Queensland Business Law Today

I recently spoke at the AICD regional conference about surviving in business. To assist attendees I created a 20 point legal business health check so that people can conduct a quick review of their business.

How do you score?

1. Is your business owned in your own name, or in an entity that owns other assets?
2. Have you signed any personal guarantees in relation to your business?
3. Are your spouse’s assets protected if your business fails?
4. If you are in business with other parties, do you have a properly documented agreement with the other owners of your business?
5. Do you have appropriate insurances in place, such as WorkCover, professional indemnity and public liability?
6. What happens if one of the owners or key people in your business die? Will the business survive?
7. Do you have properly documented terms of trade with all parties that you deal with in your business?
8. Do you know the terms of the lease of your business premises?
9. What happens on the expiration of the lease in your business?  Will your rent increase?
10. Do you have properly documented employment agreements and contracts with your employees, and contractors that you deal with?
11. Is your business logo and other intellectual property trademarked and protected?
12. Do you have systems and procedures in place to comply with your occupational, health and safety obligations?
13. Have you accounted for, or paid up to date, all of your superannuation, PAYG, GST and tax obligations?
14. Do you have appropriate corporate governance in place, such as minutes of meetings, policies, constitution, and shareholders’ agreements?
15. If there are any loans that have been made by you to your business, are they properly documented and secured?
16. Do you have a privacy policy for your customer’s information?
17. Do you have terms of trade for your website?
18. Have you protected your interests in the event you are not paid by your customers?
19. Do you have any risk management strategies to protect your business in the event of unforeseeable events, such as data crashes etc?
20. Does your business comply with all consumer protection laws?

If you have any questions in relation to your business, or the matters referred to above, please contact me.

In difficult financial climates, the businesses that flourish are those that are not afraid to diversify the products or services that they offer to their clients or customers.

Whether it is offering a new product to target a lower income segment of the market, or a Smartphone App to allow clients to access services remotely, businesses are starting to see the benefits of new and inventive ways to meet the needs of consumers in a simple and cost effective way.

Before you put your great new idea in motion however, it is important to consider how you can protect that idea before it is snapped up by the first person you ask to help you launch it. An idea will constitute Intellectual Property, which is a very important asset of your business, and needs to be protected.

What follows are five tips to protect your Intellectual Property:

• Put a dollar value on it – You should make an assessment of what Intellectual Property is crucial to your business and identify its worth. A tangible value will help you attract potential investors and get the true worth of your business in any future sale.
• Register it – Whilst you will generally have remedies available at common law, the only way to be certain that your Intellectual Property is protected is to register it as a Patent, Trademark, Design, or Plant Breeder’s Right. You can visit IP Australia’s website for more information on what Intellectual Property you can register in Australia.
• Keep it Confidential – More and more of my clients are starting appreciate the need to put in place a Confidentiality Agreement (or “Non-disclosure” Agreement) between their potential investors, advisors or contractors so that their idea can’t be taken and used in competition with them.

A Confidentiality Agreement is relatively inexpensive to prepare and can normally be used for multiple persons that you may reveal your idea to (or “Confidants”), by simply inserting each person’s details into the agreement and having them sign it before the idea is disclosed.

It also serves the purpose of being an upfront indicator to the Confidant that you take the protection of your intellectual property seriously and are not afraid to take legal steps to protect it.

• Use it wisely – Your Intellectual Property can be bought or sold just like any other business asset. In some cases it can be more effective from an asset protection perspective to license your Intellectual Property to your business from a service entity. You should speak to a Legal Practitioner to identify the best option for your business.

You also need to use your Intellectual Property prominently and consistently to ensure that if an argument arises as to who was using a particular brand first, or who consumer’s see as having a greater association with a particular brand, you can provide tangible evidence in support of your claim.

• Look out for it – Just because your Intellectual Property is registered or subject to a Confidentiality Agreement, doesn’t mean it can’t be copied unlawfully. Your rights won’t enforce themselves and need to be rigorously defended, in Court if necessary, where your idea has been stolen.

If you have any questions regarding intellectual property and asset protection, please don’t hesitate to contact me.

In a recent blog I discussed some general comments about Discretionary Trusts and asset protection.  In this blog I will speak more specifically about the limitations of Trusts in asset protection.

Limitations on Asset Protection of Discretionary Trusts

It is very important to understand some limitations that a trust has for asset protection strategies:

1. Family law – for years Family Law Courts have looked through formal trust structures to make family settlements according to who had the de-facto ownership, or control, of the trust property;
2. Trustee’s right of indemnity – a trustee is entitled to be indemnified from the trust assets from liabilities that it incurs as trustee of the trust. This means that assets of a trust could be available to pay creditors of a trustee if trust liabilities have been incurred by the trustee. If a trustee becomes bankrupt or insolvent, this right of indemnity will vest in the liquidator or trustee in bankruptcy who could sell trust assets to pay creditors. It is therefore very important that the trustee of a trust that holds valuable assets should not engage in any risky activity, like giving guarantees etc;
3. Unpaid entitlements – if a trustee makes a distribution but does not immediately pay the distribution, the beneficiary (or its creditors) could call upon the trust to pay that amount; and
4. Control – if a beneficiary effectively controls the trustees power to make distributions (for example if the beneficiary is an appointor, trustee or director of the trustee company), the Courts could decide that the beneficiary has effective ownership of the trust property and include that in the beneficiaries assets to be made available to creditors.

Steps to protect assets

A number of strategies can be implemented, but it is important to follow the following steps:

1. Consider the assets you wish to protect;
2. Consider who owns the assets you wish to protect;
3. Who controls the assets that are at risk (trust assets);
4. Decide who will hold the important roles in the trust such as trustee, appointor etc
5. Separate the control from the risk – the appointor should not be taking on any risk such as personal guarantees etc and should have its own assets completely separated (for example:
   • Mum owns the family home,
   • Dad should run the business through a trust or a company that dad is the sole trustee and shareholder of;
   • The business should own no other valuable assets; and
   • Mum can be the appointor so she has effective control of the trust.

It is very important to ensure that detailed legal and accounting advice is provided before a structure is finalised. Please do not hesitate to contact me if you have any queries.

I was recently requested by KMPG on the Sunshine Coast to address their accountants in relation to my thoughts on trusts and asset protection.  This is a very good topic and it highlights the importance of giving detailed consideration, and obtaining appropriate advice, before a business or asset ownership structure is established.

In this blog I will talk about what a trust is, the roles in a trust, and benefits of a trust.

What is a discretionary trust?

Generally speaking, a trust involves the legal ownership of the property by one person or entity (the trustee) for the benefit of other parties – the beneficiaries.

In a Discretionary Trust no individual person owns the benefit of the assets as it is up to the trustee to decide who receives income or capital distributions from the trust.

Roles in the trust

There are a number of very important roles in the trust and the people or entities that carry these roles, will have an impact on asset protection strategies. 

Settlor – The settlor’s function is to effectively establish or “settle” the trust and give the assets of the trust to the trustee to hold those assets for the benefit of the beneficiaries on the terms set out in the deed.  The settlor will have no further involvement in the trust after executing the trust deed. It is important that the settlor is not a beneficiary or trustee.

Trustee – The trustee holds the legal ownership of the assets of the trust.  The trustee is responsible for the assets of the trust, and the trust itself.  The trustee has the powers to manage the assets of the trust and conduct the trust on a day to day basis. Importantly, the trustee can decide who to distribute the income and capital of the trust to.

Beneficiaries – Beneficiaries have the beneficial interest in a trust.  They benefit from the trust income and assets if the trustee elects to distribute to a beneficiary.

Appointor – The appointor is the party who has the ultimate control over the trust because the appointor can appoint and remove the trustee. It is this position, along with the trustee, that needs to be considered very carefully when establishing a trust.

Benefits of a Discretionary Trust

There are a number of benefits from establishing a family trust including:

1. Tax advantages – income from a trust can be distributed to different parties to assist in tax planning;
2. Asset protection – subject to some limitations, a family trust can protect family assets from the liabilities of one or more family members;
3. Succession planning – a trust allows family assets to pass to future generations with minimal tax and stamp duty implications; and
4. Estate planning – a trust can be a useful tool to avoid challenges to a will.

In my next blog I will discuss the limitations on asset protection for trusts, and discuss some asset protection strategies for trusts.

It is very important to ensure that detailed legal and accounting advice is provided before a structure is finalised. Please do not hesitate to contact me if you have any queries.

The Personal Property Securities Act (“PPSA”) will come into effect early in 2012. This legislation is very important and you need to act now. It will dramatically alter the way in which security over personal property can be protected.

“Personal property” is any property, whether tangible or intangible, e.g. machinery and equipment, inventory, motor vehicles, book debts, receivables, stock, crops, trademarks and patents.  Only land, fixtures and certain licences are excluded from the definition of “personal property”.

If you answer yes to any of the following questions, you need to urgently get legal advice to protect your interests

• Do you own any equipment, goods or other property that you hire to other people?
• Do you sell goods on consignment?
• Do you manufacture and sell goods?
• Do your conditions of sale include a retention of title clause?
• Do you lease chattels as part of a lease of land?      
• Do you have security over a motor vehicle, boat or aircraft?
• Do you have security over property which has a serial number identification?
• Are you involved in transactions under which debts are assigned to you?
• Are your security agreements in writing?
• Are your security agreements registered on existing registers?
• Do you lend money for purchase of inventory or for specified articles of personal property?
• Do you take security over intellectual property e.g. design, patent, plant breeder’s right, trademark?
• Do you have “fixed and floating” charges?
• Do you have an interest in livestock, crops or equipment not in your possession?
• Do you buy or sell personal property either with real estate or on its own?

IF YOU DO NOT PROTECT YOUR SECURITY IN PERSONAL PROPERTY YOU RISK LOSING IT

If you feel that any of your transactions will be affected by PPSA, you should ensure you have proper advice about protecting them.  This posting sets out some areas affected by PPSA which may be unexpected.  If you have transactions in any of these areas, you should urgently seek advice about protecting your interests.

Register to protect your interests

Registering a security interest gives qualified priority.  Any delay in registering the interest or any inaccuracy in the registration could be disastrous.  Any new security interests created after the commencement of PPSA must be registered quickly (there are strict time limits for some securities) and may be registered before the transaction is effected.

Our role

It is not my normal practice to promote our business on this Blog, but this legislation is very important and you need to act now.  Because of this we have a special offer for December 2011for all of the subscribers of this blog and for anyone one that you may feel will benefit.

We are offering a free review of your documents so that we can let you know whether you are protected.

Failure to protect security interests could be expensive.  I therefore urge you to think seriously about the matters raised.

Please contact either Cheré Meakins or Byron Cannon to discuss this.  Given the urgency of this for your business, our offer at Ferguson Cannon to review your documents free of charge will only last to 19^th December 2011.

I was recently invited to sit on Your Business Panel. The panel was put together with the objective of assisting business owners by providing expert advice from different professions, in a unique question and answer session.

One question asked during the panel’s session highlighted to me the importance of asset protection in the structure of your business, and also the importance of keeping these asset protection objectives at the forefront of your mind throughout the course of your business.

Getting the Structure Correct – but not Sticking to the Structure

The case that sprang to mind was a recent matter where I acted for business owner.  A brief summary of the facts are as follows:

1. The client had previously sought specific advice in relation to protecting assets if the business was to fail;
2. The client had received advice to set the business up so that it was operated by a company;
3. The client was advised to ensure that all personal assets that she wished to protect were purchased in a trust, which was completely separate to the company;
4. The client’s business was very profitable and the client wanted to purchase assets in the trust;
5. The client purchased assets in the trust, however transferred funds by way of a loan from the business to the trust.  The loans, over a period of time, crept up to be millions of dollars;
6. The business is now experiencing critical cash flow issues and has large debts to a number of creditors, who are threatening legal action with the ultimate objective of winding the company up;
7. At my first consultation the client understood that the assets in the trust, along with her own personal assets were protected;
8. Some personal guarantees had been signed with creditors.

The Correct Structure for your Business

The structure implemented by this particular client had the right idea, but the execution was wrong.  Some tips for your business structure include:

1. Do not have the business in your own name, unless you hold no assets and have absolutely no risk of being sued (very rare!)
2. Own the business in a company or trust structure, to avoid personal liability (keeping in mind that you can still be personally liable in certain circumstances such as insolvent trading and not paying Superannuation for your employees)
3. Avoid signing personal guarantees
4. When you buy assets of value, do not buy them in the same entity that owns your business
5. Do not make inter entity loans to buy assets
6. Try to keep assets separate to your business finances (i.e. do not offer them up as security to your bank, if possible)
7. Constantly review your structure and get legal and accounting advice before you buy and sell an asset.
8. Review your will

Inter Company Loans

What my client failed to realise when carrying out the asset protection objective of buying assets in a trust, was that the monies borrowed from the company could be clawed back by a liquidator, leaving the assets purchased in the trust vulnerable to being sold to fund the payback of the loans, and ultimately going to the creditors of the company.

This example highlights the importance of:

1. getting professional advice when you first establish your company and business structure from an asset protection perspective, and;
2. diligently following your asset protection objectives; and
3. obtaining advice before any significant investments, or liabilities are entered into.

This client’s precarious situation could have been avoided if professional advice was obtained before the investments were purchased.

If you would like to discuss any of your asset protection objectives, please contact me as I would be more than happy to assist.