverse of your invoice.

You must enforce your terms, otherwise you are sending an implicit message to the debtor that you do not care. How you enforce your terms is a matter for your commercial judgment.

The best thing to do is immediately after the due date, an “account rendered” be sent, specifying a new due date. If the debt is still not paid, refer the matter to a lawyer for legal action.

The longer a debt is left unpaid, the harder it will be to recover. It must be made clear to the debtor that you will not let up until you have been paid.

Remember that, if you have to sue to recover your debt, the Court will require you to prove your case. Careful documentation of the transaction, and of your enforcement action, will play a very important part in that proof.

What happens if the debtor still refuses to pay.

A solicitor will usually send a letter of demand to the debtor. A simple letter of demand would cost between $60-$100.00. A letter of demand will usually threaten the issue of a summons to recover the debt if the debt is not repaid within a further 7 or 14 days.

In the event that the debt is not paid, you then have to discuss with your solicitor whether you should proceed with the next step which is to issue the summons.

Your solicitor will then have to explain to you which Court he will commence the action in.

Which Court

The West Australian court system is made up of many different courts, boards and tribunals, each with their own jurisdiction, which determines the types of cases they can hear.

Courts of Western Australia

Court

Authority

Jurisdiction

Location

Supreme Court

Constituted under the Supreme Court Act 1935. Is a superior court of record and the highest in the State. Civil, criminal and appellate jurisdictions at highest level.

Civil :

Judge sitting alone (occasionally jury)

No limit on monetary jurisdiction.

There is one Supreme Court registry located in Perth.

The court sits primarily in Perth but judges conduct circuit court sittings at 11 regional centres in Western Australia. Provision exists to sit at Christmas and Cocos Islands.

District Court

Constituted under the District Court of Western Australia Act 1969. Is the intermediate court of record in the State. Civil, criminal and appellate jurisdictions.

Civil : Up to $250,000 for monetary and general damages; unlimited for personal injuries.

The principal registry is located at Perth.

The court sits primarily in Perth but circuits are conducted at 11 regional centres.

Civil matters may be filed at regional centres.

Magistrates’ Courts

Civil Jurisdiction :

Local Courts Act

Civil :

Local Courts Act Claims for recovery of debt up to $25,000. Presided over by a magistrate.

A Small Disputes Division exists with a limit of $3,000. This division also deals with residential tenancy disputes to a limit of $6,000. The Clerk of Local Court can sit on residential tenancy disputes with consent of the parties.

Major registries of the Local Court and Court of Petty Sessions are located in Perth.

5 other registries are located in the metropolitan area.

22 registries are located in regional centres within Western Australia. There are registries at both Christmas and Cocos Islands

Boards & Tribunals of Western Australia

Tribunal etc

Authority

Jurisdiction

Location

Small Claims Tribunal Small Claims Tribunals Act 1974. Referee sitting alone. Consumer/trader disputes under $6,000. The registry is located in Perth. The tribunal sits primarily in Perth, but referees sit in country centres on an as-needed basis.

For the purposes of this newsletter, I shall concentrate on proceedings in the Local Court.

Local Court

The Local Court deals with civil cases involving claims for debt, damages and residential tenancy matters. It has two divisions – small and general disputes.

General

  • most claims for debts or damages up to $25,000

Small Disputes

  • claims for debts and liquidation sums of money up to $3,000
  • residential tenancy matters involving amounts up to $6,000
  • Legal representation in this division is not permitted unless certain conditions are met

You should seek legal advice if you are in doubt about whether or not to commence action or if things get out of hand.

Parties are encouraged to try and reach an agreement or settlement before taking action. This can save them time and expense.

Sometimes , it may not be commercially viable to issue a summons against a debtor. This is especially the case where the debt is for a small amount. A small amount may be anything below $1,000.00-$3000.00. As I always tell my clients, “principles cost money”. To sue someone on principle when the amount claimed is a small amount is not always commercially viable as the cost may outweigh the benefits to be obtained.

The other problem is when the person you are suing has no known assets. Then, you may be throwing good money after bad.

It is best to discuss any potential claims with your solicitor before proceeding.

Issuing the summons

To commence action, the plaintiff (that is the creditor) must issue a summons to the defendant (that is the debtor). The summons must include full names and addresses of the parties plus full details of the claim. The summons is then lodged (with the appropriate court fees) either in person or by mail at a Local Court.

Serving the summons

It is the responsibility of the plaintiff to serve a copy of the summons upon the defendant. An additional fee may be paid at the time of lodging the summons for the court to appoint someone to serve the summons. Alternatively, the summons may be served by the plaintiff or a process server. It is the plaintiff’s responsibility to ensure the defendant’s address for service of the summons is correct.

After the summons is served – the defendant

Upon receiving the summons, the defendant should respond, within the period specified (usually 10 days), by either:

  1. Admitting to the debt – Judgment will then be entered for the plaintiff for the amount claimed. Payment can only be made direct to the plaintiff. If you cannot pay the debt in full you must negotiate time to pay with the plaintiff.
  2. Disputing the debt – Consider the following alternatives
  • approach the plaintiff with a view to resolving the claim
  • seek legal advice
  • file a defence at the court of issue (a fee will be payable)
  1. Admit part of the debt & defend balance – As per “disputing the debt” however you must ensure you carefully read and follow the instructions on the back of the summons form as there are additional steps you must take.
  2. Not responding to the summons – As a result, judgment may be entered in favour of the plaintiff for the full amount of the claim including costs for the issue of the summons.

Admitting or confessing to a debt in full – the plaintiff

If the defendant admits to the full debt, the plaintiff will receive a Notice of Confession of Debt from the court with details of any offer to pay in full or by installments. The plaintiff does not have to accept any offer to pay by installments and defendants are encouraged to contact the plaintiff prior to lodging the confession.

Disputing a debt in full or in part – the plaintiff

The plaintiff will be advised by the court if the debt is disputed either wholly or in part. The plaintiff may then accept the part admitted by the defendant and judgment will be entered for that amount or alternatively, the plaintiff may request the matter be listed for a pre-trial conference.

The pre-trial conference

The pre-trial conference is conducted by the Clerk of the Local Court. It is a chance for the parties to clarify issues in an attempt to settle the matter. If the matter is not settled and the action is ready, the next step is to proceed to trial. I would say that 60% of Local Court cases settle at the pre-trial conference stage. If the matter is not settled then, the clerk will arrange for the matter to be heard before a magistrate in a trial.

The trial

The trial is conducted in a courtroom by a magistrate. The plaintiff and defendant are required to attend. The plaintiff may be allowed to proceed with the case if the defendant has been advised and fails to attend.

Usually, the plaintiff’s case is presented first, however different procedures may be observed at the hearing of small debts actions. The defendant is able to ask questions or cross examine each witness. When the plaintiff’s case is completed, the defendant’s case is presented. The plaintiff is able to ask questions or cross-examine each witness. Both parties then have the opportunity to summarise. The magistrate will determine the matter and make a decision. An order for costs (court fees) may then be sought by the successful party from the unsuccessful party. If the successful party was represented by a solicitor they may seek additional costs based on a costings scale.

Judgment

The decision of the magistrate is known as the judgment. The successful party is known as the judgment creditor, and the unsuccessful party is known as the judgment debtor.

If the judgment debtor does not make an acceptable proposal to pay the debt and costs to the judgment creditor, the judgment creditor may enforce the judgment by a number of methods. The most common methods are a judgment summons or warrant of execution.

Judgment summons

The judgment creditor may apply for a judgment summons to be issued. This requires the judgment debtor to come before a court and be examined as to their means to pay the debt either in full or by periodic installments. After considering the evidence, the court may order the repayment of the debt at a reasonable rate.

Warrant of execution

The judgment creditor may apply for the issue of a warrant of execution. This empowers the bailiff to seize and sell the judgment debtor’s goods and/or land. The proceeds of sale are applied to the judgment debt and costs.

Appeals

Appeals against decisions of the Local Court are made to the District Court.

This is just a small snippet of information on debt collection. It is advisable that you are aware of your rights as a creditor as soon as possible. However, it is also important to be aware of the practical side of court actions.

Tan and Tan take instructions on debt collection and would be glad to listen to your problems and try and find a solution to them.

“To cut a long story short”

I once acted for a lady who loaned quite substantial amounts of money to a close and personal friend. As usual in such personal matters, no records or agreements were signed. The defendant denied the moneys were loaned and created a big smoke screen to try and hide the real issues as to when and how the loans were made. The case turned on the credibility of the parties. It was fortunate that although my client did not keep proper records and evidence of the loans, the Magistrate believed the reason why the moneys were loaned and the fact that the moneys were loaned. The case was laborious because of all the issues raised by the defendant’s in an attempt to avoid liability for the debt.

We won the case and got judgement against the defendant and quite a substantial amount of cost. However, the problem was that the defendant had sold her house in between the lengthy Court proceedings which had to be adjourned on several occasions.

My client had to bankrupt the defendant on a matter of principle as the judgment was not able to be executed due to the fact that the defendant was impecunious.

Moral of the story:

Proper documentation would have enabled the debt to be more easily pursued in Court. If proper documentation was entered into prior to the transactions, it would have reduced the possibility of the defendant to try to create any delaying or diversionary tactics. Any loans to friends or for that matter any body should be evidenced in writing by a solicitor.

On the Light Side…

God strolls to the gates of heaven to talk to St. Peter. He says “Peter, you look tired, why don’t you take a vacation, kick it in the Caribbean for a week or two, and I’ll watch the gates.” So, St. Peter goes on vacation.

An engineer comes to the gates, God takes a look at him, and says, “You’re in the wrong place.” So he turns around, feeling quite rejected, and goes down the escalator to the gates of hell. There the devil greets him with open arms. After about a week, the engineer decides hell is just too hot and uncomfortable, so he talks to the devil and arranges to have water piped in, air conditioning installed, and swimming pools built. So after a month of construction, hell is getting to be a nice tropical place to be.

God calls the devil and asks, “So, how are things down there, pretty hot, huh?”

And the devil replies,” No, actually it’s pretty nice. We have an engineer down here who helped us pipe in some water and air condition the place.”

God says, “No, wait, that’s a mistake, the engineer was supposed to be up here.”

The devil says, “Too bad, we’re keeping him.”

God is angry: “I want that engineer, I’m going to sue.”

The devil smiles his most confident smile and says, “Yeah? Where are YOU going to get a lawyer??? They come straight to me. Hahahahahahahahaah.”

Employee & Sub-Contractor

Sub-contractor or Employee?

Frequently, in our practice, we encounter situations where employers have classified certain workers as sub-contractors, and arranged their affairs around this classification. This would include not arranging for workers’ compensation premiums, superannuation, and PAYE tax.

If a worker has signed a document and agreed to be classified as a sub-contractor, does that mean he is a sub-contractor?

The short answer is NO. The courts have repeatedly said that in a dispute as to the classification the totality of the working relationship will be taken into account.

The definitive decision on the question currently is the August 2001 High Court case of Hollis v Vabu. It has been frequently referred to as the Vabu decision. It is interesting in the sense that it deals with the circumstance of the humble urban bicycle courier.

The Vabu case delves into the world of the bike courier when seen by the highest legal minds of the land. Were couriers as independent and free-wheeling as they sometimes seemed to the world at large, or were they mere minions at the beck and call of their dispatchers.

The genesis of the case began when a Mr Hollis, himself a courier albeit not a bicycle courier, was knocked down by bicycle courier one day. The only identification possible of the perpetrator was the somewhat aptly named ‘Crisis Couriers’ emblazoned on the garment of the fleeing cyclist. With a “Sorry mate,” the mystery courier was gone like a flash on his bike.

Not being able to sue the unknown courier personally for his personal injuries, Hollis commenced action against the company Vabu trading as Crisis Couriers.

First Trial Decision: Court held that the courier was an independent contractor.

At the first trial, the Judge ruled that the courier was an independent contractor and that Vabu was not liable for the particular courier’s negligent act. This was despite the Court finding that in all probability, Vabu exercised significant control over the courier and that therefore the courier was more likely to be an employee.

What tipped the case in favour of Vabu was the fact that there was an earlier case involving Vabu and the Federal Commissioner of Taxation, which in effect ruled that the couriers were independent contractors and not employees of Vabu.

The taxation case included findings of fact that the couriers were required to provide their own bicycles; that they had to bear the expense of maintaining the bicycles, and that they had to provide their own equipment, other than radios and uniforms.

On the other side of the argument, the relevant facts were that there was little scope of negotiation for rates of pay between the parties. Vabu assumed all responsibility for the direction, training, discipline and attire of the couriers. Vabu also provided the couriers with numerous items of equipment such as a radio, which remained the property of Vabu. Insurance and deductions were imposed on the couriers, without any opportunity for negotiation.

The taxation decision was itself a vexed one. The initial trial judge had ruled that all of Vabu’s couriers, including light commercial vehicle drivers were employees at common law. Interestingly, no evidence was offered on the part of bicycle couriers. The decision was one ostensibly made in the light of the significant degree of constraint and discretion and flexibility of the courier by the company in undertaking his or her task.

Hollis Appealed to the Court of Appeal: The Court by a majority, maintained that the courier was an independent contractor. The decision of the judges was 3-2 in favour of a finding that the courier was an independent contractor.

Vabu won his appeal, and the appeal Judges found that there was not between Vabu and the couriers a common law relationship of employer and employee. The appeal decision was made on the basis that the old test of the degree of control over the worker – supposedly relied on by the first instance Judge – was ruled to be superseded by a more flexible test. However, one notes that in their enthusiasm for a flexible approach, the appeal Judges seemed to have ironically made a more conservative ruling in favour of Vabu.

APPEAL TO THE HIGH COURT: Court held that the relationship was one of employer-employee. Judges 5-1 in favour.

Not content with having lost at the 1st hearing and at the Court of Appeal, the Hollis camp were granted leave to appeal to the final bastion which is the High Court of Australia.

The grounds of Hollis’ appeal were based on arguments imposing a vicarious duty of care on Vabu, and or in the alternative, a non-delegable duty of care on Vabu. The duties of care sought to be imposed on Vabu are normally associated with strictly employee-employer relationships.

The learned High Court Judges’ written decision went to great lengths to examine the concept of vicarious liability. In effect, the history of the term indicated that the concept was used to impose liability on employers who were more likely to have deep pockets. The second rationale was the deterrence of future harm by the incentive given to employers to reduce accidents, even where there has been no negligence in the legal sense per se.

Five of the six esteemed Judges affirmed on an appraisal of the facts that were borne out at the first hearing that the courier was indeed an employee. They believed that The Court of Appeal made a mistake in making too much of the circumstances that the bicycle couriers owned their own bicycles, bore the expenses of running them, and supplied their own accessories.

In the High Court’s opinion, the couriers were not running their own business or enterprise, nor did they have independence in the conduct of their operations. They were unable to make an independent career as a free-lancer or to generate any good-will as a bicycle courier. Additionally, the couriers had little control over the manner of performing their work, with Vabu producing pay summaries every week for the couriers. Vabu was able to stipulate when annual leave was to be restricted.

The conclusion reached was that the relationship was one of employment, and thus Vabu was vicariously liable for the negligence of it’s employee.

Justice Callinan was the single judge who did not agree with his 5 brother judges. He ruled against Hollis. He held that the couriers were unlike ordinary employees. The system of work was based on the number of collection and deliveries they made. In effect, they were in direct competition with each other and therefore must be independent contractors.

In conclusion, the lesson the concerned reader should take away is that the parties cannot deem the relationship between themselves to be something it is not. This is likely to be the dominant view in employment relations for the foreseeable future.

So how does the case affect us. You must seek legal advice as to whether the person working for you is an independent contractor or an employee. Workers’ compensation and tax issues are some very important matters that need to be considered. Those issues are decided differently between an employee and an independent contractor.

On the lighter side

A lawyer died and arrived at the pearly gates. To his dismay, there were thousands of people ahead of him in line to see St. Peter. To his surprise, St. Peter left his desk at the gate and came down the long line to where the lawyer was, and greeted him warmly. Then St. Peter and one of his assistants took the lawyer by the hands and guided him up to the front of the line, and into a comfortable chair by his desk.

The lawyer said, “I don’t mind all this attention, but what makes me so special?”

St. Peter replied, “Well, I’ve added up all the hours for which you billed your clients, and by my calculation you must be about 193 years old!”

The Pope and a lawyer find themselves together before the Pearly Gates. After a small quantum of time which was spent discussing their respective professions, ol’ St. Peter shows up to usher them to their new Heavenly station. After passing out wings, harps, halos and such, St. Pete decides to show them to their new lodgings. Only a brief flight from the welcome, Pete brings them down on the front lawn of a huge palatial estate with all sorts of lavish trappings. This, Pete announces, is where the lawyer will be spending eternity, (at least until the end of time).

“Hot Dang”, the Pope says to His-self, “If he’s getting a place like this, I can hardly wait to see my digs!”.

They take flight once again, and as Pete leads on, the landscape below begins to appear more and more mundane until they finally land on a street lined with Brownstone houses. Pete indicates the third walk-up on the left as the Popes new domicile and turns to leave, wishing the pontiff all his best.

The Pope, in a mild state of astonishment, cries out, “Hey Pete! What’s the deal here? You put that lawyer in a beautiful estate home and I, spiritual leader of terra-firma, end up with this dive?”

Pete looks at the pontiff amusedly and replies, “Look here old fellow, this street is practically encrusted with spiritual leaders from many times and religions. We’re putting you here with them so you guys can get your dogma together. That other guy gets an estate, because he’s the first lawyer to make it up here!!”

Enduring Power of Attorney

What is an EPA?

An EPA is a legal document allowing you to appoint another person to make financial and property decisions on your behalf.

A person who makes an appointment under an EPA is called the DONOR. A donor can authorise another person or persons to be their ATTORNEY to act for them if they become mentally ill or lose their decision-making ability.

An EPA is different from a normal Power of Attorney, which only remains valid so long as the donor is still capable of making decisions. Under an Enduring Power of Attorney, an Attorney can act even after the donor loses their legal capacity.
What does an EPA authorise my Attorney to do?

An EPA does not authorise your Attorney to do everything on your behalf. It will only authorise them to make decisions about your FINANCIAL and PROPERTY affairs. It is important to remember that an EPA does not cover non-financial decisions – for example decisions regarding your health care or medical treatment.

If you are unsure about the types of decisions that an Attorney can make under an EPA, you should seek legal advice.
Why Should I Make an EPA?

An EPA is necessary to protect your assets and ensure that they are managed by someone you know and trust in the event that you suffer a mental disability.

If you own any property, you should consider making an EPA. A loss of legal capacity can be gradual or sudden, occurring as a result of an accident, injury or through illness or trauma later on in life.

It may not be possible to predict or prevent the onset of mental disability, but by appointing an Attorney under an EPA, you will be safeguarding your interests by putting your financial affairs in the hands of someone you trust.
Who should I appoint as my Attorney?

You can appoint anybody to be your Attorney, including your spouse, partner, children, relatives, friends, lawyer or financial adviser. You can also appoint more than one Attorney, for example where you want your children to act together (or separately) as your Attorneys.

The most important consideration you must make before appointing an Attorney is whether you can trust that person to make decisions about your financial affairs. Ideally, it should be someone who you know will manage your affairs and make decisions in your best interests.

I often tell my clients to consider the following:

If you appoint one of your children to be the attorney, is that child going to put you in the cheapest nursing home or the most expensive. Bear in mind that when you pass away eventually, that child may stand to inherit a more valuable asset if he or she placed you in an “el cheapo” nursing home.

What happens if I don’t make an EPA?

If you lose your ability to make decisions and have not appointed an Attorney under an EPA, the State Administrative Tribunal may appoint an Administrator on your behalf to manage your affairs.

Take note that a state appointed Administrator may not necessarily be someone who you trust to manage your financial matters. It is very important that you consider the need for an EPA to be in place to prevent this possibility from arising.

In most cases, an EPA will be preferable because it gives you the power to appoint someone to be your Attorney. At the end of the day, the time and cost involved in making an EPA will be a small price to pay for your peace of mind.
How do I make an EPA?

For an EPA to be valid, it must comply with the requirements set out in the Guardianship and Administration Act of 1990.

In addition, a person making an EPA must be of sound mind when the EPA is made. If there is any doubt as to the mental state of the donor, a medical opinion should be sought to confirm their legal capacity.

There are standard EPA forms that are available for download on the State Government’s website. As a donor, you can complete an EPA yourself or you can arrange for a lawyer or Trustee Company to prepare the documents for you.

You can also specify in your EPA exactly how you want your Attorneys to carry out their responsibilities. All Attorneys will have obligations under the Guardianship and Administration act and it is open for you to provide special conditions that apply whenever they make decisions for you.

If you are unsure about the legal effect of an EPA or what rights and obligations an Attorney has, you should seek legal advice.
When does my Attorney’s appointment come into effect?

An Attorney appointment can come into effect either immediately after the EPA has been signed, or only once the donor has been declared legally incapable of making decisions.

In your EPA, you must specify whether you want the Attorney to assume power immediately, or whether the appointment will only be valid after the State Administrative Tribunal makes an official declaration that you do not have legal capacity to make your own decisions.

If you appoint an Attorney to act immediately, it is important to remember that your Attorney must act in accordance with your directions whilst you are still legally capable.

An EPA can be revoked at any time, provided that you are still of sound mind at the time you revoke it.

As we get older, we may need to consider arrangements that can protect our assets if we are unable to do so ourselves.

As the population gets older, it is imperative that EPAs be considered as early as possible before it is too late.

Starting a Franchise

Franchising is one of the biggest income earners in Australia in respect of earnings by a franchisor and also in respect of assuring an income for a small business operator working as a franchisee.

For the franchisor, the earning potential of a successful business can be increased substantially by duplicating a successful operation and selling the concept to a franchisee. For many the path to richness was commenced by taking the road to starting a franchise system.

And for many small business operators with limited or no experience, the easiest way to ensuring a viable income stream is by taking up an established franchise system as a franchisee.

Of course there are pitfalls for both the potential franchisee and the potential franchisor. The aim of this article is to highlight some of the issues that may arise and which may need careful consideration by anyone interested in starting or buying a franchise

Franchising Your Business In Australia

The decision to start a franchise requires great thought, skill, patience, capital and some luck. It is often easiest to consider franchising your business after you have been in operation for at least 2-3 years and have seen a healthy income and profit stream. The establishment of a workable franchise system from conception to marketing can be as long as three years and sometimes you will not see any return until at least another 3-4 years.

What Are The Advantages Of Franchising As A Franchisor

There are many advantages to franchising. Among the advantages:

  • You will be able to see a faster growth of your business and its network by using the resources of the franchisee.
  • Instead of owning a few outlets and outlaying the capital and manpower yourself, you are able to use the capital and manpower provided by the franchisee.
  • You are able to service a wider territory.
  • The franchisor does not have to be concerned about a large number of employees resulting in less staff problems.
  • Each franchisee is motivated to work to maximum capacity to achieve maximum profit.
  • You get economy of scale and a greater bargaining power.

When Do You Think You Will Be Ready For Franchising.

  • You should probably have had a few years of running the business and had time to iron out all the kinks in the business.
  • The Business should be successful and can be replicated. If it is not successful, of course, you will not find anyone ready to take up a franchise from you.
  • Your business should be distinctive and be readily recognisable. Therefore trade mark issues should be foremost in your mind.
  • You must always be sure that you get professional advice. I always tell my clients that to succeed in business and in life you need to have a good relationship with the following persons:
  1. Lawyer
  2. Accountant
  3. Dentist
  4. Doctor
  5. Priest.
  • Especially in the legal area, there are numerous laws protecting the franchisee which need to be covered by your lawyer.

Persons interested in franchising should contact a lawyer immediately for advice and also the Franchise Council of Australia. See their webpage at www.franchise.org.au

The Franchising Code Of Conduct (The “Code”)

This is the code that is applicable to all franchises in Australia. It was implemented on July 1, 1998 and has since been amended. The Code outlines the rights and responsibilities of franchisors to franchisees, and includes particular requirements for disclosure of information and the provision of a cooling-off period. It also covers remedies for unconscionable conduct and mediation procedures.

All franchisors have to comply with the Code. The Australian Competition and Consumer Commission enforces the Code and the penalties for breaching the Code are quite severe.

The Federal Government recently amended the Franchising Code of Conduct (“Code”) by introducing the Trade Practices (Industry Code – Franchising Amendment) Regulations 2001. The Regulations were made by the Governor General on the 28th of June 2001 and commenced on the 1st of October 2001.

You need to be fully aware of your obligations pursuant to the Code if you intend to be a franchisor.

Emphasis On Current Disclosure Documents

The regulations extend the requirement for the franchisor in providing a disclosure document to maintaining a current disclosure document. The Code now provides that a franchisor must, before entering into a franchise agreement, and within three months after the end of each financial year after entering into a franchise agreement, create a document in accordance with Division 2.1. This amendment requires a franchisor to prepare and, on request, issue a disclosure document even if it has ceased franchising.

There are also amendments regarding a short form of disclosure statement that may be applicable in certain circumstances.

A reading of the Code is imperative for any persons interested in franchising as it covers the very important issue of disclosure of financial information by a franchisor. The Code also deals with the issue of mediation when there is a problem. It is very much weighted towards helping the parties in a franchise arrangement to try and resolve their differences without rushing to the Supreme or Federal Courts.

Buying A Franchise Business

I have seen some business operators struggling in managing their own little business within their individual identity. They then make the transition to taking up a franchise where the franchise name is readily recognisable and has substantial market exposure. The business then begins to prosper. That is of course the ideal scenario and it does happen quite regularly.

However, I have also represented clients who have been caught in nightmarish franchises where the sky was promised to them by the franchisors and all they received was dirt. It pays to find out as much information as possible before taking up a franchise as a franchisee.

There are many different kinds of franchise available in Australia. They range from bathing of pets to printing of signs. Prior to buying a franchise you should:

  • Select a system that you are interested in. There is no point in buying a restaurant franchise if your personality does not suit such a business.
  • Ensure you have adequate borrowing capacity, including working capital, to successfully establish this type of business.
  • Assess your own reasons for wanting to own a business.
  • Assess the lifestyle and income implications of owning and operating a business.
  • Assess what businesses are available. Market research and more market research is necessary.
  • Be sure you receive and evaluate all disclosure material during the application process. Especially, make sure the disclosure documents are discussed with your accountant and lawyer.
  • Check to see what competitors there are and find out how the competitors and the public rate the proposed franchise.
  • Where is the supply of the product coming from if the franchise is the sale of goods. There is no point in taking up a franchise from a franchisor who cannot guarantee his supply.
  • Is the business trade marked and has it any other intellectual properties.

These are just some of the questions that should be flipping through your mind when you are considering taking the franchise.

Again, it is imperative that you get accounting and legal advice before signing any franchise documents. The Code also needs to be considered to see how it applies to your situation.

The Disclosure Statement is probably the most important document next to the actual franchise agreement. Make sure you understand the contents of the documents and how it will affect you before you sign.

Tan and Tan do give advice in franchising and will be pleased to work with you. One of our favourite clients is Han’s Cafe©. We have assisted our client’s franchise from its conception as an emerging franchise to where it is now a force to be reckoned with within the cafe© business. We are also assisting other start up franchise in their exciting development stage. We will be pleased to share our knowledge and expertise to assist you in any franchise matters.

On the lighter side

You Might Be a Lawyer if…

  • you are charging someone for reading these jokes
  • you believe that a forty words’ sentence is a short one
  • you have a daughter named Sue and a son named Bill
  • you can look at a contract and instantly tell whether it’s verbal or written
  • your other car is a BMW
  • when you look in a mirror, you see a lawyer
  • when your wife says “I love you,” you cross-examine her

And one for the judges:

A prosecuting attorney called his first witness, a grandmotherly, elderly woman, to the stand. He approached her and asked, “Mrs. Jones, do you know me?”

She responded, “Why, yes, I do know you Mr. Williams. I’ve known you since you were a young boy. And frankly, you’ve been a big disappointment to me. You lie, you cheat on your wife, you manipulate people and talk about them behind their backs. You think you’re a rising big shot when you haven’t the brains to realize you never will amount to anything more than a two-bit paper pusher. Yes, I know you.”

The lawyer was stunned. Not knowing what else to do he pointed across the room and asked, “Mrs. Williams, do you know the defence attorney?”

She again replied, “Why, yes I do. I’ve known Mr. Bradley since he was a youngster, too. I used to baby-sit him for his parents. And he, too, has been a real disappointment to me. He’s lazy, bigoted, he has a drinking problem. The man can’t build a normal relationship with anyone and his law practice is one of the shoddiest in the entire state. Yes, I know him.”

At this point, the judge rapped the courtroom to silence and called both counsellors to the bench. In a very quiet voice, he said with menace, “If either of you asks her if she knows me, you’ll be jailed for contempt!