If you are a small business owner, you may have to comply with certain privacy obligations regarding personal information. Since 2018, the Notifiable Data Breaches (NDB) scheme applies to certain businesses who must report data breaches that pose a serious risk of harm. This article explains whether your small business needs to comply with the NDB scheme and how to manage data breaches.
Do I Need To Comply with the Australian Privacy Principles?
You have to comply with the NDB scheme if the Australian Privacy Principles (APPs) apply to you. The APPs apply to businesses that have an annual turnover of over $3 million, who are otherwise known as APP entities. However, you can be an APP entity regardless of annual turnover if you are a:

business that trade in personal information, such as buying and selling email lists; or
credit reporting body; or 
health service provider, such as a:

pharmacist;
allied health professional;
gym;
weight loss clinic.

Most small businesses have a turnover of up to $3 million. If your business does not fall under one of the exceptions, you are exempt from complying with the APPs.
However, you may have employed people in your small business. Your employment records would contain individual tax file numbers (TFN). You will have to comply with the NBD scheme applies to TFN information, regardless of whether you are an APP entity. You may also have to comply with other privacy obligations if a data breach compromises the security of the TFNs.
What is a Data Breach?
The NDB scheme sets down rules for APP entitles to report data breaches to the Office of the Information Commissioner (OAIC). A small business may cause a data breach if personal information is accessed or disclosed without authorisation. Loss of personal information also counts as a data breach.
Personal information is information about an identified individual or an individual who can be reasonably identified. Some common examples are:

name;
date of birth;
email;
address;
occupation;
gender; and
health information.

A data breach is not always caused by computer hackers or by someone illegally accessing the data for criminal or malicious purposes. Human error or IT failures can lead to data breaches. Some examples of data breaches include:

losing physical devices like laptops, hard drives or paper forms that contain personal information;
unauthorised access by an employee;
sending an email to the wrong person by mistake;
selecting cc instead of bcc in an email; or
accidentally forwarding information to unauthorised parties.

If a data breach occurs, you must know when you are required to notify affected individuals and the OAIC. 
Eligible Data Breach
An eligible data breach for your small business occurs when:

there has been unauthorised access to, or unauthorised disclosure of, personal information;
the breach, according to a reasonable person, is likely to result in serious harm to the person or people concerned. The categories of harm include physical, psychological, emotional, financial or reputational harm; and
your small business cannot prevent the likely risk of serious harm with remedial action.

An example of remedial action could be an isolated incident where you have accidentally sent the wrong data file to a client. You immediately contact the client to ask them to delete the file. The client says they did not copy the data file and shows proof that they delete the file. 

If your business is not an APP entity, but you hold TFN information, you may have to report unauthorised disclosure of TFN information. For example, if a hacker stole details of your employees’ TFN information from your computer servers, that is likely to be an eligible data breach.

Assessment
If you suspect that a data breach has occurred, you should take all reasonable steps to complete an assessment. You must do this within 30 calendar days of becoming aware of the suspected data breach. You should treat these 30 days as the maximum time limit. Aim to complete the assessment as soon as possible. If you cannot assess the breach within that period, you should provide written evidence showing:

the steps your business has taken within the 30 days to assess the data breach;
the reasons for the delay; and
whether the assessment period was reasonable and efficient.

When assessing the data breach, you should:

decide whether an assessment is necessary;
assign the person or team that will be responsible for completing it;
gather all relevant information immediately, focusing on questions like:

who was involved in the suspected breach;
if there is any sensitive information that has been compromised;
where, when and why did the breach occur; and
what is the likely impact of the breach? and

evaluate the information and decide whether the identified breach is an eligible data breach.

Notification
If you have reasonable grounds to believe there is an eligible data breach, you will need to notify the affected people and the OAIC.
There are three options available when notifying affected individuals. Choose the option that is practical for your small business. Whatever option you choose, your notification should include the following information:

your contact details;
a description of the eligible data breach;
the type of personal information that was involved in the data breach; and
a recommended way of responding to the data breach, such as cancelling credit cards or changing online passwords.

 
1. Notify All Individuals
If practical, notify all the individuals whose personal information was part of the eligible data breach. This option is appropriate if you have a data breach that involves multiple people. In that situation, you cannot reasonably assess which particular individuals are at risk of serious harm. Therefore, you should notify everyone as a precaution. 
2. Notify only those individuals at risk of serious harm
If practical, notify only those individuals who are at risk of serious harm from the eligible data breach. This option is appropriate if the data breach happens to one person’s personal information or you can identify the multiple people who are at risk of serious harm. If you cannot identify people at risk of serious harm, you should adopt option one.
3. Publish notification
Option one and two are the preferred methods of notification. However, if you cannot contact the individuals for practical reasons, you must publish a statement on your website containing the relevant information. Furthermore, you must proactively publicise the statement, such as sharing the notification on social media.
Notifying the OAIC
You must notify the OAIC for any potential data breaches that pose a risk of serious harm. The OAIC has an electronic form that you can submit to notify the breach. You should include the same information as you would when notifying individuals.
Key Takeaways
Most small businesses will be exempt from the NDB scheme as they are not APP entitles. However, if you are looking to grow more rapidly, you may become an APP entity and have to comply with the NDB scheme. The key considerations of the NDB scheme for your small business are:

whether you are an APP entity or TFN recipient;
if you know what a data breach and eligible data breach are;
if you know how and when to conduct an assessment to confirm whether a data breach has occurred; and
if you know how and when to notify affected individuals and the OAIC.

If you need assistance confirming how the NDB scheme may affect your startup, get in touch with LegalVision’s IT lawyers on 1300 544 755 or fill out the form on this page.

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The relationship between franchisor and franchisee is a unique commercial relationship. As a franchisor:

you are the creator of a brand. This includes all business operations, policies, procedures and marketing;
which you license to another party (the franchisee);
who then uses that brand to build a profitable brand is maintained to a high standard.

A franchisee’s conduct in operating their business impacts you and your franchise brand and in some instances, you may be at risk of being held liable for your franchisee’s conduct. As a franchisor, it is likely that you will want to:

protect your brand; and
avoid any legal liability for your franchisee’s conduct.

This article will explore where potential liabilities may arise for franchisors and what steps you can take to monitor franchisee compliance and minimise your risk of liability.
When Can a Franchisor Be Liable for a Franchisee’s Conduct?
Despite the independent nature of the franchisor and franchisee relationship, there are a variety of situations where a franchisor may be liable for the conduct of its franchisee. The most obvious is where legislation imposes liability. For example:

the prohibition against misleading and deceptive conduct under the Australian Consumer Law gives rise to actions against persons whose behaviour causes loss or damage. A franchisor can, therefore, be liable for a franchisee’s misleading conduct;
additionally, under consumer law, a franchisor may be considered the manufacturer of products sold by franchisees. As the manufacturer,  they will be liable for products with safety defects; and
also, the Fair Work Act renders responsible anyone ‘involved’ in a breach of the Act. In addition, the Act imposes additional obligations on franchisors to ensure compliance with employment law.

How Can Franchisors Minimise Their Liability?
Franchisors can take steps to minimise their potential liability before their franchisees’ businesses are fully operating. Those steps include:

awareness of your legal obligations and potential liability under the law by getting legal advice;
issuing an employment contract for your franchise network, to minimise risk;
training your franchisees on a range of legal issues, including consumer and employment law;
prescribing an audit system in your franchise operations manual;
ensuring your franchise agreement contains an audit power;
selecting an online point of sale and accounting software, to ensure you can monitor franchisee compliance remotely and regularly.

What Audit Powers Do Franchisors Have?
Most franchise agreements will contain a provision that allows for random or periodic audits of a franchise. These clauses will generally enable the franchisor to:

firstly, audit the franchisee’s books and records;
secondly, visit the franchisee’s business premises at any time to inspect the premises and observe the employees as well as the business operations;
finally, investigate the franchisee’s performance of, and compliance with, the franchise agreement.

As a franchisor, it is essential to be aware of the procedures for audits set out in your franchise agreement and operations manual. Given that you may need to take legal action, it is also essential to keep a record of audits you conduct.
What Surveillance Methods Can Franchisors Implement?
If you want to implement surveillance procedures in your franchisee’s businesses, set out the parameters for this in your franchise agreement. The provisions of your franchise agreement should:

include a requirement to implement and use specific surveillance methods. For example, requiring the installation of particular equipment and software; and
require that the franchisee provides access to its surveillance records upon request.

Examples of surveillance include:

camera surveillance;
computer surveillance;
GPS-tracking; and
listening devices.

As the laws governing surveillance vary between states, it is important to be aware of the law in the states that your franchise operates. For example, in New South Wales, the law requires that employees are:

given a minimum period of notice before surveillance takes place; and
advised of the duration of the surveillance.

Breaches of the requirements under the legislation carry heavy financial penalties, so it is vital that you have adequate mechanisms in place to ensure your franchisees are complying with the laws.
What Should You Do if You Discover a Breach?
If you discover your franchisee has breached the franchise agreement, you should:

collate all evidence you can legally obtain; and
assess what is required to rectify the breach.

If the matter is serious enough to warrant termination under the Franchising Code of Conduct (the Code) or the franchise agreement, you may need to issue a breach notice under the Code. This allows the franchisee a reasonable time to remedy their breach. However, if the franchisee does not correct the breach, you can proceed to issue a termination notice.
Usually, terminating a franchise agreement will be the last resort. In many instances, breaches of the franchise agreement can be remedied by working with your franchisee to help turn the issue around.
Key Takeaways
For franchisors, there are areas of potential liability that may arise in the course of a franchise relationship. However, there are steps franchisors can take to monitor franchisee compliance with the franchise agreement. Above all, as a franchisor, you should ensure that your franchise agreement contains audit powers and surveillance mechanisms, allowing you to monitor and record franchisor compliance.
If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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When buying a franchise business, it is important to consider both the risks and rewards of joining an established brand. If you are purchasing a franchise business for the first time, you may have several legal questions Franchise Code of Conduct (the Code) and how it applies to you. If you have already received franchise documents from the franchisor, you may also have questions about whether your franchise agreement is ‘standard’ or similar to other business purchase contracts you may have received in the past.
This article will identify 5 key questions you should ask your franchise lawyer before committing to a business purchase.
1. How Does the Franchise Code of Conduct Protect Me?
The Code provides a legislative framework which applies to you, the franchisee, no matter which Australian state or territory you are based in. By imposing disclosure and process requirements on the franchisor, the Code contains some built-in protections for you.
However, it is important to note that the Code does not guarantee franchise systems are profitable or that this franchise is right for you.  There are definitely attractive and profitable franchise systems, but there are also some franchise systems that are high-risk. Through appropriate advice and due diligence, you should be able to determine whether a franchise is right for you.
2. What Are the Franchisor’s Disclosure Obligations?
The Code requires that the franchisor provides two documents to a prospective franchisee. These are the:

franchise agreement; and
franchise disclosure document.

Typically, the franchise agreement will set out the franchisor’s obligations to you with regards to providing:

ongoing training;
support; and
marketing assistance.  

One sign that a franchise system may not deliver desired results is the franchise agreement containing limited franchisor obligations. Franchisors should be prepared to commit contractually to some minimum support obligations to their franchisees to ensure they are best equipped for success.
The Code also imposes obligations on a franchisor to give financial disclosure upfront – this information should be contained in the franchise disclosure document. Practically, this means where a franchisor has been operating for more than two financial years, they must provide a copy of either:

their financial reports for the last two financial years; or
an independent audit report provided by a registered company auditor.

Even if a franchisor’s company has only recently been incorporated, the franchisor should still have the company accounts audited.  Again, not doing this may be a sign they are not as professional and organised as they first appear.
In addition, the disclosure document should list all current franchisees in the network and their contact details. This is very valuable information.  Contacting a few of the existing franchisees will give you a gauge on the health of the network.
3. What Leasing Documents Can I Expect to Receive?
Unless the franchise business model you are looking to join allows you to work from a mobile unit or to work from home, the franchisor will commonly provide you with legal documents which specifically relate to the lease of the business premises.
You may receive a copy of a sub-lease or licence agreement, which will have been prepared by the franchisor’s solicitor to give your rights to access and operate from the premises. These documents will indicate that the franchisor:

has found a premises for the business; and
intends to hold the lease as head tenants and sub-let or grant you a licence to occupy the premise.  

Under these arrangements, you are more vulnerable to being removed from the premises. This is because the franchisor holds the head lease. Generally, if you do not pay franchise fees, the franchisor will be able to terminate the licence to occupy.  Again, legal advice will help you decide if this arrangement is best for you.
If the franchisor does not specify a site for the business, this might cause some issues. Securing a site can be a time-consuming process. If you pay franchise fees in the hope of securing a site without one being specified in the franchise agreement, you may be waiting for some time for the business to operate.
4. What Happens at the End of My Franchise Term?
Many franchisors will offer a franchisee the right to operate a business using the franchise brand and operation systems for a fixed-term. As a franchisee, when the franchise agreement comes to an end, you can no longer use the brand and the systems. Instead, you will need to look to the terms in your franchise agreement to see whether you have the option to renew.
Additionally, where you do have an option to renew the agreement for a further term, you should ask your franchise lawyer about:

what processes you need to follow to validly exercise your option to renew; and
how much the renewal fee will be.

More often than not, there will be specific requirements that the franchisee will need to meet in order to exercise their option to renew.
5. Can I Sell My Franchise Before the End of My Term?
When you first look into buying a franchise, you are likely not considering what will happen if you decide to sell the franchise. It is not uncommon that your circumstances may change, and when the time comes for you to consider your options for selling the business, the need for franchisor consent is easy to overlook.
While the franchise agreement gives you the right to operate the franchise business yourself, if you wish to sell the franchise, it is typically required that you:

seek the franchisor’s consent; and
follow any other directed procedures. Generally, this will involve applying to the franchisor in writing to seek their consent to transfer the franchise to the incoming purchaser.

Key Takeaways
Before you commit to purchasing a franchise, it is important to understand the key protections and requirements contained in the Code. An experienced franchise lawyer will be able to advise you on whether the franchisor’s documents or commercial practice is ‘standard’. Key questions to ask a franchise lawyer are:

what protections does the Code provide?;
what are the franchisor’s disclosure obligations?;
should the franchisor provide leasing documents?;
what happens at the end of the franchise term?; and
is it possible to sell my franchise before the end of the term?

If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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As a builder, you can be held liable for any losses that happen while working on a construction site. Before you sign your next construction contract, you should pay attention to the indemnity clause. Not reviewing the indemnity clause could be costly for your business. This article will explain what builders should look for in an indemnity clause when reviewing a construction contract. 
What is an Indemnity Clause?
An indemnity clause is a promise by one party in the contract to provide protection and compensation to the other party if the loss, damage or costs occur.

For example, a basic indemnity clause could state that the builder indemnifies the principal against all claims that arise out of the contract. The builder is the “indemnifying party” and the principal is the “indemnified” party.

A well-drafted indemnity clause distributes risk between parties who are willing to bear the risk. This process is known as “apportioning liability” between parties. Depending on the party’s wishes, the clause can cover a broad or narrow range of losses. 
The most common types of indemnities in contracts cover:

intellectual property breaches;
breaches of work, health and safety laws;
injury or death; and
property damage.

Why Are Indemnity Clauses Important in Construction Contracts?
Indemnity clauses help to distribute the risk of certain losses between principals and builders. In a typical construction project, the principal engages a builder and the builder engages subcontractors to complete some of the work. The builder will usually indemnify the principal in their contract. The subcontractor will then indemnify the builder in their contract. This approach is known as “passing through” risk down the contracting chain. 
As the builder, you need to ensure you know who you are indemnifying and how you are indemnified for the particular losses. While you cannot avoid indemnity clauses altogether, you can negotiate a fairer indemnity clause. For example, an indemnity clause can state that one party will only indemnify the other party against one particular loss, not all causes of potential losses. The most common example is a clause that indemnifies for losses arising from a breach of contract.

Example Clause: The builder indemnifies the principal against all claims, costs, losses, damages or other liability arising out of a breach of the builder’s work health and safety obligations under the contract.

An indemnity clause can provide certainty for who is liable for particular losses. The most obvious benefit of an indemnity clause is that the indemnified party does not have to prove fault.

Example Scenario: A fire breaks out on the principal’s premises because a subcontractor failed to stamp out a burning cigarette butt. The fire causes $30,000 worth of damage. The principal does not have to prove the builder had caused the damage because of their action or inaction. The builder has already promised to compensate the principal for any loss caused.

How Can the Builder Indemnify the Principal?
Firstly, you need to understand the scope of your indemnity. Are you indemnifying the principal broadly for any losses, damages or costs? As the party indemnifying, you would want to make sure that the indemnity clause is precise and drafted as narrowly as possible. You should link the indemnity to a particular loss, such as losses linked to a contractual breach. 

Example Clause: The builder is liable for and agrees to indemnify the principal against any claim, action, damage, loss, costs, charge, expense, penalty, fine, or payment which the principal suffers, incurs or is liable for under the contract, which is caused or contributed to by a negligent act or omission by the builder or its personnel in the performance of the services.

How Can the Subcontractor Indemnify the Builder?
If you engage any subcontractors, you want them to indemnify you for all types of losses. Your indemnity clause should set out the subcontractor’s liability for types of losses or damage that occur in a construction project. Ensure the indemnity clause covers all the risks associated with any goods or services you provide. You can cover many types of losses in an indemnity clause, as long as the clause does not become so broad that it becomes ambiguous. 

Example Scenario: In a construction contract, the subcontractor agrees to provide services to the builder for a lump sum of $40,000. The subcontractor breaches the contract by negligently causing a fire which burns part of the principal’s premises. The principal sends the builder a bill for $30,000 to repair the damage. The indemnity clause in this situation will mean the subcontractor is responsible for paying the $30,000. 

Key Takeaways
Indemnity clauses highlight who is liable for certain risks that arise in projects. You can have a broad or narrow indemnity clause depending on who you indemnify or who will indemnify you. Always keep in mind who you are indemnifying and for what types of losses. If you have any questions or want assistance in drafting an indemnity clause, get in touch with LegalVision’s construction lawyers on 1300 544 755 or fill out the form on this page. 

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As a self-employed business owner, one of your first decisions is to choose your business structure. Most people choose to become a sole trader or start a company. The business structure you choose will determine the amount of tax you have to pay for your business. This article explains your tax obligations as a self-employed business owner, based on your choice of sole trader or a company structure. 
Taxation as a Sole Trader
As a sole trader, you are taxed at individual income tax rates. You report your business income in your individual tax return. The amount of tax you pay will depend on:

the revenue from your business;
additional income sources; and
any deductions you can claim. 

If you run a thriving business as a sole trader, you could pay up to 45% in tax (excluding levies). However, you will be able to take advantage of the tax-free threshold of $18,200, that apply to both sole traders and individuals.
The individual rates can change from year to year, but below you can find the current Australian Resident tax rates for the year of 2018/19:

Taxable income
Tax on this income

0 – $18,200
Nil

$18,201 – $37,000
19c for each $1 over $18,200

$37,001 – $90,000
$3,572 plus 32.5c for each $1 over $37,000

$90,001 – $180,000
$20,797 plus 37c for each $1 over $90,000

$180,001 and over
$54,097 plus 45c for each $1 over $180,000

Taxation as a Company
A company is a separate legal entity. You must report any company income in a company tax return, not your individual tax return. 
There is no tax-free threshold for companies and the tax is not calculated on a progressive scale. Instead, a flat company tax rate applies to all income generated by the company.
There are two different company income tax rates:

the “base rate” of 27.5% that applies to companies that have an aggregated turnover of less than $50 million; and
30% that applies to companies that have an aggregated turnover of more than $50 million.

Unlike a sole trader, you cannot offset any tax losses against your individual income. The company’s tax losses are contained within the company. However, a a flat tax rate is appealing to fast-growing businesses as the tax rate remains steady despite revenue growth.
Tax Liability as a Shareholder
If your business is a company, you can distribute company profits to yourself as a shareholder by issuing dividends. These dividends will affect your yearly tax liability as they will be part of your personal income. Australia uses an imputation system to determine tax liability so that you avoid being taxed twice at the company and shareholder level.
First, your company distribute profits on which income tax has already been paid, such as when your company pays a dividend to you. Then the company has the option of passing on (‘imputing’) credits for the tax. That process is called ‘franking’ the distribution.
If your company pays fully franked dividends to you as a shareholder, you will receive franking credits for the tax already paid by the company. Therefore, you do not have to pay tax on the whole dividend. You will only pay tax if your personal tax rate is higher than the company’s tax rate. Otherwise, you will receive a tax refund if your personal tax rate is below the company’s tax rate.
Goods and Services Tax (GST)
Registering for Goods and Services Tax (GST) is mandatory for both a company and a sole trader if your business:

has a turnover of $75,000 or more;
provide rideshare services for money, such as driving for Uber; or
want to claim fuel tax credits for your business.

If none of the above applies to your business, it is optional for you to register for GST.
If you do not register for GST, you should remember to keep a close eye on your turnover. Otherwise, the ATO may fine you with penalties if your revenue surpasses $75,000 and you fail to register. 
‘Small Business’ Tax Concessions
If you have started out as a self-employed business owner, you can take advantage of small business tax concessions.
The small business tax concessions apply if you operate a business for all or part of the income year and have less than:

$10 million in aggregated turnover (for all concessions except for capital gains tax concession); or
$2 million in aggregated turnover (for capital gains tax concessions only). 

The main difference between operating as a sole trader or a company for small business tax concessions is the use of capital gains tax (CGT). 

CGT refers to the tax you pay on the gains and losses from capital assets. Capital assets are long-term assets such as property or company shares. For example, if you sell shares in your company, the gain or loss is calculated by the difference between the cost of acquiring the asset and the amount you receive when you sell the asset.

Capital Gains Tax Discount for Sole Traders
As a sole trader, you can receive a 50% CGT discount on your capital gain before including it in your income in certain situations. You must have owned the asset for 12 months or more. You can reduce the capital gain after applying all the capital losses for the income year, as well as other non-applied net capital losses from earlier years. 
Capital Gains Tax Discount for Companies
Unlike sole traders, companies do not have the 50% CGT discount. However, if your company is a small business entity, you could access small business CGT concessions.
Your company may be eligible for the small business CGT concessions if:

the business has an aggregated turnover of less than $2 million; or
the company has a total net value of assets (including any affiliated entities like subsidiary companies) that does not exceed $6 million.

The small business CGT concessions allow you to disregard some or all of the capital gains made from an active asset.
An active asset is an asset used in the course of carrying on a business, or an asset inherently connected with the business. For example, the corner store you bought to sell your candy merchandise could be an ‘active asset’. 
If you sell an active asset that has been continuously owned for 15 years, and you are aged 55 or over and retiring, you can disregard the entire capital gain.
If this 15-year exemption is not available, you can:

reduce the capital gain by 50%;
use the small business retirement exemption to reduce capital gain for amounts up to $500,000; or
defer all or part of the capital gain for two years or longer if you acquire a replacement active asset or spent money on making capital improvements on that active asset.

The purpose of these concessions is to boost your cashflow and potentially eliminate tax payable on a business exit.
Personal Services Income
If you run your business by yourself, you should be aware of the rules concerning Personal Services Income (PSI). This is income produced mainly from your personal skills or efforts as an individual.
Your income can fall under PSI in almost any industry or profession. Examples include professionals in the financial industry, information technology consultants, engineers, construction workers and medical practitioners. If the ATO classifies your income as PSI, they will tax all the profits from your business as a wage to you. Therefore, even if you are making the money through a company structure, the net outcome is similar to a sole trader. 
However, if you have employees or you are selling goods, the PSI rules are unlikely to apply. You can retain any excess profits in the company to be taxed at the company rate. 
Key Takeaways
As a self-employed business owner, you can take advantage of different tax concessions depending on whether you start out as a sole trader or a company. If you need help on how to choose a business structure or how to navigate your tax considerations, get in touch with LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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Are you a business or a person who has received a subpoena from someone else? When you receive a subpoena, you usually have to comply with the request. However, there are certain situations where you can object to the subpoena. This article will explain the different situations where you can object to a subpoena.
What is a Subpoena?
A subpoena is a court order that requires either:

a witness to attend court to give evidence; or
a person or company to produce documents to the court for evidence in a case.

Parties in a court case issue a subpoena to people or companies who are not part of the case. A subpoena will state when you are required to attend court to provide evidence or when you have to produce the requested documents. If you receive a subpoena, you usually have to comply with the request or risk getting a fine. However, there are valid reasons for you to object to a subpoena.
What Are the Reasons to Object to a Subpoena?
You can object to a subpoena by arguing that the:

subpoena has not been issued correctly according to the law (technical grounds);
subpoena is an abuse of process or oppressive (general objections); and
requested documents cannot be disclosed because of special rules that apply to the evidence (privilege).

Technical Grounds
Every state or territory in Australia has different requirements on how subpoenas are prepared and served. If the person serving a subpoena fails to follow all the requirements, you can successfully object to the subpoena. Common reasons for objecting to a subpoena on technical grounds include that:

the party failed to serve the subpoena on your correct address or failed to serve the subpoena within the appropriate timeframe;
the party issuing the subpoena does not agree to cover your reasonable costs for complying with the subpoena; and
the issuing party fails to show a legitimate purpose for wanting the information or documents for their case. 

Examples

The party served the subpoena to your old residential address rather than your new address. 
If you live in Bathurst and the subpoena states you have to attend a hearing in the Sydney CBD, the party that issued the subpoena should pay your reasonable travel costs. 
If the party wants documents relating to employment records when the dispute is actually about insolvent trading between directors, that is not a reason to request those documents. Broad-ranging requests are known as “fishing expeditions”. A subpoena must unearth information that the party reasonably believes is relevant to the dispute. 

General Objections
Courts understand that people or companies may not always be able to comply with a subpoena, especially if the request is broad or ambiguous. For this reason, you can object to a subpoena if you can show the subpoena is an abuse of process.

For example, a subpoena is issued on a large $200 million company to provide all of its employment records. However, those records cannot be produced or are irrelevant to the court case on insolvent trading. 

Similarly, you can object to a subpoena if it is oppressive. The meaning of “oppressive” may depend on the resources required to comply with the subpoena. If the subpoena request is ambiguous and broad, a court may also rule the subpoena as oppressive. 

In the above example, the subpoena would be oppressive as it would be extremely expensive and time-consuming to produce all the documents.

Privilege
Privilege is the legal protection of certain correspondence and communications. A common example is client legal privilege.The privilege operates by protecting any communication between you and your lawyers when the advice relates to taking legal action.

For example, a party cannot subpoena your former lawyer to provide email correspondence about confidential business matters that are at the centre of a dispute. 

Key Takeaways
If you have received a subpoena, you must either comply with the subpoena or find a valid reason to object. Otherwise, you could face heavy fines or other penalties. Three common reasons to object to a subpoena include: 

technical grounds, where the party fails to issue the subpoena properly;
general objections, where the subpoena is an abuse of process or oppressive; and
privilege, where the law protects certain information from being used as part of a court case.

If you have questions or need to know if you can object to a subpoena, get in touch with LegalVision’s dispute resolution lawyers on 1300 544 755 or fill out the form on this page.

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As a small business, you may be all too familiar with signing contracts where the other business has failed to uphold their end of the deal. However, what do you do if that business still insists on payment? Can you refuse to pay? This article explains when you can withhold payment if the other business has breached the contract.
What is a Breach of Contract?
A breach of contract is a failure by one party to comply with a requirement under a contract. Not all breaches of contract are treated the same way. Some types of breaches may lead to the immediate end of the contract. Others may be so minor that they require the other business to apologise or rectify the mistake, such as replacing the broken goods.
The four most common breaches of contract include : 

a material breach, where the business fails to perform a key element of the contract;
a minor breach, where the business makes a minor error;
an anticipatory breach, where one business signals to the other that they will not be able to perform a key element of the contract; and 
an actual breach, where the business fails to perform the contract at all. 

Example Scenario
You are a business that buys a dozen computers for the office. The contract states that the computers will be delivered to you within five days after your online order. The computers will come with two monitors. You will receive a user manual. The contract guarantees the computers will have quality monitors. You agree to pay for the computers upon delivery of the products to the office.
A material breach in this scenario would be if the computers were delivered to you with broken monitors. A minor breach would be if the user manual did not include 1-2 pages about the monitors. An anticipatory breach would be if the computer company told you that they will not deliver the computers within five days as promised. An actual breach would be if the computer company failed to deliver the computers at all.
When Can You Withhold Payment?
If you can show a breach of contract, your ability to withhold payment will depend on:

the wording of the relevant contract;
the type of breach;
whether the breach is linked to payment; and
whether there is an express right in the contract to withhold payment.

The three most common ways of withholding payment include:

a right to set off;
pre-conditions to payment; and
defective or incomplete work.

1. A Right to Set-off
Your contract may have an express right for you to withhold payment through a set-off clause. That provision allows you to set-off any owed money against money that you owe the other business.

For example, you owe a contractor $500 for delivering your goods to a destination but the contractor made the delivery five weeks late. There was a late delivery fee of $50 per week.  Under the contract, you will owe the contractor $500 and the contractor owes you $250. Therefore, by setting off the $500 against the $250, you can legally withhold $250 of the $500 being claimed by the contractor. 

2. Pre-conditions to Payment
You can require the other business to fulfil certain conditions before they are allowed to claim payment from you. That means the payment terms in your contract should outline the conditions for payment. If the other side fails to fulfil one or more those conditions, you can withhold payment. 

For example, you engage a photographer to shoot photos for your website. Your payment terms state that the photographer must provide final edited photos for your approval before they can claim full payment under the contract. The photographer sends you some unedited photos and insists on payment. You can argue that as they failed to send you final photos, they have no right to claim payment. 

Defective or Incomplete Work
In some situations, you can withhold payment because the goods or services were defective and incomplete. The other side cannot claim payment as they failed to deliver the goods or services to a standard that would trigger payment. You will have to prove a link between the failure of the other party to deliver and the payment that you are withholding.

For example, if a carpenter finishes putting in floorboards into a house but uses poor quality wood that cracks under little pressure, the builder could potentially withhold payment until the floorboards are replaced.

What Are the Dangers of Withholding Payment?
You need to make sure the contract legally allows you to withhold payment in certain circumstances. Otherwise, the other business could take action against you under the contract’s dispute resolution clauses. Depending on your contract, that could mean expensive court action as they seek to claim payment from you.
Even if the other party has breached the contract, you may also be breaching the contract if you illegally withhold payment. Your business could be similarly exposed to financial liability, such as damages or costs.
There are also industry-specific laws that restrict your ability to withhold payment. For example in the construction industry, the security of payment laws do not allow contractors to withhold payments to subcontractors just because principals are also withholding payment to contractors. Be sure you know the relevant laws of your industry before you draft any clauses around withholding payment.
Best Practice Checklist
Before you withhold payment in a contract, you should:

read the terms of your contract;
find out if there is an express right to set-off amounts under the contract;
see if you require the other business to fulfil certain conditions before payment;
check if the other business has fulfilled those conditions;
confirm if the contractual breach is the reason for withholding payment;
discover if there are any laws that prevent you from withholding payment in a contract; and
clarify that withholding payment will not lead your business into breaching the contract.

Key Takeaways
You can only withhold payment if you can establish a breach of contract from the other business. Once the breach is established, you usually have three methods that will allow you to withhold payment. These methods are: 

a right to set-off;
establishing pre-conditions to payment; and
refusing payment because of incomplete or defective work.

If you have any questions or need assistance on how to withhold payment, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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Using a recruitment agency can be an expensive exercise for employers. As a recruitment agency, you want to persuade employers that you will find the right candidate for their job role. Therefore, if a chosen job candidate fails to stay in the job, you will want to reassure employers that you can find a suitable replacement. This guarantee is known as a replacement guarantee and is usually included in a recruitment agreement. This article explains how you can draft an effective replacement guarantee.  
Why Should You Have a Replacement Guarantee?
The best case scenario is where a chosen candidate stays with the client’s company for the long-term. However, many candidates can accept a job but resign shortly afterwards, such as during the probation period. A replacement guarantee means you have to recruit a replacement candidate at your own cost. Therefore, the replacement guarantee means you may have to do additional work for no extra cost even after a successful placement.
There is no legal requirement for recruitment agreements to contain replacement guarantees. However, a replacement guarantee can help you stand out among other agencies. You may also earn the trust of potential clients who know you are committed to finding the right talent for your company.
What Should the Replacement Guarantee Include?
Your replacement guarantee is an important clause in your recruitment agreement. The clause should protect your business’ cashflow while reassuring potential clients that you are committed to finding them the right candidate. Your replacement guarantee should be clear and easy to understand to minimise misunderstandings. Here are six factors to consider when drafting your replacement guarantee. 
1. Timeline
Your agreement should state the time for when the replacement guarantee will apply. A replacement guarantee should usually span the first three months of the candidate’s employment. However, the period can be as long as six months, depending on the company’s usual length of probation period.

For example, if a candidate leaves the job within three months, the replacement guarantee means that you will have to find them an appropriate replacement candidate. However, if a candidate leaves their employment after three months, you will not be obliged to replace the candidate.

2. Exclusions
You may decide when a replacement guarantee will or will not apply in a particular situation. A replacement guarantee should not apply every time your chosen candidate resigns. Outline certain exclusions that your client needs to accept before they sign up to your services. 

For example, you could suggest that the replacement guarantee will not apply if the client drastically changes the job description. Originally, the company may have asked you to advertise for a marketing manager. However, after they interview the person, they employ them as an IT manager. They refuse to pay your fees because they did not hire the person for the advertised role. In that situation, you could argue that the replacement guarantee will not apply.

3. Redundancy
You may want to exclude genuine redundancy as a situation that triggers the replacement guarantee. You should not be obliged to find a replacement candidate if a client has carried out an internal restructure of the company. 

A genuine redundancy is where an employer does not intend to replace the employee and you cannot move them into another position within the organisation.

4. Notice
Your client should notify you if the candidate leaves their job and why they left that position. That information will help you decide whether you are legally obliged to exercise your replacement guarantee under the recruitment agreement. Otherwise, you will be wasting money and time that could be better spent recruiting candidates for other clients. 
5. Promise
Do not promise that your recruitment agency will find a suitable replacement candidate. You can still provide details of candidates to your client for them to interview. Your client makes the final call on who to employ for their business, not your recruitment agency. 
6. Refund
Some recruitment agencies may opt to provide a refund if the candidate leaves employment within a certain period. The refund amount is usually a percentage of the client’s original payment to the recruitment agency. A refund option may be attractive if finding a replacement candidate is too time-consuming or expensive. 
Key Takeaways
You are not required to have a replacement guarantee. However, most recruiters nowadays include them in their contracts. An effective replacement guarantee considers:

the nature of the client;
whether the replacement guarantee protects your interests;
limiting the scope of the replacement guarantee;
whether the replacement guarantee will work with your business model; and
whether a refund is more appropriate than a replacement guarantee.

If you have any questions or need help with drafting your recruitment guarantee, get in touch with LegalVision’s contracts lawyers on 1300 544 755 or fill out the form on this page.

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Are you a business who uses downloadable software or a software as a service (SaaS)? A software referral agreement is a popular way to drive extra revenue to your business. Under the agreement, you refer your customers to buy software from a supplier. In return, the supplier pays you for that referral. This article explains how a software referral agreement works.
How Does a Software Referral Agreement Work?
A software referral agreement sets out the terms and conditions of a referral relationship. In a referral relationship, you pass on suitable customers to the supplier through an agreed process. There is no direct payment from the customer to you for buying the software. 
Instead, the supplier will pay you a referral fee, usually though a one-off fee paid as a lump sum. If the customer has bought a SaaS product, your referral fee will accrue over time based on the customer’s ongoing subscription to the product. 
If you have an ongoing referral fee, ensure your software referral agreement provides for continued payment even after you or the supplier end your referral agreement. That continued payment process may last only for the first 12 months of purchase. Alternatively, the payment may continue indefinitely as long as the customer continues to subscribe to the SaaS.
What is a Qualified Referral?
Your software referral agreement may state that you will only get paid if you provide qualified referrals. Typically, a qualified referral is a referral that meets certain criteria set under a referral agreement. 
Common criteria for a qualified referral include that:

the customer is new to the supplier or falls under a category of existing customers as defined in your referral agreement;
the customer bought the software or subscription within a specific timeframe following your referral; and
you make the referral to the supplier in an agreed format.

For example, you have to add the referral’s details in a spreadsheet, email the supplier the details or provide the referral with a unique code that attributes the referral back to your business.

Why Should You have a Referral Agreement?
A referral agreement is useful where you cannot provide the software or SaaS yourself. However, you can provide general support and consulting services, which could enhance your customer’s experience. Therefore, a referral relationship provides customers with more value without the cost of investing in software resources.

For example, if you are a graphic design teacher who uses Adobe Creative Cloud, a referral agreement allows you to earn extra money based on referring your students to buy the product.

From a risk perspective, a referral agreement limits the extent of responsibility for any damage or dissatisfaction from the customer. Your customer contracts directly with the supplier, so they have to take action against the supplier if anything goes wrong. You should not be included in the contract between supplier and customer, especially if you are involved in the transfer of payment. Otherwise, your referral agreement may look more like an IT reseller agreement which attracts extra responsibilities and risks. 
How is an IT Reseller Agreement Different?
An IT reseller is a business that is authorised by the supplier to resell products directly to customers. The reseller obtains payment from the customer and passes on any applicable fees to the supplier. An IT reseller agreement governs the relationship between the reseller and the supplier. As a reseller, you carry more responsibility and risk when directly selling the IT product to customers.

For example, if you are reselling a SaaS product like Adobe Creative Cloud, the supplier may make you liable in the agreement if you fail to deliver the product on time as requested by the customer. Therefore, you have to be extra careful to ensure you deliver a quality service.

In a software referral agreement, you as the referrer agree to send suitable customers to the software supplier. The customers do not buy the product directly from you. Therefore, you would not have the same risks as a reseller on direct liability for any damage or viruses to the software.
Key Takeaways
A referral agreement minimises your risk and brings additional revenue to your business. You are not as involved with the customer and the delivery of the software. The software supplier will also benefit from additional revenue brought by your customers. Ensure that your referral agreement allows you to get paid fairly. If you have any questions or you need assistance with a referral agreement, get in touch with LegalVision’s IT lawyers on 1300 544 755 or fill out the form on this page. 

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Many businesses choose to structure themselves as sole traders or companies. However, you can also set up a unit trust to run a business. A unit trust shares some of the benefits of a company structure and has additional tax benefits. If you want to set up a unit trust for your business, you should be aware of the advantages and the disadvantages. This article explains the main features of a unit trust and how a unit trust compares with a discretionary trust and a company.  
What is a Unit Trust?
A trust is the relationship between a trustee and beneficiaries governed by the trust deed. The trustee legally holds assets on behalf of and in the interest of its beneficiaries. The trustee is typically someone you trust or a company (corporate trustee) controlled by trusted directors which usually include beneficiaries.
The two types of trust include:

discretionary (or family) trusts where the trustee can distribute income; or
unit trusts where beneficiaries or unitholders’ hold fixed parcels or units in the trust.

A unit is a piece of property, such as a specific amount of income or shares. Unitholders are those who hold a fixed interest in the trust. The trustee distributes assets or income proportionally to each unitholders’ units.
This is different from a discretionary trust, which distributes assets or income at its discretion as long as they are in the best interest of the beneficiaries.
Why Should You Use a Unit Trust?
Unit trusts are used for two purposes, which include:

a group of unrelated parties that invest either in shares or in property; or 
unrelated business owners who operate a business that intends to raise limited capital.

The unit trust’s advantages and disadvantages are listed below.
1. Liability
A unit trust minimises liability. If a person sues the company run as a unit trust, only the trustee is sued on behalf of the trust. That means the assets held by the trust are at risk. The unitholders’ assets are safe. However, if the trustee breaches its fiduciary duties to the unitholders, the company assets could be at risk. 
2. Investment
A unit trust can attract a certain kind of investment. For example, units can be subscribed for to raise funds for the unit trust. Businesses operated through a unit trust tend to attract fewer investors than companies. The investors tend to be family or friends rather than venture capitalists or angel investors. 
3. Loans
Unit trusts are taxed at the highest marginal income tax rate. A unit trust generally distributes any income generated. The trust can struggle to retain funds to anticipate repayments and borrow money. Therefore, financiers may not want to lend to trusts. However, a unit trust can make distributions to a separate company that can holds funds and make repayments. 
4. Tax Planning
A unit trust does not have to pay tax. They can sell an asset that has been held for 12 months or more. The Capital Gains Tax (CGT) may apply, although they may be eligible for a 50% discount. 
Distributions from the unit trust form part of the unitholders’ income, which is subject to their marginal tax rate. Franking credits are available for unitholders in a fixed unit trust.
How is a Unit Trust Different From A Discretionary Trust or Company?
A unit trust has certain advantages over a discretionary trust or a company. However, many business owners may want to structure their business as a discretionary trust or a company. The table below illustrates the key differences between a discretionary trust and a company.
 

Discretionary trust
Company

Liability  
Beneficiaries are not liable if the trustee is sued. The trustee is liable if they breach their fiduciary duties to beneficiaries. 
Company assets are at risk. Shareholders’ and directors’ assets are not. The only exception is if directors breach their directors’ duties. 

Investment
A discretionary trust does not allow for investment as the beneficiary has no fixed interest. 
Investors can subscribe for shares.

Loans
It is difficult for financiers to lend money to a discretionary trust because any income generated must be distributed. A discretionary trust can distribute to a separate company set up for the purpose of borrowing and repaying money.
Financiers can lend to companies, especially if directors provide personal guarantees for the repayment of loans. 

Tax
A discretionary trust does not pay tax. If a beneficiary is an individual, the marginal tax rate applies. They are also taxed on their present entitlement and specific entitlement.
The tax rate for a company is 27.5% or 30%. Dividends form part of the shareholders’ income subject to their marginal income tax rate. Shareholders receive franking credits when the company pays full franked dividends. 

 
Key Takeaways
A unit trust is an alternative business structure for businesses who want to protect their assets and plan their tax obligations. Business owners who want to structure their business through a unit trust will enjoy tax benefits such as the CGT. If you have any questions about unit trusts or need assistance with preparing your fixed unit trust deed, get in touch with LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page. 

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It is important for manufacturers, importers and retailers to understand that they can be liable for safety defects in their products. Everyday items can cause a lot of damage, from contaminated food to exploding cell phone batteries. If your business provides products with safety defects, you will be vulnerable to legal claims. You may need to pay compensation for the damage or injury that your product caused. This article will discuss manufacturer’s liability and the different ways that consumers can enforce their rights against manufacturers and other suppliers. It will also include some tips for how to reduce the risk of being taken to court over a product liability claim. 
What is Product Liability?
Product liability is an area of law that ensures those who make products available to the public are held legally responsible for injuries that those products cause. It is relevant to anyone involved in a commercial supply chain. This includes businesses that manufacture, distribute, supply or otherwise make the product available to the consumer.
If you are sued for damage caused by your defective product, then the court will consider factors such as:

the product’s quality;
how you represented the product (i.e. through its packaging, warnings or instruction booklet); and
loss or damage arising from the product (i.e. physical injury or damage to private property).

How Does a Consumer Make a Product Liability Claim?
Consumers have strong rights in this context and have multiple ways to sue someone over damage caused by a safety defect. Typically, there are three options for consumers to bring a claim.
Option 1: Breach of Contract
A consumer won’t necessarily need to have a direct contract with you to take you to court. If you are part of a series of contracts that govern the product’s journey from the assembly line to the shop floor, you may still be liable.
In principle, a consumer can only take action against the other party in the contract. Since the contractual relationship in these circumstances will generally be between the retailer and the consumer, the consumer will typically be able to take action against the retailer. However, the retailer can then seek a remedy from its contractual partner. This continues up the chain of suppliers and distributors to the original manufacturer.
It is common for businesses to pass on risk through their contracts. Therefore, no matter where your business operates in the supply chain, you could potentially include an indemnity clause in your contracts (i.e. a clause that states that another party will absorb your legal costs if you are sued). As a result, liability could fall on the party who simply wasn’t able to negotiate a good deal.
Option 2: Negligence
Product liability is determined by more than contractual relationships. The law states that the original manufacturer of goods owes a duty of care to members of the public using their product. This means that if the manufacturer breaches that duty of care, a member of the public may be able to skip the retailer they contracted with, and sue the manufacturer directly.
There is a famous English case which established this principle (known as the tort of negligence). Ms Donoghue had the misfortune of drinking a ginger beer contaminated by a decomposing snail, and the court agreed that she had grounds to sue the bottler, Mr Stevenson, directly. The court determined that the bottler, Mr Stevenson, owed a duty of care to Ms Donoghue to safeguard her against foreseeable risks of injury. The court held him liable for her consequent illness.
It is generally accepted that other parties in a supply chain (whether retailers, importers, distributors) which add to or modify a product including packaging and labelling will also owe a duty of care to the consumer. On the other hand, you are not expected to test or inspect products in sealed containers which would not normally be opened until they reach the end user.
Option 3. Australian Consumer Law
In Australia, the Australian Consumer Law (ACL) further protects consumers.
Under the ACL, a ‘consumer’ is a person who has acquired goods that are:

$40,000 or less;
generally used for personal, domestic or household use or consumption; and
not purchased for resupply.

The term ‘manufacturer’ is broadly defined and includes the actual manufacturer as well as people who:

produce goods;
import goods into Australia; or
allow their brand or name to be applied to goods.

For example, if another business manufactures chemical cleaner in Bangladesh and you sell it in Australia under your own brand, you may still be considered a manufacturer.

With these broad definitions, it is often easier for a consumer to make a claim over a defective product under the ACL than under the previous two options (contract law or negligence). The ACL also has a regulatory component. It provides a mandatory safety standard for products and gives the government the power to issue product bans or recall consumer goods that could cause injury. Therefore, you need to be aware that it is not just consumers that can hold you responsible for safety defects.
Manufacturer’s Defences
If a consumer sues you for product liability, you may be able to avoid liability. However, you will need to prove that the:

safety defect did not exist at the time of supply;
product that you produced was merely a component of the finished product, and the safety defect arose due to the overall design of the finished goods or the packaging, instructions or warnings in those finished goods;
you could not have discovered the safety defect when you supplied the goods because there was insufficient scientific or technical knowledge at the time; or
safety defect only existed because you complied with a mandatory standard (in which case the government may have to pay any compensation).

Practical Steps for Manufacturers to Protect Themselves
Rather than waiting for a defect to occur and defending yourself in court, all manufacturers and suppliers should proactively take steps to reduce the risk of an accident occurring.

Contracts
As mentioned above, you can negotiate indemnity clauses into your contracts. These clauses pass risk on by requiring another party to absorb legal risks. However, it is important to note that you cannot contract out of negligence (i.e. your duty of care).

Quality Assurance
You should have in place policies for product reviews and quality assurance in order to minimise the risk of problems emerging with products in the first place. These policies should comply with safety standards under the ACL.

Packaging
Ensure that your marketing and packaging includes clear and detailed descriptions, assembly instructions and warnings.

Insurance
Insurance companies offer products and public liability insurance or business pack insurance that includes product liability insurance.

Keep Records
Under the ACL, consumers can take action within ten years of the time you supplied the goods with safety defects. Therefore, it is important to keep good records and to manage your contracts. This will make it easier to find information necessary to defend the claim.

Product Recall
If you become aware of an issue, you should have a procedure in place to warn consumers and recall products to reduce the risk of further injuries.

Key Takeaways
Product liability affects businesses at every stage of the production and sale process, including manufacturers, distributors, suppliers and retailers. Consumers are granted wide protections for goods with safety defects and businesses should proceed with caution. While there are defences for manufacturers to raise if a consumer takes you to court, it is important to put in place practical steps to protect yourself from being sued. If you would like to discuss the steps you can take to minimise the risks of claims arising in these circumstances, or have an issue with product liability, you can contact LegalVision’s competition lawyers on 1300 544 755 or fill out the form on this page.

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A holding company is often used in company structuring to minimise risk and liability. It doesn’t usually produce goods or services or have a role in the day-to-day operations of the business. Rather, it is created to buy and own the shares in other companies, known as subsidiary companies. However, when a subsidiary of a holding company continues to trade while it is insolvent (i.e. when it cannot pay its debts), the holding company may be liable for those debts. In these circumstances, a holding company may find itself facing a demand for payment from a liquidator.
This article discusses:

the difference between a holding company and a subsidiary;
when a holding company will be liable for the debts of a subsidiary;
in what circumstances a liquidator can make a claim against a holding company for a subsidiary’s debt; and
what defences may be available to the holding company.

What is the Difference Between a Holding Company and a Subsidiary Company?
Holding Company
A holding company is a company that has control over one or more other companies (known as subsidiary companies). A holding company will likely own all or a substantial amount of the shares in its subsidiary company (or companies).
The purpose of a holding company is to manage and oversee some of the more major operations of the subsidiary company. There are many advantages of operating with a holding company, such as minimising the risk of someone suing you and providing a more tax effective structure.
 
Subsidiary Company
A subsidiary company is a company that is under the control of a holding company. A holding company must wholly or partly own the subsidiary company. For a company to be classified as a subsidiary, the holding company must:

control the composition of the subsidiary’s board;
have control of over 50% of the total number of votes at a general meeting of the subsidiary company; or
hold more than 50% of the issued share capital of the subsidiary company (i.e. the funds that the company raises in exchange for shares).

 

When is a Holding Company Liable for the Debts of a Subsidiary Company?
A holding company will liable (i.e. responsible by law) if:

it was a holding company of the subsidiary at the time the debt arose;
the subsidiary company was insolvent when the debt arose, or became insolvent by incurring the debt;
at that time, there were reasonable grounds for suspecting that the subsidiary company was, or would become, insolvent; and
either the holding company, or one or more of its directors, was aware of the grounds for suspecting the subsidiary was insolvent or it would be reasonable for one or more of the directors to suspect the subsidiary was insolvent.

When Can a Liquidator of a Subsidiary Company Make a Claim Against the Holding Company?
A liquidator of a subsidiary company may recover a debt from a holding company when the:

holding company is liable (according to the above criteria);
person or company that is owed money has suffered loss or damage as a result of the subsidiary’s insolvency;
debt was wholly or partly unsecured when the loss or damage occurred; and
the subsidiary company is being wound up (i.e. being dissolved).

What Defences Can a Holding Company Raise?
1. ‘Safe Harbour’ Provisions
The directors of a holding company may have a defence if:

it is taking steps to ensure the directors of the subsidiary (who suspect insolvency) develop a course of action that is likely to lead to a better outcome for the company in liquidation;
the debt arose in connection with that course of action; and
the directors of the subsidiary were developing this course of action when the debt arose.

2. Reasonable Grounds to Suspect Solvency
The holding company may also have a defence if there are reasonable grounds to expect the subsidiary was solvent.
3. Reliance on Information Provided by the Subsidiary
The holding company may have a defence if the holding company and its directors believed (and had reasonable grounds to believe) that:

a competent and reliable person was responsible for providing the holding company with adequate information about the subsidiary’s solvency; and
based on the information provided by that person, the holding company expected that the subsidiary was solvent.

4. Director Unable to Participate
The holding company may not be liable if, due to illness or some other good reason, the relevant director of the holding company was unable to participate in the management of the holding company when the debt arose.
5. Reasonable Steps to Prevent Insolvent Trading
If the holding company took all reasonable steps to prevent the subsidiary from incurring the debt, the company may not be liable.
Key Takeaways
In certain circumstances, a holding company may be liable for debts incurred by a subsidiary company when the subsidiary company could not pay its debts. If the directors of the holding company were aware of, or should have been aware of, the insolvency, then the holding company may be liable for the debt. In those circumstances, a liquidator may pursue the holding company for the debt.
Directors of holding companies should therefore ensure they keep up to date on the finances and operations of both the holding company, and its subsidiaries. Furthermore, they should take steps to prevent all companies within their corporate group from engaging in insolvent trading. A failure to do so could result in the holding company paying for the subsidiaries debts. Have questions about the liability of companies and directors for company debts? You can contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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There are two ways of becoming a shareholder in a company: either by purchasing existing shares (a share transfer) or by subscribing for new shares (a share issue).
If you wish to become a shareholder in a company, you should know the difference between a share transfer and a share issue. Choosing either option depends on whether you want to make a direct investment or join an existing shareholding. Both options require different legal documents and procedures that will allow you to become a shareholder of the company. This article tackles the most common questions as well as an explanation of the process and potential benefits as a shareholder. 
The Basics

Question
Share Transfer
Share Issue

What is a share transfer or share issue?

 
A share transfer is the buying and selling of shares between shareholders. The incoming shareholder (buyer) buys existing shares from a current shareholder (seller) who wishes to sell their stake in the business. The company’s total equity remains unchanged.
 
The incoming shareholder (or investor) subscribes for new shares. The company “creates” new shares by issuing shares to the investor in exchange for additional equity to grow the business.

When does a share transfer or share issue occur?

 
Shares are transferred where an existing shareholder fully or partially exits the company. A seller wants to sell shares because they need money or they no longer want to be part of the company.
 
Shares are usually issued when a company wishes to raise money and grow the business.

What is the share price?

 
The buyer and seller agrees on the price. The shareholders agreement or constitution can provide guidance on how to determine the price where parties disagree.
 
The incoming shareholder generally subscribes for shares at fair market value. Different tax rules may apply if the shareholder gets discounted shares.

 
How Do You Transfer or Issue Shares?
The process will vary according to the company’s shareholders agreement and company constitution. However, there are some basic steps that you can expect for each process.
Share Transfer

The seller notifies all other shareholders of their intention to sell. Shareholders may notify the seller of their intention to buy shares within a specified time period or waive their right to purchase shares. This process is known as exercising pre-emptive rights or first right of refusal.
If more than one shareholder intends to buy the shares, each shareholder buys shares in proportion to its existing shareholding.
If no shareholder intends to purchase shares, the seller or the company finds a third party buyer.
The seller prepares a share sale agreement with company warranties depending on the buyer’s familiarity with the company. The parties ratify the share sale agreement and share transfer form.
The company resolves to transfer the shares, prepares a share certificate for the buyer updates the internal and ASIC register.
If the buyer is a new shareholder, they sign the shareholders agreement. 

Share Issue

The investor and the company typically negotiate a term sheet.
Parties sign a share subscription agreement for the investor to invest funds and for the company to issue shares, subject to company warranties.
Existing shareholders resolve to issue shares and agree to waive their first right of refusal. Investors sign a share application form and the company updates the company records.
A new investor becomes a party to the shareholders agreement.

How Am I Affected as a Shareholder?
If you are buying shares in the company as part of a share transfer, you may gain some decision-making ability within the company depending on the size of your shareholding.

For example, a majority shareholder could control the outcome of an ordinary or special resolution if they hold at least 75% or more (for a special resolution) or 51% or more (for an ordinary resolution) of the shares. 

Similarly, the company’s shareholders agreement could stipulate privileges if you hold a certain percentage of shares. 

For example, you could become a director of the company if the shareholders agreement allows for shareholders to be appointed directors if they have 20% or more of the shares.

Similarly, in a share issue, you could have greater influence on the company’s affairs depending on the percentage of shares that you own. However, the process is quite different from a share transfer. There are also different tax implications for both processes. These differences are summarised below.
Company Control and Tax Implications

Question
Share Transfer
Share Issue

How does this affect dilution and control of the shares in the company?

 
The seller owns less shares (if they are only selling part of the shares) and the buyer owns more shares. Every other shareholders’ ownership remains the same.
 

Existing shareholders’ ownership dilutes. For example, where two equal shareholders hold 40 shares, their ownership decreases from 50% to 40% if an incoming shareholder purchases 20 shares.
Existing shareholders may lose some control, similar to a share transfer.

What are the tax implications?

 
For the seller, the share sale triggers a capital gains tax (CGT) when shares are held on capital account.
CGT is calculated on the difference between the sale price and the original price of the share when they were bought by the seller.
 

As a general rule, an individual investor will not be taxed for subscribing for shares unless the investor received a discount on market value.
Once a shareholder, any dividend received will form part of the investor’s taxable income subject to its marginal tax rate.

 
How Are Existing Shareholders Affected?
Existing shareholders can exercise their first right of refusal before you join as a shareholder.
If it is a share transfer, they can notify the seller of their intention to buy shares within a specified time period or waive their right to purchase shares. If it is a share issue, they can resolve to issue shares and agree to waive their rights of refusal.
A share transfer or share issue could significantly impact their ability to make decisions within the company or control the company. 
Key Takeaways
A share transfer allows new shareholders to buy into an existing shareholding. A share issue allows a shareholder to come on board as an investor, increasing the equity available for company growth. Existing shareholders should be wary of a share transfer or share issue if either process could affect their decision-making ability or dilute their control of the company. If you have any questions or need assistance with a share transfer or a share issue, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

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If you are thinking about starting court proceedings or you have been successful in court, it is important to consider how you are going to enforce the judgment. However, enforcing the judgment and receiving money from the debtor (i.e. the person that owes you money) can be difficult, especially if they are bankrupt. The situation can be more complicated if the judgment took place overseas or alternatively, if the judgment took place in Australia, but a foreign court must enforce it. This article sets out how bankruptcy in Australia affects the process of enforcing a judgment, whether in Australia or overseas. 
What is Bankruptcy?
Bankruptcy is a legal process in which a court declares that a person is unable to pay their debts. The process releases the bankrupt person from most of their debts and can be voluntary or involuntary. Bankruptcy will normally last for three years and one day.
During bankruptcy, a third party, known as a trustee, manages the bankruptcy process. The trustee looks after the bankrupt person’s financial affairs and is able to sell most of their assets in order to pay out creditors (i.e. a person that the bankrupt person owes money to).
Foreign Judgments
Australia’s foreign judgment laws provide that some foreign courts can enforce judgments of some Australian courts. This is due to reciprocal arrangements between certain countries. These countries include:

United Kingdom;
Canada;
Hong Kong;
Germany;
Korea;
Japan;
Italy; and
Switzerland.

These countries have enacted similar laws for the enforcement of Australian court judgments. New Zealand is not part of the regime, as New Zealand and Australia have a separate reciprocal arrangement.
In order to be able to enforce the judgement overseas, the Australian judgment must be:

for a sum of money; and
final and conclusive (i.e. not subject to any pending court orders).

Furthermore, the application to enforce the order must have been made within six years of the judgment.
How Does Bankruptcy Affect the Enforcement of a Judgment?
This issue of how bankruptcy affects the enforcement of an Australian judgment on an overseas debtor was discussed in a 2017 High Court case. This case illustrates the difficulties faced by creditors trying to enforce a judgment on a person who has been declared bankrupt in Australia. In this case, the court made a judgment against a person who held assets overseas (the debtor). However, when the other side tried to enforce the judgment, a court declared that the debtor was bankrupt in Australia.
The court found that if a person is bankrupt in Australia, a creditor cannot start legal action against them without the court’s permission. Furthermore, the court stated that the purpose of this specific law was to prevent someone from enforcing a judgment in a foreign legal system that would otherwise not be enforceable under Australian laws. In short, because the debt could not be enforced in Australia because of the bankruptcy, it could not be enforced overseas either.
What Does this Mean for Creditors?
In light of this case, it is clear that a creditor cannot use Australia’s foreign judgment laws to gain an advantage overseas that would otherwise not be permitted in Australia. A person wishing to enforce an Australian judgment overseas (or a foreign judgment within Australia) against a debtor who is bankrupt in Australia will need to wait until the debtor’s assets have been sold. The court will divide the proceeds of these assets among creditors.
However, bankruptcy generally only lasts for three years and one day. Therefore, a debtor may return to a financial status that enables a creditor to enforce a judgment against them. The limitation on enforcing court judgments in Australia is 12 years (or 15 years in Victoria and South Australia).
Key Takeaways
Enforcing an Australian or foreign judgment can be difficult when a debtor has been declared bankrupt in Australia. A creditor cannot rely on foreign judgment laws in Australia to enforce a judgment overseas that would not be possible in Australia. Bankruptcy therefore presents a real problem for creditors who are relying on court judgments. Their only option is to wait until their debtor’s assets have been sold, and see whether they receive any proceeds. For many creditors, this may mean they never receive the full value (or any) of the judgment. However, a judgment can be enforced in Australia within 12-15 years. Therefore, a creditor may still enforce a judgment if their debtor recovers from bankruptcy in this time. If you have any questions about how you can enforce a judgment debt in Australia or overseas, you can contact LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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