Legal MythBusters

Myth #1

“If I win in Court, the other party has to pay all my costs.”

Wrong.

It is true that there is a general principle that provides that if you are successful, you are entitled to an order for

your costs.

However, this principle does not always work out in practice. Here are some reasons why.

Not all jurisdictions apply this principle. For example, the Victorian Civil and Administrative Tribunal is generally a “no-cost” jurisdiction where each party bears their own costs. See here.
Costs orders are ordinarily made on what is called a “party and party” basis. What that means in practice is that you do not recover 100% of the costs that you have spent. The usual range of recovery is between 50%-70% of you have spent. There is therefore usually a significant gap.
Only the costs of the legal proceedings will be capable of being considered for a costs order. Work done out outside of that proceeding will not be recoverable.
The best you will ever get is an order that your costs be paid. There can be significant enforcement costs – and if the other side goes bankrupt, or into liquidation, then you may not be able to recover anything even though you have an order.

Myth #2

“I’m not bound because I didn’t sign a contract.”

Mostly false.

There are some contracts that must be in writing – for example, contracts for the sale of land.

However, for the most part, oral agreements will be upheld by a Court and you will be bound by what you agree.

In fact, many disputes arise even when there is a written contract, but there is a question as to whether there was an oral variation to that contract – even when the document itself says any variation must be in writing.

The real problem is that it can be very difficult to prove that someone agreed to something verbally. It usually requires a Court to hear the parties who were there at the time, form a view about the truthfulness of each person, and then make a finding. The uncertainty of which way a Court will go is the most difficult issue.

Hence why lawyers insist on signing with witnesses – this doubt is removed.

Myth #3

“If it’s a term of the contract, it’s enforceable!”

Mostly true.

A Court will generally look to the bargain the parties have struck and try to hold them to it.

If a term of the contract is illegal then it will not bind the parties.

There are also some terms which might be seen by the Court as being unreasonable and will be struck down or varied as a result. For example, a ‘too wide’ restraint on an employee may be struck down.

Myth #4

“I can avoid my creditors by transferring assets to my partner and declaring bankruptcy.”

True and false.

If, under proper asset planning consideration, assets are transferred to a partner, that is OK. Even so, there are timeframes that apply if financial problems subsequently arise.

However, if at the time of the transfer, there are actual creditors, or the threat of financial problems, then that will enliven the ability of a trustee in bankruptcy to subsequently reverse those transactions.

Inevitably, transfers when facing insolvency issues will be reversed.

Myth #5

“My personal assets are safe from my business debts.”

Maybe. The answer depends on circumstances. Below are some examples.

If you trade as an individual – then no. All your assets are available if there is a claim on your business.
If you are a person in business partnership – then no. Not only are your assets available, but also those of your partner/s, and the partnership assets.
If you trade only as a company and do not mix personal and business assets – then usually yes.
If you have given personal guarantees to suppliers – then no, as the guarantee might be enforced on you.
There are circumstances where government legislation imposes personal liability on you for undertaking acts within a company. For example – trading whilst insolvent; not paying employee superannuation; certain company taxation liabilities; and for some health and safety breaches.

Myth #6

“I own the majority of shares in a company so I can decide what the company does.” Mostly true. There is a distinction between ownership and control. As long as you control sufficient shares to remove all directors, and appoint your own directors, that is true. However, a majority of shares many not be sufficient. You may need 75% or higher. The constitution of the company or a shareholders agreement will give the answer to this. If you are the majority shareholder, and the director, then yes, you can control the company. However, once the company trades with third parties, your duties as a director become very significant, as well as employees and other third parties such as banks. Creditors then become important. If you take decisions that benefit a shareholder over a creditor, you may be held liable personally for doing so.

Myth #7

“I just bought a new business, I am not responsible for anything that happened before my purchase.”

Normally this is correct.

Most business purchases take the business asset out of the original entity, and put that business into a new entity.

However, sometimes a sale occurs where the purchaser buys the shares in the business owning entity. In that case, great care needs to be taken to check the actual financial position of the company, and hefty warranties and indemnities provided by the vendor to cover any liabilities that have been forgotten or misstated.

Myth #8

“As a beneficiary of a trust, the trustee must meet my demands.”

Normally – no.

The normal position under most trusts is that the trustee has wide discretion in their decisions to manage trust assets. Provided the powers exist in the trust deed and those powers are exercised properly, the trustee is free to use their powers in the way they see fit.

In the case of a discretionary trust, the powers are particularly wide when it comes to income distribution – the trustee can exclude or include anyone.

However, there are circumstances where a trustee can be held to account – for example, in a unit trust, if a trustee is obliged to distribute income equally to all unit holders, a failure to do so can be actioned.

Myth #9

“I can secretly record conversations.”

This has come up more and more with the advent of smartphones.

The safest answer is no – but with exceptions depending on the circumstances of the recording, and the state you live in.

Myth #10

“If my house is registered in my name, no one else is entitled to it. ”

Normally yes.

However, if you are in a marriage or defacto relationship, it may be that your partner has an interest in the property just by reason of being in the relationship. This is why when relationships fail, the non-owning partner will put a caveat on the property claiming an equitable interest arising from the relationship.

If you have pledged the property in support of some obligation then that party will also have an interest in the property. That interest may or may not be registered. For the most part they are registered – for example, a mortgage over the property – but is quite common for a caveat to be placed on a property close to sale which is when forgotten pledges come to light.

1. Trusts
2. Charging your property