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BUSINESS DEBTS

Ian Macdonald

August 2018

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BUSINESS DEBTS

1.1 Introduction - Assisting Clients with Business Debts

1.2 Financial Counsellors Role

2. Analyzing Business Debts

3. Sole Traders

4. Business Names

5. Bankrupt Sole Traders

6. Companies

6.1 Companies and Small Business

6.2 Companies and Insolvent Trading

6.3 Companies and Guarantees

6.4 Companies and Taxation Debts

6.5 The End of a Company

6.6 Receivership

6.7 Administration and Liquidation

6.8 Voluntary Administration

6.9 Liquidation

6.10 De-registration

7. Partnerships

7.1 The Nature of Partnership

7.2 Partner’s Liability

7.3 Joint Liabilities of Partners

7.4 Joint and Several Liability of Partners

7.5 Partnerships, Taxation and Liability

7.6 Partnership and Bankruptcy

8. Trusts

8.1 Trusts and Businesses

8.2 Business Debts and Trusts

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Part 2

9. Tools to Deal with Business Debts

9.1 FOS - CIO - AFCA

9.2 What is the basis for IDR and EDR in Business Matters?

9.3 Small Business and AFCA

9.4 General Approach to AFCA Complaints

9.5 One-Stop Shop

9.6 Role of Banking Code of Practice

10. Unfair Contract Terms

11. Consumer Guarantees

12. Sources of Assistance

12.1 Small Business Commission

12.2 Australian Small Business and Family Enterprise Ombudsman

12.3 Franchising Disputes

12.4 Small Business Helpline

Notes

Ian Macdonald

August 2018

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BUSINESS DEBTS

1.1 Introduction

When clients have a problem with debt from a struggling or failed small business,

one of the first things to do is to separate their debts into business and personal

debt. This is important for two reasons.

The first is that if the clients have operated a business using a company, then in

the first instance the debts of the business are the problem of the company,

rather than the persons behind it. The clients can separate out their personal

debts, and use the usual consumer-debtor implements to deal with these debts.

If the debt is covered by the National Credit Code, they can consider a hardship

variation, or consider if the circumstances of the formation of the contract were

such as to view it as an unjust contract. If creditors are pressing, they must

follow the enforcement provisions of the Code. For example, in normal

circumstances a default notice complying with section 88 of the Code must be

served on the clients.

If clients have operated a business as a sole trader or partnership, they will be

personally liable for business and personal debts. However, it is still useful to

separate those debts which were for personal or household purposes rather than

the business, because if the Code applies they can use all the resources of the

Code to deal with those debts. More detail of the possible liability of persons who

have operated a business using a company are set out later in this paper, as are

details of sole trader and partnership liability.

1.2 Financial Counsellors Role

Different agencies have different views about the level of involvement it is

appropriate for financial counsellors to have in matters involving business debt.

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Most agencies will not become involved in a business debt matter where the

business is continuing to operate, though rural counsellors normally do this.

Most counsellors will assist people who are struggling with a burden of debt left

behind after the collapse of a small business, however some are wary of a

situation in which the collapsed business operated as a company. I suggest it is

a matter for each agency to decide what types of matter it will agree to deal with.

2. Analyzing Business Debts

When a business encounters financial difficulty, losses may flow on to affect

people connected with the business, be they people who have run the business,

or friends or family members. The ways in which people are affected by the

failure of a business depend very largely on the way the business, and its debts

and borrowings were structured. In simple business structures, like a sole trader

or a partnership, there is no barrier to prevent a business liability affecting people

involved in a direct and perhaps ruinous way. In contrast, a company or trust

structure may offer a barrier between people connected with the business, and

the debts and liabilities of the business.

In order to offer useful information and options to clients affected by debt

following the collapse of a business, it is necessary to look at the four main ways

in which small to medium businesses are structured, and the implications of each

structure for the financial stability of affected persons.

3. Sole Traders

The quickest, simplest and cheapest way for a person to set up in business is as

a sole trader. The business is an activity of the person. Accordingly, there is no

barrier to prevent liability incurred by the person in the business activity affecting

the person personally. Creditors can pursue the person for debt they have

incurred in the business by suing them, obtaining a judgment, then enforcing the

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judgment with a property (seizure and sale) order. All the person’s assets, other

than those items protected by regulation 35 of the Civil Judgment Enforcement

Regulations 2005 (CJER) can be taken by a bailiff, unless the sole trader

becomes bankrupt.

The options for a sole trader who is experiencing difficulty with debt are similar to

those for a consumer debtor. Ordinary tools of trade, plant and equipment,

professional instruments and reference books to the value of $2,500 used by the

sole trader to earn income by personal exertion are protected by regulation 35 of

CJER.

If a sole trader becomes bankrupt, property used by the sole trader to earn

income by personal exertion is protected to the value of $3,750. The sole

trader’s vehicle or vehicles are protected to the total value of $7,900. Any other

business assets pass to the trustee in bankruptcy, along with other unprotected

property. For a full account of the effect of bankruptcy see the Bankruptcy

Checklist which is available from the FCAWA website.

This unlimited personal liability of a sole trader is one of the main reasons why

many people in business prefer to use a company or trust structure, which

affords some protection of assets in the event of the business running into

financial difficulty.

4. Business Names

A person, a partnership or a company conducting a business may wish to use a

trade or business name for their business. A business name must be registered

under the Business Names Registration Act 2011 (Commonwealth). This is a

nation-wide system operated by ASIC since 28 May 2012. It is important to note

that a business name is no more than a trading name, and does not indicate that

there is anyone or anything other than the person, partnership or company which

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has registered the name. A sole trader or partnership may use a business name

with the word ‘Company’ or some abbreviation of that word in it. This does not

indicate it is a company incorporated under the Corporations Act. If a company

incorporated under the Corporations Act is a private company, that is, it does not

offer its shares to the public, it must have the words ‘Proprietary Limited’ or ‘Pty.

Ltd.’ after its name. A public company, which can offer its shares to the public,

usually has the word ‘Limited’ or ‘Ltd.’ after its name: Corporations Act 2001

(Commonwealth) s. 148.

5. Bankrupt Sole Traders

As noted in the Bankruptcy Checklist mentioned earlier, there are some

restrictions on bankrupts, but within those restrictions bankrupts can operate a

business as a sole trader.

The main restrictions are that bankrupts must disclose their status if they are

seeking credit or writing cheques to a particular creditor for more than $5,726

(inflation adjusted); and they must disclose their bankruptcy status and their true

name if they carry on business under a name other than their own (no additions

are allowed); Bankruptcy Act 1966 (Commonwealth) s. 269. Some occupations

are not open to bankrupts. Within these limits, a bankrupt can conduct a

business. This may be of great benefit to a person with skills who is bankrupt,

but wishes to continue to work in their particular field.

6. Companies

6.1 Companies and Small Business

Individuals running a small business may be attracted by the idea of using a

company to run the business. This is for two main reasons. There may be

taxation advantages. This is because use of a company may allow the spreading

of income across a family or other group, or if a business is very profitable,

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individuals may pay tax at a higher marginal rate than a company, which pays tax

at a set rate, depending on its turnover. The other important attraction of a

company is that it is a separate legal person from the people setting it up and

running it. With some exceptions noted below, a company’s liabilities do not flow

over to the persons operating the company. It is vital, in sorting out the financial

position of a person who has run a business using a company, to separate the

company’s liabilities from those of the person or persons behind the company.

If a company starts to experience financial difficulty, it is important to check

whether the company is insolvent, that is, unable to pay debts as they fall due. If

it is insolvent, or heading that way rapidly, then its directors should cease trading.

6.2 Companies and Insolvent Trading

If clients have run a business using a company, it is necessary to ensure they

realize that they will incur personal responsibility if they are directors, and the

company incurs debt when it is insolvent. The director’s duty is to prevent the

company incurring the debt. Directors are liable if they are aware of the situation,

or if a reasonable person in that situation would be aware: s. 588G Corporations

Act 2001 (Commonwealth).

A director of a company which breaches these provisions is liable to civil

penalties. These include a pecuniary penalty order, disqualification from

managing a company, and a compensation order by which the director has to

compensate the company for any loss (s. 588G (2) ). If the actions of the director

are dishonest, then the incurring of the debt by the company constitutes an

offence by the director (S. 588 G (3) ).

In dealing with clients who have operated a business using a company, it is

necessary to warn them against allowing the company to incur further debt. If the

client is one director of a company, and is concerned another director of the

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company may be incurring debt which the company cannot pay, they should seek

to disassociate themselves from this, which they can do by resigning as a

director.

6.3 Companies and Guarantees

Companies are often formed with very little share capital, and even a company

that has been operating for some time may have few assets that are readily

saleable. For this reason lenders will often require that the directors of a

company give their personal guarantees for borrowings by the company. If they

have done this, they will be personally liable for the debts of the company, if the

company does not pay them. This is important to remember, when sorting out

what debts are the company’s, and what debts are those of the client personally.

A guarantee may mean that debt is a debt both of the company, and the director.

If a person has been drawn in to being a director of a company and a guarantor

by a friend or family member, but in reality has very little involvement in, or

understanding of, the affairs of the company they may incur a heavy liability. If

there has been undue influence brought to bear on the person at the time of

signing the guarantee, it may be set aside. Unconscionable conduct in business

transactions may attract the operation of the Australian Consumer Law. This is a

law of the Commonwealth, which is applied in this state by Western Australian

legislation (1)

A wife who has been induced by her husband to enter a guarantee she has not

understood may be assisted by the principle in Yerkey v Jones (1939) 63 CLR

649. This requires a creditor to take reasonable steps to ensure that the wife

understands her obligations before she enters the guarantee, otherwise it will not

be enforced against her. This principle will be easier to use for a wife who has

some barriers to her understanding, which may be language, unfamiliarity with

the husband’s business, or with business matters generally.

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6.4 Companies and Taxation Debts

It is not uncommon for a company experiencing some financial difficulty to fail to

pass on to the Australian Taxation Office (ATO) tax which it has withheld from

employees’ wages. In this situation, the directors of the company are required to:

* make an agreement with ATO relating to payment of the liability;

* appoint an administrator of the company; or

* begin to wind up the company

If they do not do one of these things, they become personally liable for the

amount owing to ATO. ATO can give the directors 21 days to pay the amount,

and if it is not paid in that time can commence proceedings to recover the amount

from the directors. – Taxation Administration Act 1953 Division 269.

There are a number of other PAYG (Pay As You Go) provisions in tax legislation

to which similar rules apply. The key issue is to ensure that all PAYG obligations

have been met.

6.5 The End of a Company

In Australia, companies do not become bankrupt. If companies get into financial

difficulty, there are a number of different mechanisms by which this can be

resolved. The main thing which the directors need to think about is their potential

personal liability if they allow the company to trade while it is insolvent. That is, it

is necessary for directors to deal firmly with the situation.

There are several ways a company’s insolvency can be resolved. The main

features of these are:

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6.6 Receivership

Receivership stems from a default by the company in meeting its obligations

under a secured contract. It is essentially action by a secured lender. A loan

may be secured over all the assets and ongoing business of the company. If the

company defaults, the loan contract may provide the lender can appoint a

receiver to take control of the company’s assets and business. If the secured

contract relates only to some assets of the company, then the receiver may just

sell those assets in order to meet the indebtedness. If, at the conclusion of the

receivership, the company is solvent it may go on trading under the control of its

directors. If it is insolvent, it may go into another form of insolvent administration.

6.7 Administration and Liquidation

Whereas receivership is conducted by secured creditors, and is triggered by a

default in the company’s obligations to that creditor, administration and liquidation

are conducted in the interests of creditors generally. They are triggered by the

insolvency of the company. Insolvency of a company is defined in the same way

as for a person – inability to pay debts as they fall due.

6.8 Voluntary Administration

Due to the possibility of directors being held personally liable for the debts of the

company if they allow it to trade while it is insolvent, if the directors see the

company moving towards insolvency they may decide to put the company into

voluntary administration.

The process of a company entering voluntary administration begins with the

directors passing a resolution to appoint a registered liquidator as administrator.

The administrator takes control of the company, investigates its financial affairs,

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and reports to creditors whether the company should be wound up (liquidated), or

whether it can continue to trade under a Deed of Company Arrangement (DCA).

There are very short times lines with this process. Within five days of the

appointment of the administrator there must be a meeting of creditors, at which

they can decide whether to accept the person who the directors have chosen as

administrator, or whether they wish to appoint someone else. Within twenty-one

days the administrator has to call a meeting of creditors at which they can decide

to allow the company to continue operating under a deed of company

arrangement, or whether it should be wound up. Directors considering voluntary

administration should get legal advice first. If an administrator is appointed, and

finds the company has been trading whilst insolvent, this could lead to action

against the directors.

6.9 Liquidation

Liquidation or winding up is the legal process by which the business of the

company comes to an end. Its assets are sold and its liabilities paid, if there is

enough money to go around. If there is not enough a percentage is paid, and if

there is a surplus, it is divided amongst shareholders.

Liquidation is often preceded by provisional liquidation. This is due to the fact

that liquidation may take some time. During provisional liquidation there is a stay

in place, preventing legal proceedings or enforcement against the company,

without leave of the court. The provisional liquidator may carry on the business.

6.10 De-registration

The types of proceedings described above are appropriate for companies where

there is a substantial business, or worthwhile assets to be divided up. The sale

of these can generate sufficient funds to pay a receiver, administrator or

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liquidator. However, if a small business has operated using a company form, and

it encounters financial difficulty, there may be no assets of value, no continuing

income stream, and no other available source of funds to pay an administrator or

liquidator. If there are no debts to ATO to create the sort of difficulties described

above, the directors can do nothing, and allow the company to be de-registered

by the Australian Securities and Investments Commission (ASIC).

A company is required by the Corporations Act 2001 (Commonwealth) to provide

a response to a return of particulars to ASIC, and to pay an annual review fee.

ASIC may decide to de-register a company if:

* the response to a return of particulars sent to the company is at least

six months late, and

* the company has not lodged any other documents with ASIC in the last

eighteen months, and

* ASIC has no reason to believe that the company is still carrying on

business.

Alternatively, ASIC may also decide to de-register a company if it has failed to

pay its review fee within twelve months after the due date for payment: s 601 AB

Corporations Act.

Accordingly, if directors of a company which has ceased trading cannot afford to

wind it up formally, they can let it be de-registered. However, they should note

that when a company is de-registered, any assets it owns vest in ASIC: s 601

AD Corporations Act.

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7. Partnerships

For centuries the most common way in which two or more people conducted a

small business was partnership. Partnership was popular because very little

formality was required in setting up and running it. It was, and still is, the

simplest and cheapest way for two or more people to set up in business. In

recent years partnership has been largely replaced by companies due to taxation

and liability considerations.

7.1 The Nature of Partnership

Partnership is defined in section 7 of the Partnership Act 1895 (WA) as ‘the

relation which subsists between persons carrying on a business in common with

a view of profit’. Partnership is a relationship between persons, rather than a

separate legal body, which a company is. Partnership may be created by written

agreement between the parties, by a verbal agreement, or by action. If people

are conducting a business together and sharing profit a partnership is deemed to

exist even if the parties are not aware of it. Partnership is a legal description of

an agreement or activity.

The law relating to partnership is summed up in partnership acts which are very

similar in all Australian states and territories, and in New Zealand. Partnerships

are generally limited to a maximum of twenty persons (s. 11 Partnership Act),

however regulations made under section 115 (2) of the Corporations Act 2001

(Commonwealth) allow some professional partnerships to be made up of a larger

number of persons: Corporations Regulations 2001 Reg. 2A.1.01.

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7.2 Partner’s Liability

One important feature of the nature of partnership is that in examining the liability

for debt flowing from a failed small business, it is necessary to check whether

various individuals were members of a partnership, and thus liable for its debts.

For example, if a husband has conducted a business of earth-moving, and his

wife has done secretarial and bookkeeping work as a part of that business, they

have shared profits, and done partnership tax returns then the wife will be

deemed a partner, and liable for the debts of the partnership even if her name

has not been used in the partnership advertisements, invoices and other

documents.

7.3 Joint Liability of Partners

One of the major drawbacks of a partnership is that every partner has an

unlimited liability for the debts of the partnership. There is no fence to stop

liability for a debt incurred in the partnership business from flowing over to the

personal resources of each partner. A creditor can sue all of the partners, and

they are jointly liable for all the debts of the partnership: (s 16 Partnership Act).

This joint liability of partners for contractual debts and liabilities is different from

the liability of partners for a tort or wrongful act of a partner, which is joint and

several.

7.4 Joint and Several Liabilities of Partners

Partners are jointly and severally liable for the wrongful acts of a partner who is

acting in the ordinary course of the business of the firm, or with the authority of

other partners: (s.19 Partnership Act). The contractual liability of the partners is

joint, that is, the creditor cannot sue one or some of the partners first, and others

later, but can only bring one action. The tortious liability is joint and several,

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which means the wronged person can sue all or some of the partners first, and

others later: (s. 19 Partnership Act).

An example is that if a partner is driving a vehicle in the course of the partnership

business, is careless and has an accident, the other party to the accident can sue

one or some of the partners, some now and others later.

This liability of the partners, which places all their personal property such as

homes and private cars at risk for the default of their partners, or the business, is

one of the main reasons for the loss of popularity of partnership and the

increased popularity of companies.

7.5 Partnership, Taxation and Liabilities

As noted above, a company is a separate legal person from the people behind it.

It is taxed as a separate body. However, a partnership is nothing other than the

partners who comprise it. The taxation liability is spread across the partners.

A person in business may wish to make family members partners, so as to

spread the taxation liability. However, as noted above, partners take on liability

for the debts and liabilities of the partnership. Accordingly, a strategy which has

taxation advantages may have disastrous implications if the partnership incurs

large and unexpected liabilities.

In contrast, use of a company to run a business can provide taxation advantages,

by spreading income and tax liability across a number of shareholders, and

safety. Shareholders are not normally liable for the debts and liabilities of the

company.

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7.6 Partnership and Bankruptcy

Section 44 of the Partnership Act provides that subject to any agreement

between the parties, a partnership is dissolved by the bankruptcy of a partner.

As noted above, a partnership may come about by verbal agreement or by

action. In such cases, where there is no agreement to the contrary, the

partnership will be dissolved if one of the partners becomes bankrupt.

If there is a written partnership agreement, it is necessary to read it to see if it

makes provision for this situation.

If a partner becomes bankrupt, the partnership share of that person vests in the

trustee in bankruptcy. Whether or not the partnership is dissolved, the trustee

will examine the affairs of the partnership to determine what the interest of the

bankrupt is.

If the partnership is dissolved, the trustee will stand in the shoes of the bankrupt

on the winding up process, and take an appropriate share of any surplus assets.

If the partnership has an agreement that provides the partnership is not dissolved

by the bankruptcy of one of the partners, the trustee is likely to offer to sell the

share of the bankrupt to the remaining partners. This will be beneficial to the

bankrupt estate, by generating income for it, and will be beneficial to the

remaining partners who can continue to operate the partnership business, after

buying the bankrupt’s share.

8 Trusts

A trust, unlike a company, is not a legal person. It is a relationship between a

trustee and beneficiaries. The trustee holds the trust property for the

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beneficiaries, who are the people who derive benefit from the trust. The trustee

is the legal owner of the trust property, and the income coming to the trust. From

a taxation point of view, the Australian Taxation Office regards a trust as a

separate entity from the persons or corporations constituting and operating the

trust.

Trusts have a very long history. Initially they were used for protection of property,

but in the last thirty five years discretionary trusts have become very popular due

to their taxation advantages. In a discretionary trust, the trustee has a discretion

whether to pay money or give property, and if so, how much, to the beneficiaries.

8.1 Trusts and Business

One popular way for small to medium businesses to be structured currently is to

have a proprietary company which is the trustee of a trust. This combines the

taxation advantages mentioned above with a safety mechanism. In the event of

the business encountering financial difficulty, the trustee (which is operating the

business) is entitled to be reimbursed from trust property to meet liabilities, and in

some circumstances to be reimbursed by beneficiaries: (2). There will not be any

liability of beneficiaries if the trust document makes that provision, nor if the

beneficiaries are purely discretionary beneficiaries unless they have requested

the trustee to incur a particular liability: (3).

8.2 Business Debts and Trusts

The effect of this is that a ratchet principle may operate, by which benefits can

flow out to discretionary beneficiaries of a trust, but a legal bar exists to liability

for the debts of the business following the same path.

In the event of a business operated by use of a trust encountering financial

difficulty, it is necessary to see the trust document, to work out where liability for

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the debt lies. If the trust has a company as trustee, the material set out above

relating to companies encountering financial difficulty must also be considered.

NOTES:

1. Fair Trading Act 2010 (Western Australia)

2. Hardoon v Belilios [1901] AC 118

3. ‘Principles of the Law of Trusts’, Ford and Lee, The Law book

Company

Limited, second edition p.632 and ‘Equity and Trusts’ Michael Evans

Lexis Nexis Butterworths, third edition p.512 at [19.18]

Ian Macdonald

August 2018

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BUSINESS DEBTS

Part 2

9. Tools to Deal with Business Debts

Tools for dealing with business debts are different from those for disputes

between consumer borrowers and lenders. For consumer borrowers, the most

valuable resource is the National Consumer Credit Protection Act, and the

National Credit Code. These do not apply to commercial lending with the

exception that lending for investment in residential real estate is covered.

Counsellors often use Internal Dispute Resolution (IDR), and External Dispute

Resolution (EDR) for consumer borrowers. IDR and EDR are also available to

small business borrowers. The Code of Banking Practice and the Customer

Owned Banking Code of Practice also cover small businesses. The Australian

Consumer Law has also been extended to provide some protection to a small

business.

9.1 FOS, CIO, and AFCA

Counsellors have used FOS and CIO external dispute resolution bodies for some

years. With effect from 1 November 2018 they will be largely replaced by AFCA,

the Australian Financial Complaints Authority. The resources and membership

base of FOS is transitioning to AFCA to form its foundation. The role of CIO and

SCT, the Credit Industry Ombudsman and the Superannuation Complaints

Tribunal will also be taken over by AFCA with effect from 1 November 2018.

9.2 What is the Basis for IDR and EDR in Business Matters?

All persons and organizations conducting a financial services business in

Australia are required to have an Australian Financial Services Licence (1). It is

a requirement of holding an Australian Financial Services Licence to have an

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Internal Dispute Resolution Scheme which meets an Australian Standard, and to

belong to an External Dispute Resolution Scheme (2). With effect from 1

November 2018, this will be AFCA.

9.3 Small Business and AFCA

Section E of the draft Rules of AFCA define a small business as a primary

producer or other business that had fewer than 100 employees at the time of the

act or omission giving rise to the complaint. Sub-rule C 1.3 (b) excludes from

AFCA’s jurisdiction a complaint about small business (including primary

producers) credit of more than $5 million. This relates to a complaint by a

borrower or guarantor.

9.4 General Approach to AFCA Complaints

As noted in 9.2 above, every company conducting a financial services business

in Australia is required to hold an Australian Financial Services Licence, which in

turn requires the company to have an IDR scheme which meets an Australian

standard, as well as to belong to an EDR scheme. In normal cases it is

appropriate to lodge a complaint with the lender’s IDR section first, and go to

EDR only if this does not resolve the matter. Rule A 8.1 of the draft Rules of

AFCA provide that AFCA will seek to resolve a complaint by facilitating

negotiations, and conciliating a complaint. However, if a matter is urgent, for

example because a lender has issued legal proceedings, it is appropriate to go

straight to EDR.

9.5 One-Stop Shop

A very useful aspect of the change to AFCA is that it will no longer be necessary

to check which EDR scheme an organization belongs to. However, up until 1

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November 2018 it is still necessary to identify which EDR scheme is involved,

and to lodge a complaint with it.

9.6 Role of Banking Code of Practice

When lending by a bank or other financial institution is at the centre of a

complaint, judging the conduct of the financial institution will be in the light of the

principles of the Banking Code of Practice 2013, or the Customer Owned

Banking Code of Practice 2018. The Banking Code of Practice has been over-

hauled, and a replacement will operate from 1 July 2019. Both Codes of Practice

deal with private individuals and small businesses as customers able to use

them. Both Codes of Practice define a small business as one which employs

fewer than twenty full-time employees, or fewer than one hundred full-time

equivalent employees if the business includes manufacture of goods. Useful

provisions in the Codes of Practice are provisions for:

* Obtaining copies of documents;

* Cancelling direct debits;

* Dealing constructively with a customer experiencing financial difficulties;

* Requiring guarantees; and

* Compliance with Debt Collection Guidelines

10. Unfair Contract Terms

Small business proprietors are at a disadvantage in dealing with big businesses

in a way similar to that of consumers dealing with a big business. This has been

recognized with the extension of the Unfair Contract Terms provisions of the

Australian Consumer Law to small business, with effect from 12 November 2016.

The unfair contract terms legislation is part of the Australian Consumer Law, set

out in Schedule 2 of the Competition and Consumer Act 2010 (Commonwealth).

Unfair contract terms are applicable to:

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* standard form contracts; that is, a pre-printed contract offered by the big

business on a ‘take it or leave it’ basis;

* terms in a contract which cause significant imbalance between the rights

of the big business and the small business. An example is where one

party to the contract can terminate it, but the other cannot;

* terms in a contract which are not reasonably necessary to protect the

legitimate interests of the party benefiting from that term;

* terms which may cause detriment to the small business if they are relied

on. If a contract term is unfair, it is void. Unfortunately, only a court or

tribunal can find a term is unfair. These provisions are applicable to small

business contracts which are defined as:

* the contract is for the supply of goods or services, or a sale or grant of an

interest in land; and

* one party is a business employing few than 20 persons; and either -

- the upfront price payable under the contract does not exceed $300,000,

or

- the contract has a duration of more than twelve months and the upfront

price does not exceed $1 million (section 23 Schedule 2 Competition and

Consumer Act 2010.)

11. Consumer Guarantees

The Australian Consumer Law provides for guarantees relating to goods or

services supplied to a consumer. The word ‘consumer’ is defined in section 3 of

Chapter 1 of the Australian Consumer Law to include persons acquiring goods as

a consumer if:

* the amount paid did not exceed $40,000; or

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* the goods were of a kind ordinarily acquired for personal, domestic or

household consumption; or

* the goods consisted of a vehicle or trailer acquired for use principally in

the transport of goods on public roads.

A person is taken not to have acquired goods as a consumer if they were

acquired:

* for the purpose of re-supply; or

* for the purpose of using them up or transforming them, in trade or

commerce in the course of production or manufacture or in the course of

repairing or treating other goods or fixtures on land.

The definition of acquiring services as a consumer is:

- the purchase price did not exceed $40,000, or

- the services were of a kind ordinarily acquired for personal, domestic or

household consumption (section 3 (3)) Chapter 1, Schedule 2 - The

Australian Consumer Law.

12. Sources of Assistance

There are a number of avenues for small business operators to seek assistance

if they are experiencing difficulty.

12.1 Small Business Commission

Western Australia’s Small Business Commission is able to:

* provide access to information and practical support for small business;

* assist in resolving business to business disputes;

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* investigate complaints about unfair market practices; and

* advocate at all levels of government in their role as regulators.

The Small Business Commission can be contacted by phone at 13 12 49, or by e

mail at info@smallbusiness.wa.gov.au.

12.2 Australian Small Business and Family Enterprise Ombudsman

This organization has an assistance team which will provide information about

possible avenues of assistance. There is an information line: 1300 650 460. The

organization can provide a list of specialists who can provide Alternative Dispute

Resolution. Its website is www.asbfeo.gov.au.

12.3 Franchising Disputes

If a small business has a dispute with a franchisor, the business operator can

consider using the Franchising Code of Conduct. This is a mandatory industry

code that regulates the conduct of franchisees and franchisors. The Code is

Schedule 1 to the Competition and Consumer (Industry Codes - Franchising)

Regulation 2014. The Code covers;

* disclosure requirements;

* a good faith obligation;

* a dispute resolution mechanism;

* a cooling-off period; and

* procedures for ending franchise agreement.

The Code is regulated by the Australian Competition and Consumer Commission

(ACCC). There is an Office of the Franchising Mediation Adviser, which can be

contacted on 1800 472 375.

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12.4 Small Business Helpline

ACCC also operates a Small Business Helpline, at 1300 302 021. It provides

information on how ACCC supports small businesses, and operators of small

businesses can report a small business issue. It operates from 8.30am to

5.30pm (Australian Eastern Time) each weekday.

NOTES

1. Corporations Act 2001 s. 911A

2. Corporations Act 2001 s. 912A

Ian Macdonald

August 2018

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CASE STUDY

Leonard has come to see you to ask for some help in dealing with his financial

difficulties.

Leonard explains that he runs a business called Leonard’s’ Lawns in Flinders

Valley. His business has been quite profitable; to the degree that his accountant

advised him to form a company and trust for tax purposes. This company is

called Leonard Lawns Holdings Pty. Ltd. as trustee for the Leonard Lawn Trust.

His problems began with the War of the Roses.

The War of the Roses

Leonard explains that as well as cutting lawns, he does general gardening also.

One of his most profitable areas is Greenslopes Road in Flinders Valley. This is

a well-vegetated area suitable for growing roses. A number of ladies in the area

compete to produce the rarest and most spectacular roses for the annual

Flinders Valley Agricultural Show. One of his customers, Miss. Lidian, imported a

very rare Boston Concord rose from Massachusetts. She guarded it carefully,

and instructed Leonard to keep well away from it. Some of his other customers

in Greenslopes Road laughed about Miss. Lidian’s obsession with her special

rose, and spoke of spraying Round-Up on Miss. Lidian’s rose garden.

Leonard’s Laser Lawnmower

Leonard is a very modern-minded man. He believes in having the most modern

machinery for his business. Recently he leased, through his company, the latest

model of self-propelled and laser-guided lawnmower. He was trying it out on

Miss. Lidian’s lawn when he inadvertently reversed its laser-guidance system.

The machine reversed at high speed over Miss. Lidian’s rose garden, reducing

her Boston Concord and other roses to mulch..

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The Writ

Miss. Lidian was more than furious. Leonard tried to explain the malfunction of

the laser-guidance system, but Miss. Lidian was convinced he had done it

deliberately, at the urging of her rival rose-growers in Greenslopes Road. She

has sued Leonard and his company for $250,000. Leonard offered to pay her

monthly payments, but she refused. She has now had judgment entered against

him for that sum, plus costs and interest. Leonard has been served with a

bankruptcy notice, requiring him to pay $266,000 within twenty one days, or Miss.

Lidian will proceed with a creditor’s petition to make him bankrupt. Neither

Leonard nor his company can pay that sum.

Leonard’s Assets

As well as his laser lawnmower, Leonard’s company leases a dual cab truck with

climate control air conditioning, and a hydraulic lift platform at the back to load his

machinery. Other than these items, he has some minor personal possessions,

and gardening tools worth $2,500.

Leonard’s Books

Leonard is too busy with his business to do books of account. He puts the

money he receives from his customers into the company’s bank account, and

puts invoices and receipts for his expenses in a shoe box. At the end of the year

he takes his bank statements and the shoe box to his accountant, who does tax

returns for Leonard, and his company and trust.

Leonard’s Business

Leonard’s other customers in Greenslopes Road are warmly supportive of

Leonard. Though they are not in a position to help him pay $266,000, they are

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delighted at Miss. Lidian’s misfortune, and continue to have Leonard do their

gardening. His income has not suffered after the reversing over the roses.

Leonard’s Accountant

Leonard has discussed the situation with his accountant. His accountant says

that Leonard and his company are pretty judgment proof. Their only assets of

significance are the leased mower and truck. Both are worth less than the

amount owing under the leases. The accountant suggests that if things get a bit

sticky, Leonard can appoint him, the accountant, as director of the company, and

Leonard can resign as director and then go bankrupt.

Questions

1. Leonard Lawns Holdings Pty. Ltd. cannot pay $266,000. Is there

anything Leonard should do about this?

2. Leonard’s accountant suggests that Leonard appoint himself, the

accountant, as director and Leonard can go on running things from behind

the scenes. Are there any flaws in this scheme?

3. Leonard’s Uncle Livingston, himself a veteran of a number of failed

businesses, says that if Leonard goes on working and paying the lease

payments on the lawn mower and the truck, it is unlikely the lessor

companies will take any notice of what has happened. Is this a good

strategy for Leonard to follow?

Leonard has heard the gossip around town is that Miss. Lidian is determined to

make him bankrupt. If Leonard does become bankrupt:

4. Would it be significant that he has not kept books of account?

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5. Could Leonard continue to trade as Leonard’s Lawns?

6. Could Leonard borrow to buy new equipment or machinery?

7. Could Leonard lease new machinery?

8. Could Leonard manage a company, either his existing one, or a new

one?

9. Could Leonard continue to work as a lawn mower and gardener?

Ian Macdonald

August 2018

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