What is Involved in Dissolving a Partnership?

What is Involved in Dissolving a Partnership?

Partnerships involve two or more people who are in business together and share ownership of the assets and liabilities of the business. Partnerships can come to an end for many reasons, for example:

  • Disputes of profit share;
  • Day to day control of the business; and
  • Disagreement in the direction of the business and financial circumstances.

If you are in a partnership, it’s most likely you signed a partnership agreement with your partner(s). Conversely, if there is no partnership agreement, the terms and conditions of your partnership will be determined by the state legislation. We can assist with identifying the legal requirements in your state.

Different ways to dissolve a partnership

A partnership can be dissolved when:

  • An agreement between yourself and all other partners have been reached;
  • One partner gives written notice to the other partners;
  • The life of the partnership, according to the partnership agreement, has expired;
  • Any partner dies or becomes bankrupt;
  • A court orders that the partnership ends; or
  • It becomes illegal (e.g. if one partner cannot legally own the business).

Dissolving a partnership does not necessarily mean that the business will stop operating. It can still continue to operate after dissolution, however, it will have a new business structure. There are a variety of different business structures available, such as sole trader or company.

Things to Consider when Dissolving a Partnership

The primary question is whether the business will still remain operational. If so, you need to consider what the new structure of the business will be. For example, it could be a sole trader or a company. You will also need to think about registering a new ABN, register for GST, as well as other considerations.

You also need to think about whether any partners are selling their interests. If they are, do they have any Capital Gains Tax to pay? If you are acquiring the remaining shares of another partner, who will pay the transfer duty?

Administrative Factors

There are also administration factors to consider. Think about whether the partnership books, final tax return and BAS statements have been completed and filed. Tax obligations are important and should be dealt with appropriately so that you avoid issues in the future. Are all of the bank accounts for the partnerships closed? Likewise, are there any outstanding personal or business loans that may be affected? You should consider insurance policies and ongoing contracts with other people, organisations and authorities. These need to be cancelled or transferred into the new name.

Employee Obligations

Employee obligations apply if your partnership had employees. Most often these are based on your employee contracts. If you need to terminate staff or make them redundant, you may need to provide them with payment in lieu of notice. The age of the employee and how long they have worked for you will determine this.

Legal Advice for Dissolving a Partnership

Dissolving a partnership is a complex process. Therefore we recommend you seek legal advice. Our experienced lawyers can take you through the entire process. We will explore your options with you and ensure you have met all your legal obligations. Please contact Etheringtons Solicitors if you have any questions by using the contact form or calling us on (02) 9963 9800.

Debt Collection Basics For Business

Debt Collection Basics For Business

If you are owed money for goods or services, the first step in attempting to recover it is generally to send a Letter of Demand to the other party. This letter should set out the amount of money outstanding, a cut-off time to respond by, and if no response is received by you that you will take legal action with no further notice to the recipient.

Letter of Demand

The Letter of Demand is sent by you (or your lawyer) if you are owed the money (the creditor) and it warns the person owing the money (the debtor) that if they don’t pay the debt within a certain time period (such as seven days) they will be sued in court to recover the debt.

A Letter of Demand should be the last letter a creditor sends before issuing court proceedings. While Letters of Demand are not court documents they are often an effective means of forcing the debtor to take action.

It is a good idea to contact us first to ascertain whether it is prudent to proceed with court proceedings and this will usually depend on the size of the debt. Naturally, if the sum owed is small it may not be economically viable to pursue the debt by engaging a lawyer(NB: if they’re doing it themselves it usually won’t cost anything to send the letter). You must ensure however that, in enforcing your rights to recover the debt, you act within the law.

Principles of Debt Collection Fairness

When sending a Letter of Demand, you should be careful not to harass the debtor or send a letter which is designed to look like a court document.

You must not pursue a person for a debt unless you have reasonable grounds for believing the person is liable for the debt.

Time Limits

A creditor has a limited period of time to sue for a debt. In most instances, for debts owed, this will be 6 years.

If the debtor has made no payments towards the debt or has not acknowledged in writing that they owe the debt for a period of 6 years from when the debt arose, then the debt may no longer be recoverable.

Disputed Debts

The debtor has the right to dispute a debt and may do so on the grounds if:

  • it is not their debt;
  • they have already paid the money;
  • they disagree with the amount of the debt; or
  • it is an old debt and they haven’t made a payment for at least 6 years, no court judgment has been entered against them and they haven’t admitted in writing that they owe the debt in that time.

If the debt is disputed, then you, as the creditor, may have no alternative but to commence legal proceedings or to seek to negotiate a compromise with the debtor.

When Your Lawyer Becomes Involved

If you, as the creditor, are not willing to negotiate or wait for payment, you may wish to contact us to assist with pursuing the debt.

If you know the debt is due and payable, and you want to commence legal proceedings, it is prudent to have a lawyer assist you and represent you in court to recover the debt. If your lawyer advises that the size of the debt make their engagement not economically viable, then we may still be able to help you to negotiate a payment plan that is manageable to the debtor and acceptable to you.

It is not in the debtor’s interest to ignore your claim and risk the additional costs of the legal fees and interest on top of the original debt. By following the correct process we can help obtain a satisfactory result for you.

New Customer – Credit Application Process

Before you take on a new customer, you should have the correct systems in place to ensure that you are able to assess the customer’s credit position.

Do you have a credit application process for your new customers?

Your Credit Application and Terms of Trade should provide you with security over the goods which you have sold to the customer and, if the customer is a corporate entity, ensure that the directors of the company provide you with their personal guarantees. You must, however, ensure that you register any security over goods on the Personal Property Securities Register and we recommend that you speak with a lawyer to assist you with this process to ensure that the registration is not void.

If you do not have a system in place, contact us and we will help you put a system in place to protect you and provide you with security for money owed to you. It is important that you have the correct systems and documentation in place before you do or provide credit to any new customers.

Conclusion

You should contact us to discuss your legal rights and obligations if you are owed money or if you owe money to someone else who is threatening court action.

If you would like more information or require assistance or advice on how to proceed in debt recovery matters please contact us on (02) 9963 9800 or via our contact form.

Does your privacy policy comply with the privacy laws?

Does your privacy policy comply with the privacy laws?

Privacy laws in Australia are governed by the Privacy Act 1988 (Cth) (the ‘Act’) and the Australian Privacy Principles which affect the handling of personal information.

The principles were introduced in 2014 to bring Australia’s privacy laws (first introduced in 2001) in line with advancing technology trends and to provide more transparency around the capture and use of personal information.

The principles make it difficult for businesses to collect information about consumers without their knowledge and prescribes how businesses handle, use and store personal information and engage in direct marketing.

These principles have been further strengthened by the Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth) which imposes mandatory reporting requirements on entities subject to existing obligations under the Act, for an ‘eligible data breach’.

If your business is affected, you may need to update your privacy policies and your procedures and systems to comply with the law.

Which businesses are affected by the privacy laws?

The Act applies to Australian Government agencies, businesses with an annual turnover of $3 million or greater, credit reporting bodies, and smaller entities ‘trading in personal information’.

What does ‘trading in personal information’ mean?

Personal information is information that identifies, or could reasonably identify, an individual. This includes names, addresses, dates of birth and bank account details.

Trading in personal information includes collecting or providing personal information to a third party for a benefit, service or advantage. If you collect personal information and then provide it to a business to manage your direct marketing, you may be trading in personal information.

What are the key obligations?

Businesses subject to the Act must:

  • Ensure they have a privacy policy that addresses specific topics;
  • Have procedures and systems in place to ensure they comply with the Act and the privacy principles;
  • Understand what an ‘eligible data breach’ is and implement policies to deal with such breaches.

Entities affected by the Act may face significant fines for serious or repeated breaches.

How do I ensure my business complies?

Businesses affected by the Act should review and identify how they deal with personal information. The following elements need to be addressed:

Privacy Notice

When you collect personal information, inform individuals of your organisation’s name, contact details, the purpose of collection and to whom it will be disclosed.

Privacy Policy

Your privacy policy must address the required topics. These include:

  • What personal information you collect.
  • How you collect the personal information.
  • The purposes for which you use and disclose it.
  • If you provide personal information to parties overseas you need to disclose that and, if practicable, specify the countries where those parties are located.
  • Setting out how you secure and store personal information.

Systems

Establish a system to ensure that:

  • Staff who handle personal information comply with the new privacy laws.
  • Individuals can access their personal information and correct out of date or incorrect information.
  • You have a process to deal with complaints about your compliance with the laws.
  • Enables recipients of direct marketing material to unsubscribe.

Understanding eligible data breaches

An eligible data breach happens if:

  • There is unauthorised access to, unauthorised disclosure of, or loss of, personal information held by an entity; and
  • The access, disclosure or loss is likely to result in serious harm to any of the individuals to whom the information relates.

An entity must give notification of an eligible data breach:

  • If it has reasonable grounds to believe that a breach has occurred; or
  • If information has been lost and unauthorised access or disclosure of that information is likely to occur;

and, in either case,

  • The breach would likely result in serious harm to the individuals to whom the information relates.

Dealing with eligible data breaches

If a breach occurs, an entity must notify any affected individual and the Office of the Australian Information Commissioner (OAIC).

If an entity suspects a breach has occurred, it must investigate the circumstances of the possible breach within 30 days of becoming aware of it, to determine whether it is an eligible data breach.

Notification must include:

  • The entity’s identity;
  • Details of the data breach – i.e. how the breach occurred;
  • The information that is the subject of the breach;
  • The recommended actions that individuals should take in response to the breach.

Notification is not required if an entity is able to quickly remedy a data breach so that it is unlikely to result in serious harm.

Entities that fail to carry out the investigation and notification processes prescribed by the reforms will breach their obligations under the Act and may face civil penalties.

Conclusion

Business entities that handle personal information must understand and comply with privacy laws. Staff should be trained, and policies implemented on how to collect, store and manage personal information. Policies should identify systemic problems when collecting and handling information and set out appropriate solutions.

Staying one step ahead of your privacy obligations, and minimising the potential for data breaches to occur, is essential to safeguard against fines and loss of reputation.

If you need more information or if you need assistance or advice on how to proceed please call us on (02) 9963 9800 or via our contact form, here.

Review your Shareholder’s Agreement Regularly

Review your Shareholder’s Agreement Regularly

What is a Shareholder’s Agreement?

A shareholder’s agreement is essentially a corporate pre-nuptial agreement. It sets out the rights and obligations of shareholders or members in their ownership of a company. It is not compulsory but it is prudent to have one before you start a company together with another person in order to avoid disputes which could cost you tens of thousands of dollars or more.

Common Clauses

At minimum it should contain clauses regarding what will happen if one or more shareholders leave the business. These include share buyback, restraint of trade, dispute resolution process and tag along and drag along rights.

Review your SHA Regularly

Many Shareholder’s Agreements, drafted between the owners in the initial excitement of the start of a new venture, lie at the bottom of the draw gathering dust, while the business grows and develops around it. Typically, most businesses progress differently to how the owners originally envisaged and the Shareholder’s Agreement is only ever dusted off in the event of a dispute.

However, if a business is expanding rapidly or economic conditions change, there may be provisions in the Shareholder’s Agreement which will ultimately become a hurdle for the future growth of the business, its eventual sale or even its very survival.

For example, while a requirement for unanimous agreement between all the shareholders to raise capital may seem logical and sensible at the start, 10 years down the track, now with a number of loyal employees also owning small parcels of shares in the company, such a provision could potentially be very disruptive. Especially so if one shareholder becomes disgruntled with their lot.

The same equally applies with Partnership Agreements.

It is therefore prudent to revisit your Shareholder’s Agreement every few years to ensure that it is still relevant and effective for managing and expanding your business.

We would be happy to review your Shareholder’s Agreement or Partnership Agreement with you to ensure that it provides your business with the best framework for management and growth. If you would like more information on how we can assist you with your matter, do not hesitate to contact us on 9963 9800 or via our contact form.

5 Things You Need to Check Before Signing a Business Lease

5 Things You Need to Check Before Signing a Business Lease

Below are five things you need to check before signing a business lease.

1. Factor in rent payments

As a tenant, you are required to pay an amount – often referred to as your rent – for occupying the premises. This amount is usually paid to your landlord or managing agent each month. Calculate how this will affect your business so that you will be able to operate effectively whilst paying the rental amount. Look out for clauses in your lease that set out the yearly increase in the amount of rent payable, as well as the utilities you are required to pay for.

2. Obtain council approval

It is important to check if you require Council Approval to operate your business before entering into a lease. All properties in Sydney are zoned by the local council. The type of activities and zones will vary from council to council, and determine what sort of activities the property can be used for. Examples include:

  • Residential zones;
  • Commercial zones; and
  • Industrial zones.

If you are entering into a lease, you need to ensure that your business is allowed to operate at that location. If you operate without council approval the council can stop your business from trading or order you to close your business.

3. Organise a security

When entering into a lease, the landlord will usually require you to provide security for the lease. The amount of security is usually the equivalent to four or more weeks’ rent.

The type of security you could provide are:

  • Bank Guarantees;
  • Bank cheque;
  • Deposit bond; or
  • A guarantee by a third party.

It is important to ensure that you seek legal advice on the type and amount of security you provide, as you will be forfeit this amount if you break the terms of the lease. Read our article Three Most Common Forms of Security for Leases for a detailed explanation of securities.

4. Note the condition of the property

Most leases have a ‘make good’ clause, which requires you to return the premises to its original condition when the lease ends. You therefore need to ensure that you keep evidence of the condition of the property when you entered into a lease. If this is not done, the landlord can use the security provided you provided to ‘make good’.

This is a common area of dispute between landlords and tenants. It is therefore important to know your make good obligations.

5. Seek a legal opinion on the terms of the lease

The lease is prepared by your landlord and will therefore be drafted in their favour. Hence it is crucial that you seek a solicitor’s advice on the terms of the lease. They can also assist with negotiations. This can bring a balance of power to the relationship between you and your landlord, and will ensure that you know what you are signing. Leases can have three or five year terms and are difficult to terminate before their expiry, so it is important to know your obligations and if there are any unfavourable terms.

Conclusion

These are some of the issues that may arise when signing a business lease. Therefore it is important to seek legal advice if you are considering entering into a business lease. Please get in touch to discuss your lease.

Personal Liability for Company Directors

Personal Liability for Company Directors

A company is an association incorporated under the Corporations Act 2001 (Cth) (the ‘Act’). The effect of incorporation gives the company a separate entity, distinct from its directors and shareholders. It can enter into contracts, sue and be sued in its own right.

The Australian Investment and Securities Commission (ASIC) is the Government body authorised to administer the Act and may investigate and impose civil and criminal penalties for breaches under the Act.

As the company is a separate legal entity, generally its directors are not personally liable for the company’s actions. However, increasingly, ASIC and creditors of companies that have limited assets are pursuing recovery personally from company directors who may have breached their duties under the Act.

In certain circumstances, directors can be held personally liable for losses of the company. Some of these circumstances include:

  • Insolvent Trading;
  • Personal Guarantees;
  • Breaching directors’ duties;
  • Taxation debts and superannuation contributions; and
  • Phoenix activity.

Insolvent Trading

The Act prohibits a company from trading whilst it is insolvent.

Because a company is a separate legal entity, directors and shareholders are generally protected from being personally liable for the company’s debts. This protection may be abused when directors allow companies to continue trading and incurring debt despite warnings of potential insolvency.

To circumvent unscrupulous or reckless trading, the Act provides that directors who allow a company to trade whilst insolvent will be in breach of both civil and criminal provisions of the Act and may be liable for its debts.

There are certain defences available and directors may not be liable if:

  • they had reasonable grounds to expect the company was solvent at the time the debt was incurred and would remain solvent after that time; or
  • at the time the debt was incurred they did not participate in management due to illness or some other good reason; or
  • they took all reasonable steps to prevent the company from incurring the debt.

Arguably, the threat of being personally liable for insolvent trading could cause directors who are facing transient cashflow issues to succumb to the early appointment of an administrator, despite good prospects of survival. To find an appropriate balance between encouraging enterprise and protecting the community, additional protections for directors have been introduced.

The safe harbour provisions are available to directors who take positive steps that are reasonably likely to result in a better outcome for the company than administration or liquidation. Directors will not be liable for the debts of a company incurred whilst it is insolvent if:

  • after suspecting the company is in threat of insolvency, the directors begin to develop a course of action that could reasonably be likely to lead to a better outcome for the company than immediate administration or liquidation; and
  • the debts were incurred directly or indirectly in connection with this course of action.

Factors that may establish that a course of action would likely lead to a better outcome include:

  • whether the director properly informed himself / herself of the company’s financial position;
  • whether the director prepared a plan to improve the financial viability of the company such as a restructure;
  • whether the director retained a suitably qualified person to advise on the restructuring;
  • the taking of appropriate steps to prevent any misconduct within the company that could adversely affect its ability to pay its debts.

Directors generally cannot rely on the safe harbour provisions in circumstances where the company has failed to meet its obligations for employee entitlements as they fall due, failed to maintain accurate financial accounts and records, or failed to substantially comply with its reporting and filing requirements under Australian taxation laws.

Personal Guarantees

A personal guarantee is a separate agreement between a director and a creditor where the director of a company agrees to pay a debt of a company in the event that the company does not make payment.

This could include a director providing security over personal assets such as a home.

Breaching directors’ duties

Under the Act, directors have certain duties that must be complied with.

Where a breach of any of these duties is committed and the company suffers a loss, directors can be personally liable.

In these circumstances, civil and criminal penalties under the Act will apply, including paying compensation to the company.

Taxation debts and superannuation contributions

Directors are personally responsible for companies complying with Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.

Where these obligations are not met by a company, a director can become personally liable for non-compliance and be penalised.

Phoenix Activity

This activity occurs where the directors of a company place it into administration or liquidation to avoid payment of creditors but continue the business under a new company name.

Not only can it result in civil and criminal penalties for directors, it can also result in a term of imprisonment.

Conclusion

Company directors hold a position of power and trust. The risk of personal liability is real but manageable and should not deter you from pursuing business and employment opportunities.

The best ways to meet the obligations of being a director are to become familiar with your duties and to understand the legal obligations and the situations which could give rise to personal liability, to be involved in the affairs and operations of the company and to obtain professional advice and assistance when needed.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form here.