“Safe Harbour” for Company Directors. – Ken Sorrenson

KJSbwCompany directors may be personally liable for a debt incurred by the company if –

  • They are directors at the time the company incurs the debt;
  • The company is insolvent at the time or becomes insolvent by incurring that debt; and
  • At that time, there are reasonable grounds for suspecting that the company is insolvent or would become insolvent.

Essentially, these are creditor protection provisions which actually don’t work all that well in practical terms. From the creditor’s perspective, successful action against directors is very rare and from the company’s perspective the provisions are a disincentive to “trade on” with a view to business recovery due to the potential risks to directors of doing that.

From September this year new legislation introduced so-called “safe harbour” provisions for company directors.

Directors will not be liable for certain debts incurred whilst the company is insolvent, if after suspecting insolvency, directors start taking a course of action “reasonably likely to lead to a better outcome for both the company and its creditors as a whole” than would be the case if the company immediately appointed an administrator or liquidator.

For the purposes of working out whether a particular course of action is reasonably likely to have a better outcome for the company, factors including whether directors-

  • are properly informing themselves of the company’s financial position;
  • have taken steps to prevent misconduct by officers and employees of the company;
  • have taken steps to ensure the company is keeping appropriate records;
  • are obtaining advice from an appropriate qualified person; and
  • are developing a plan for a restructure which is designed to improve the company’s financial position.

Directors seeking to rely upon these provisions should note –

  • The onus of proving that the safe harbour should apply rests upon the directors;
  • It only covers debts that are incurred in connection with the course of action during the period commencing when the course of action is first taken. It does not apply to debts incurred earlier;
  • The safe harbour can’t be relied upon if the company is failing to pay employee entitlements (including superannuation) or failing to comply with taxation law requirements.

Company laws are complex.  At Everingham Solomons we have the expertise to assist you with all company law matters because Helping You is Our Business.

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Surcharge Land Tax & Stamp Duty – Ken Sorrenson

KJSbwLast year, the New South Wales Government introduced surcharge land tax and stamp duty upon land purchases and land holdings by foreign persons. The surcharges are payable in addition to land tax and stamp duty normally payable and they are significant –

  • The land tax surcharge is 0.75% for the 2017 year increasing to 2% for 2018 onwards; and
  • The stamp duty surcharge from 1 July 2017 is a massive 8%.

Both surcharges relate to residential land only and were intended to put a brake on the level of foreign investment which was seen as driving escalating home prices particularly in the Sydney market.

The legislation to implement these changes coupled with the interpretation adopted by Revenue NSW (the new name for the former Office of State Revenue) has had some unexpected consequences resulting in potential liabilities for taxpayers who certainly wouldn’t consider themselves to be foreign persons.

It is particularly important that anyone who holds land in or proposes to purchase land in a discretionary trust, check to see whether they are potentially caught by these surcharges and take remedial action where appropriate.

Most discretionary trusts give the trustee a very wide power to distribute income or capital to potential beneficiaries and the beneficiary class is usually quite expansive. The interpretation adopted by Revenue NSW is to the effect that a discretionary trust will be liable for the surcharges even though none of the beneficiaries who actually receive or are likely to receive distributions of income or capital are foreign persons. Essentially, if there is a theoretical possibility that a foreign person could be a beneficiary, then the surcharges will apply.

Depending upon the trust deed concerned, it may be a relatively simple matter to amend the trust to remove the prospect of surcharges applying.

As land tax is assessed on the basis of landholdings as at 31 December each year, it is important that trust deeds be reviewed prior to that time.

At Everingham Solomons we have the experience and expertise to assist you with this issue because Helping You is Our Business.

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Insolvent Trading – Clint Coles

CCA company is its own legal entity. While it doesn’t have a pulse, just like a person, a company can enter into contracts, incur debts, sue and be sued in its own name.

The directors of a company however must be living, breathing people. They are the people that control the company.  Although the company is able to do things in its own name, it does so at the will of the directors.

Because a company is a separate entity from the directors that guide it, normally a company’s debts are repaid only from the company’s assets. The company’s creditors do not have access to the directors’ personal assets to repay the company’s debts. Understandably, this causes frustration for the creditors where the company is broke but its directors appear wealthy.

One of the few exceptions to this rule comes from section 588G of the Corporations Act which makes it an offence for a director to causes a company to incur a debt knowing that the company cannot repay it. The offence is known as insolvent trading.

If a director causes or allows the company to trade whilst insolvent , the creditor, the company liquidator, or ASIC can sue the director personally to have the director repay the debt either to the creditor or the company.

The proceedings against the company director are not only compensatory. They can be criminal in nature as well. ASIC has the power to prosecute directors for insolvent trading with the penalties including fines up to $220,000 and imprisonment for 5 years. The director can also be disqualified from acting as a director in the future.

A word of warning however: Insolvent trading cases are relatively rare. They are legally complex and expensive to pursue. Very few company liquidations result in insolvent trading prosecutions.

The practicality of dealing with companies is that creditors should be diligent in investigating the company’s creditworthiness and should often take written guarantees from the directors or shareholders behind the company.

If you have any commercial litigation enquiries, contact Everingham Solomons because Helping You is Our Business.

Click here for more information on Clint Coles

Why Choose A Company? – Terry Robinson

TLRbwCompanies are a common structure favoured by businesses, particularly where there are a number of unrelated parties involved. One of the main reasons for this is because the shares in the company provide for a clear definition of the interest or share held by each shareholder in the company and its assets and also because it facilitates with relative ease, the sale and purchase of shares and accordingly the change of shareholders’ interests in the company.

Another draw card prompting people to use a company structure, is the ability to lock in a flat corporate tax rate in the year in which the income is derived, with the potential for shareholders to claim franking credits when dividends are subsequently paid. Currently the corporate tax rate is in the range of 28.5 % to 30% and there may be small cuts to that tax rate in the future.

As a comparison, an individual will be paying at least 34.5% tax rate, including the Medicare levy for every dollar above $37,000 of income in a year.

From an asset protection perspective, the use of a company can provide a high level of protection, if the objective is to quarantine the risk to the company. This is because the company’s creditors will generally only have access to the company’s assets in the event of insolvency and will not have access to a shareholders personal assets.

Where however it can be shown that a company has been trading whilst insolvent or where there are unpaid company tax debts, directors may be held personally liable for the debts of the company.

A significant disadvantage of a company particular in relation to holding assets which are likely to increase in value, is that companies are ineligible for the 50% capital gains tax discount. Furthermore, the small business capital gains tax concessions are effectively negated by the use of a corporate entity.

The time to consider which entity you will commence or run your business is at the time you are considering commencing the business, as there are usually significant transactional costs and taxes associated with changing the structure after the business has commenced.

We can at Everingham Solomons, assist you with most business matters because Helping You is Our Business.

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Crowdfunding and Business Finance – Ken Sorrenson

KJSbwIn its simplest terms Crowdfunding involves using a social media platform to request relatively small amounts of money for a particular purpose. Most of us would have had some contact with crowdfunding usually in the context of a funding request for a charitable or benevolent purpose.

Overseas, crowdfunding is used for wider purposes including raising business finance. Essentially the request for finance is made by way of a “kick-start” request with the promise that those who contribute will be given the 1st opportunity to invest if the proposal comes to fruition.

Laws in Australia are beginning to catch up. In March this year legislation was approved to allow unlisted public companies with less than particular revenue and asset thresholds to raise capital via what is referred to as “crowd-sourced equity funding” (CSF).

There are quite a few conditions and restrictions that will apply to any company seeking to raise capital through CSF but the main ones are –

  • All CSF offers will need to be made through a financial services licensee whose licence authorises the licensee to provide a crowdfunding service;
  • There are caps both on how much can be raised (normally $5 million within a 12 month period) and how much can be invested (normally $10,000 for a retail investor);
  • Funds can’t be raised for the purpose of investing in other companies or investment schemes; and
  • The CSF regime does not apply to private companies.

For most of us, the last point is the most important. Overwhelmingly, new businesses start out as private companies. There is already some scope under corporations’ law for private companies to raise start-up or business expansion finance but the present provisions are complex, restrictive and can be expensive to implement.

It could be strongly argued that the CSF regime is most needed in the private company space. The government has stated that work is already underway to extend the CSF provisions to private companies. Whilst that may take some time, we will be watching those developments with keen interest.

At Everingham Solomons we have the expertise to assist businesses with questions about fundraising and business finance generally because Helping You is Our Business.

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Forge Group & General Electric – Pitfalls in the Financing and Leasing of Goods – Clint Coles

CCForge was a company in the business of building power stations and had contracted with the Western Australian government to build one at Port Hedland. Forge leased four turbine generators from General Electric and put them in the power station.

Shortly after the turbines were installed, Forge went broke and its liquidator took the generators to sell. General Electric, as the owner, appealed to the court.  Forge’s liquidator argued that the lease fell within the auspices of the Personal Property Securities Act (PPSA) which required such leases to be registered. As the lease was not registered, upon liquidation the PPSA provides that title to the leased goods passed to the liquidator.

Of course, General Electric didn’t want to give up the turbines and argued that the PPSA didn’t apply. One of the arguments was that the generators were fixed to the land, rather than being a good detachable from the land (which would have excluded the arrangement from the PPSA).

On that issue the court looked at the usual matters that separate a good (an item separate to land) from a fixture (an item that becomes part of the land, like a house). The court looked at the extent to which the generators were bolted down, plumbed in and the purpose for which they were placed on the land.   The court concluded that they were goods rather than fixtures and accordingly that the PPSA applied.  General Electric lost the generators.

The case highlights the problems that arise in leasing and financing goods, particularly goods that may become fixtures. Semi fixed plant like stock yards, pumps, fuel tanks, fit-out items, storage containers, and large stationary machinery are pressing examples.

If there is any doubt as to whether a particular piece of plant is a fixture, the secured party should register a PPSA interest and also have the mortgagee of the land disclaim any interest in the plant.

If you need help with any commercial leasing or financing arrangements, contact Everingham Solomons Solicitors because Helping You is Our Business.

Click here for more information on Clint Coles.

Which entity should I use? – Terry Robinson

TLRbwBefore you embark on a new business or venture, one of the most important decisions you will need to make is what type of structure should be set up for the venture.

Should your venture operate as a sole trader, partnership, company, discretionary trust, unit trust, a company with a discretionary trust as a shareholder or a of combinations of these?

To make this decision you need to work out what your priorities are.

The major drivers when choosing a structure include but are not limited to:

  • Asset protection – are your personal assets exposed to creditors and lawsuits?
  • Legal minimisation of income tax.
  • Minimisation of potential capital gains tax on future disposal.
  • The ability to utilise and carry forward losses.
  • Family considerations – is the business to be conducted by one family or a number of families. Is the business to be passed down the generations and is income to be distributed to family members?
  • Does the entity need to be flexible to allow parties to enter and exit the venture?
  • Do the owners of the entity understand the structure and what the cost of administering that structure is?
  • Will the business derive income from the provision of personal services of the principal? Generally, personal services income cannot be split, for example, with a spouse.
  • Will the business or investment have significant assets? Should the assets be held in one entity whilst the operating business utilises another entity?
  • Does the business venture have a high risk exposure from a legal suit?

A client needs to consider what their priorities are when considering what operating structure is to be utilised.

It may be that tax is not the main focus of a structure. In many cases, asset protection is more important for some clients.

The clients may have other priorities such as the provision for family members, the ability to increase their retirement savings.

Some structures expose the proprietors to personal liability whilst other structures provide insulation from personal suit.

Accordingly, the structure should be tailored to meet the client’s priorities as best as it can.

Unfortunately there is no one entity that satisfies all of the above considerations.

If you are thinking of establishing a business or new venture, we at Everingham Solomons have the expertise to assist you because

Helping You is Our Business.

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Proceeds of Security Agreements – Clint Coles

CCSecurity agreements are a safety mechanism for business. The most well-known security agreement is a mortgage.  A mortgage is commonly applied to land. The essence of a mortgage is that if you don’t repay the bank, they can sell your land to repay themselves.

But security agreements of a similar effect apply to personal property as well – that is, property other than land. Security agreements over personal property are important where you sell goods on trading credit or a vendor finance basis.

A well drafted security agreement will give the person wearing the credit risk a right to repossess and resell the goods supplied on credit (and often any other goods held by the debtor).

One of the beauties of the security arrangement is that it does not normally end with those original goods provided on credit. It can continue in the proceeds generated by those goods.

To take a simple example, if you sell a vehicle to a first buyer on a secured credit arrangement, and, the first buyer on sells the vehicle to a second buyer, you have a number of choices against both buyers if your security documents are in order.

Firstly, exercising your power of attorney over the first buyer’s bank accounts you may be able to directly access the cash proceeds of the sale.

Alternatively, if the first buyer took the cash out of the bank and purchased a boat with those same monies, you may be able to repossess the boat.

If the first buyer was involved in an accident and wrote off the vehicle, you may be able to access the insurance proceeds directly from the insurer.

Separately, you may be able to take and repossess the vehicle directly from the second buyer, now in possession of it.

However, your interest in the proceeds ceases once the proceeds are no longer identifiable or traceable. To take proceeds you must be able to follow an item of property directly as it is transformed into other items of property. There must be a close and substantial connection between the two pieces of property so that the property rights in the original, flow through to the subsequent.

Enforceable personal property securities are accordingly very useful to businesses. If we can help with any security arrangements, contact us at Everingham Solomons Solicitors because Helping You is Our Business.

Click here for more information on Clint Coles.

But, I own it! – Clint Coles

CC

Doesn’t matter.

The Personal Property Securities Act 2009 (Cth) (hereafter called ‘PPSA’) is dangerous for people (hereafter called ‘owners’) that, as part of their business, lease or loan goods to others (hereafter called ‘lessee’).

When goods are loaned or leased for a term of more than one year, or, an indefinite

term – that is any length of time, no matter how short, without a firm end date – the owner of the goods may unknowingly be creating a deemed security interest in the goods which requires registration under of the PPSA.

The problem is of course that the average person has no idea that they are creating a deemed security interest and therefore no idea of the need to register it.

Often, the first time the owner of the goods becomes aware of a problem is when someone else asserts a right to take the goods directly from the lessee. The logical exclamation from the owner is likely to be ‘But, I own it!’ Well, hard as it may be to believe, that may not matter.

The PPSA provides that where the owner doesn’t register their deemed security interest:

  1. upon insolvency the goods become the property of the insolvent person, and therefore open to be taken by a liquidator;
  2. upon sale to a third party, the third party takes free of the security interest, that is, free from the interest of the owner; and
  3. in terms of priority, the unregistered security interest ranks below a registered security, which makes the property open to be taken by a secured creditor’s receiver.

Why on earth, you might ask, did someone come up with such a law? Well, it is to aid secured lending by addressing what would otherwise be problems with apparent ownership.

When a financier loans money, they do so after making an assessment of the value of assets that the borrower has. If you look like you own a lot of assets because you lease or have been loaned a lot of assets, then the rationale is that, in absence of the true owner declaring their ownership through registration, the financier should be able to access the assets if the borrower defaults.

If you need assistance with any commercial problems, contact Everingham Solomons because Helping You is Our Business.

Click here for more information on Clint Coles.

Business Restructures – Ken Sorrenson

KJSbwBusiness operators need to review their business structures on a regular basis.

What you set up years ago may well have been correct at the time but it may not be optimal for your current situation, particularly if your business has expanded.

In past times there were usually stamp duty and capital gains tax costs that needed to be built into any restructure decision and often those costs made restructure not viable.

From 1 July 2016 stamp duty and capital gains tax laws changed markedly –

  • Stamp duty on business assets other than land was abolished in NSW; and
  • New tax legislation usually referred to as “small business restructure rollover” (“SBR”) took effect. These provisions enable businesses whose aggregate annual turnover is less than $2 million to restructure their business asset holdings without income tax or capital gains tax liabilities.

The tax law change is particularly significant. Unlike other “rollover” provisions that existed before that time the SBR rollover allows transfer of assets between different types of business structure. Under pre-existing CGT rollover rules, individuals and trusts could transfer to companies but under SBR assets can be transferred from the existing structure into any other form of structure. For instance trust to trust, company to trust and trust to company transfers are all possible. The main exclusion is that transfers to self-managed superannuation funds are not allowed.

The SBR rollover is also wider than the previous provisions in that it allows not only CGT assets to be transferred but also depreciating assets and trading stock.

Whilst stamp remains an issue for restructures involving land, there are concessions available particularly for farming land which can be very helpful in reducing or avoiding stamp duty cost.

Restructuring a business is complicated and expert advice needs to be obtained.

At Everingham Solomons we have the expertise to work with business operators and their accountants to optimise business structures Because Helping You is Our Business.

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