Company

Director duties

There are numerous and important legal responsibilities imposed on directors of companies under the Corporations Act 2001 and other laws, including the general law.

Of these director duties, some of the most significant are contained in Chapter 2D of the Corporations Act:

  • to exercise the degree of care and diligence that a reasonable person might be expected to show in the role – the business judgment rule (s.180).
  • to act in good faith in the best interests of the company and for a proper purpose (s.181)
  • to not improperly use their position to gain an advantage for themselves or someone else, or to the detriment to the company (s.182)
  • to not improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else, or to the detriment to the company (s.183)
  • to lodge information with ASIC (s.188)

but there are others, including to:

  • to avoid conflicts of interest between the interests of the company and theirpersonal interests and to reveal and manage conflicts if they arise (s.191)
  • to take reasonable steps to ensure that a company complies with its obligations in the Corporations Act related to the keeping of financial records and financial reporting (s.344)
  • to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent (eg, if it is unable to pay its debts as and when they fall due) (s.588G)
  • if the company is being wound up, to assist the liquidator and provide accurate details of the company’s affairs.

Directors can also be liable for unpaid taxation obligations and unpaid superannuation monies – for which the ATO can issue Director Penalty Notices.

Failing to comply with director duties can result in criminal sanctions, fines, disqualification from acting as a director and other consequences, such as breach of contract such as obligations under a Directors & Shareholders Agreement.

People can be responsible as directors even if not formally appointed

What many people don’t know is that the term “director” is defined in section 9 of the Corporations Act to include a person:

  • who is appointed as a director (or alternate director), regardless of the name given to their position; and
  • even though not validly appointed and recorded at ASIC as a director:
    • who acts in the position of a director (also known as a ‘de facto director‘); or
    • whose instructions or wishes the appointed directors are accustomed to act in accordance with (also known as a ‘shadow director’)

Commonly used terms for the titles of ‘director’ include ‘non-executive director‘, ‘executive director‘, ‘managing director‘, ‘independent director‘ and ‘nominee director‘.

Often, businesses give titles to employees rather than pay rises. Similar considerations apply to partnerships, where some partners are ‘salaried partners‘, not ‘equity partners‘ so they take home a salary rather then enjoy the fruits of the business. What these ‘salaried partners‘ (in the same vein as ‘non-executive directors‘) often fail to understand or appreciate is that they are holding themselves out as directors or partners of the business and will have full responsibility as such if something goes wrong, such as an insolvency.

How to meet the responsibilities

Those with key roles in any business, regardless of its legal form, you should:

  • understand your legal obligations and make compliance with them part of your business
  • keep informed about your business’ financial position and performance, ensuring that it can pay its debts on time and keeps proper financial records
  • give the interests of the business, its stakeholders/owners and its creditors top priority, which includes acting in the business’ best interests (even if this may not be in your own interests)
  • use information you get through your position properly and in the best interests of the business
  • get professional advice or more information if you are in doubt.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to Corporations Act or corporate governance issues or any business or commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Bringing on business partners?

For businesses that are growing and putting on other shareholders and directors, a Shareholders Agreement is a must have. If your business is not a company but it a partnership or a unit trust structure, the document would be a Partnership Deed or Unitholders Agreement.

Don’t leave some of the most important and fundamental issues for your business to chance. Consider a company with 2 or 3 shareholders – a typical small to medium sized business scenario…

COMMON PROBLEMS FOR SHAREHOLDERS

Issues that commonly that can affect shareholders include:

  • A shareholder sells their shares, leaving you with an unintended business partner;
  • A shareholder dies and you inherit an unintended business partner or you have to buy the shares from their estate for more than you ought to;
  • As a shareholder, you want out but cannot find a suitable purchaser but the other shareholders won’t buy you out;
  • The shareholders don’t have available funds to pay out an exiting shareholder;
  • The majority shareholder wishes to run the business one way, but is restricted by a minority shareholder;
  • You, as a minority shareholder, are being treated poorly by other shareholders who are running the business with little regard to your interests;
  • You wish to sell the company’s business as there is an excellent offer on the table, but another shareholder will not and is jeopardizing the sale;
  • You wish to receive dividends from the business, but others want to reinvest the profits.

The aim of a Shareholder Agreement is to bring some certainty to the business relationship so there is confidence in how the business will operate

TAILORED SOLUTIONS

A Shareholder Agreement tailors the rights and obligations of the shareholders to fit the particular purposes of the company, the nature of its business and the aims and wishes of its shareholders – to help avoid some of the potential problems identified above.

Some factors that should be considered in a Shareholders Agreement include:

  • The company’s activities/type of business – its purpose;
  • The roles and obligations of the shareholders;
  • Who are the directors and how the shareholders can change them;
  • Director remuneration;
  • Who will manage and control the business day to day, such as a managing director;
  • Meetings – how they are called, how they are run, counting of votes;
  • How decisions are made by shareholders or the board of directors;
  • What types of decisions require a simple majority, special resolution or a unanimous vote;
  • Payment of dividends;
  • Funding/borrowing;
  • Restrictions on the issue/transfer of shares and calculating the share price;
  • How shareholders can exit from the company and on what terms;
  • Funding of exits (including death) – buy/sell obligations and personal insurances;
  • Restraints on existing shareholders as to company customers etc;
  • Insurances to be taken out; and
  • How any disputes are to be resolved.

The aim of a Shareholders Agreement is to bring some certainty to the business relationship so that shareholders can have some confidence as to how the company will be run and, if there is a falling out, to provide a mechanism for that falling out to be dealt with, as painlessly as possible.

Ideally, the Shareholders Agreement would be in place from the outset whilst all parties are in agreement in relation to all issues however, they can be documented at any time (provided all parties agree).

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting or buying a business, drafting business documents or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your business needs.

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Creditor’s Statutory Demand

If you or your business are owed a debt by an Australian company that is not disputed, then there can be a relatively simple, yet effective way of obtaining payment in as little as 3 weeks.

The Corporations Act 2001 (Cth) provides for the issue of a document called a “creditor’s statutory demand” to any company that owes a debt greater than the prescribed amount (which is presently $2,000).

The process is basically that the demand is served and then you wait.

Statutory demands must be in the prescribed form, detail the debt due, be signed by or on behalf of the creditor and be properly served on the company. Where the debt is not a judgment debt, an affidavit is also required to be signed, certifying that the debt is due and payable.

The Act provides where the demand is served and not complied with within 21 days, the company is presumed to be insolvent and is liable to be wound up. Compliance with the demand is achieved by either paying the debt due or coming to an arrangement satisfactory to the creditor in relation to payment of the debt within that 21 day period.

The presumption of insolvency lasts for 3 months after the 21 day period expires. Any proceedings to wind up the company on the basis that it is insolvent must be commenced within that period.

Creditor’s statutory demands may only be set aside by the Court on certain grounds and applications to do so must be both filed with the Court and served on the creditor that issued the demand within that 21 day period. Grounds for setting aside the demands are limited and include where there is a defect in the demand, where the amount owed is less than the prescribed amount or where there is a dispute as to the existence and/or amount of the debt claimed. None of these grounds may be relied on to oppose a demand after the 21 day period.

Where the debt is disputed, the service of a creditor’s statutory demand is not the appropriate way to obtain payment however, there are other methods available.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to debt recovery, company issues or any commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your legal concerns or objectives.

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Selling your business?

So you have an offer to buy your business. How exciting!

Although there may be agreement on the price being paid and the amount of deposit, what else needs to be considered?

  • How is the price apportioned between goodwill and equipment?
  • Have you considered the costs associated with the sale – you may have an agreement with a business broker, but there are lawyers, accountants, financial advisers also.
  • What about tax, capital gains tax (CGT) in particular, and is GST payable?

Who does what?

You need good advice. You are great at what you do, but you cant do everything. You need a great team of advisers – this is their thing.

Your lawyer will be required to prepare the legal documents that give effect to the sale (such as Business Sale Contract, Share Sale Agreement, Deed of Restraint, Deed of Consent to Assignment of Lease, Employment Contracts, Deed of Novation, Consultancy Agreements etc… yes, there may be others).

Your accountant can advise on the price apportionment and taxation implications, whether GST is payable or not, and how to make the most of any CGT concessions, exemptions and rollover relief such as those relating to small business and retirement.

Your financial adviser can give you advice on what to do with your cash to make the most of it now or in retirement.

What are you actually selling?

It would seem obvious, but have you considered what you are actually selling? Are you selling your business or, in the case of a company or unit trust, the entity that owns it?

There is a big difference, particularly given that entitlements to income and liability for expenses incurred prior to completion of the sale will remain with the vendor under a business sale whereas in the case of a share sale, the whole lot will be under the control of the purchaser from completion.

This will also affect how much due diligence a purchaser may undertake – as any prudent purchaser would have concerns about potential claims, tax debts etc

The usual things

Assuming a sale of business, not a share sale, some of the other things to consider is what is included in the sale?

  • Business name
  • Plant and equipment used by the business
  • Stock
  • Customer lists
  • Agreements with suppliers, referrers… to the extent they can be transferred
  • Phone/fax numbers, logos, domain names, email addresses social media etc
  • Intellectual property – do you have any trademarks?
  • Licenses/permits to operate the business
  • Are staff being terminated or transferring to the purchaser? What are employee entitlements are due?
  • Are the business premises leased? Is the agreement subject a an assignment of the existing lease or the granting of a new lease?
  • Personal Property Securities Register issues – for example, is the telephone system under a hire purchase agreement? Is the photocopier leased?
  • Do you need the consent of anyone to the sale proceeding? Eg, a franchisor, a mortgagor, someone you have given a first option to purchase to for example?
  • Are there to be restraints of trade/non-competition provisions that affect you? What about for key staff?

Although an exciting time, there are many issues that need to be considered when you are selling your business. The abovementioned items are certainly not an exhaustive list of things to consider and every business is different, but hopefully it gets you thinking about what you may need to consider when selling your business.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to buying/selling businesses, intellectual property or any commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your legal concerns or objectives.

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What does a Bankruptcy Notice do?

A Bankruptcy Notice is a document that, once served, requires the person served to either pay a debt (or enter into an arrangement for payment of a debt) within a specified period of time, usually 21 days.

If the Bankruptcy Notice is not complied with within that time, the person has committed an “act of bankruptcy” entitling the person owed the money (creditor) to commence bankruptcy proceedings.

It is usually a good idea not to try to do this yourself but rather to engage a lawyer to assist, including obtaining a National Personal Insolvency Index (NPII) search beforehand.

How is a Bankruptcy Notice issued?

Bankruptcy Notices are issued by the Australian Financial Security Authority (AFSA) (formerly the Insolvency & Trustee Service Australia (ITSA)) at the request of a creditor.

In order to apply for a Bankruptcy Notice, you must hold a final judgment for at least $5,000 that is no more than 6 years old.

Once issued, the Bankruptcy Notice needs to be served on the debtor. There are various ways to achieve this (including by post in some circumstances).

If the debtor does not dispute the validity of the Bankruptcy Notice or pay the judgment debt or come to a satisfactory arrangement for payment of the debt within the 21 day period, then the debtor will have committed an “act of bankruptcy” as defined in the Bankruptcy Act 1966 (Cth) and the law will presume the debtor to be insolvent, entitling the creditor to commence bankruptcy proceedings. The order declaring someone a bankrupt is called a “sequestration order“.

What is the effect of bankrupting someone?

Most people do not wish to be made bankrupt due for various reasons including:

  • the stigma associated with being declared bankrupt (and the effect this can have on obtaining certain employment etc);
  • the fact that all of the bankrupt’s property (subject to some exceptions) vests in the appointed trustee; and
  • because of the adverse effect of bankruptcy on a person’s credit rating (and therefore their ability to get a loan later in life).

This is why issuing a Bankruptcy Notice and, if necessary, commencing bankruptcy proceedings can be an effective way of obtaining payment if you are a creditor.

What does the court look at before bankrupting someone?

Bankruptcy proceedings are commenced by filing a Creditor’s Petition in the Federal Court of Australia or the Federal Circuit Court of Australia.

Before a person is declared bankrupt, the Court must be satisfied that the person has committed an “act of bankruptcy” in the 6 months before the commencement of the bankruptcy proceedings. The most common act of bankruptcy is failing to comply with a Bankruptcy Notice.

Effect of bankruptcy on company directors

For those in business for themselves, one of the effects of being declared bankrupt, in addition to losing control of the majority of your assets, is that s.206B of the Corporations Act 2001 (Cth) provides that undischarged bankrupts or those who have entered into personal insolvency agreements cannot act as a director or take part in the management of a company.

AFSA and ASIC have a Data Matching Protocol such that ASIC will receive notification of a director’s bankruptcy. Although a bankrupt automatically ceases to be a director, the director must notify ASIC by lodging a Form 296 - Notice of Disqualification from Managing a Corporation and further, the Company also has an obligation to notify ASIC of the cessation of an officeholder by lodging a Form 484 - Change to Company Details within 28 days of the change taking effect.

The Court has the power to grant leave to an undischarged bankrupt to take part in management of a company, subject to ASIC being notified of the application. Such leave, which can be granted both with or without conditions, is not available however, where the disqualification was imposed by ASIC (as opposed to an automatic disqualification due to the operation of the Corporations Act).

The court will not easily be convinced that the usual prohibition should not apply and will exercise its discretion with a view to balancing the considerations relevant to the bankrupt and the public policy behind the prohibition. In such an application, the applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition. The policy behind the law is protect the public and among other things, to seek to ensure that investors, shareholders and others dealing with a company are not disadvantaged.

Hardship to the proposed director is not of itself a persuasive ground for the granting of leave although it is one of many factors which may be considered by the court in exercising its discretion. The court will have regard to the reason for the disqualification, the nature of his or her involvement, the general character of the applicant including the applicant’s conduct in the intervening period since being removed from office or prevented from being in office, the structure of the company, its business and the interests of shareholders, creditors and employees.

Although such applications are not commonplace, an undischarged bankrupt may be granted leave to take part in the management of companies generally or, more frequently, in the management of a particular company. The disqualification imposed by the Corporations Act continues despite the Court granting leave and care must be taken to ensure that any conditions on the leave are complied with as failure to do so can result in the leave being revoked and the commission of an offence.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to bankruptcy, insolvency, debt recovery, commercial law or business disputes, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Minimizing risk in your business

Running a business is risky and small businesses can be especially so. Minimizing risk in your business is crucial.

Often, SME owners put their own personal assets on the line, whether to borrow funds from a lender to start up or buy stock or equipment or by signing a guarantee in relation to suppliers and others for the debts of the business.

There are several methods of protecting personal assets from creditors, but it is a process that many don’t follow. Some are quite simple and easy to put in place. They include…

Placing assets in a spouses’ name or in a family trust

In most circumstances, creditors will not be able to make a claim upon assets owned by your spouse or held by a discretionary trust, provided that you are not the trustee. If your spouse is the trustee, then he or she is the person who will usually decide how to divide up the income or capital of a trust (or not to).

Of course, stamp duty and capital gains tax issues must also be considered before acquiring or transferring assets as well as the potential operation of claw back provisions. The loss of the principal place of residence CGT exemption or the land tax issues may be a factor weighing against doing this.

In the end, it is weighing up risk vs benefits and making an informed decision regarding any asset protection measures.

Encumbering assets if you cannot transfer them

An asset that is mortgaged to its value is not attractive to a creditor. The mortgagee in such a case is the only entity that will benefit from the subsequent sale of the asset.

A guarantee form a person without assets is effectively valueless. Often businesses don’t check to see what a guarantor actually owns.

If you seek a guarantee from a director of another business, you could make some inquiries about their credit/financial position before creating an account,

Correctly structuring your business

Sometimes it is not feasible to establish an asset-holding entity and a trading entity (as many small business start-ups are strapped for cash) but it can be a great way to protect the business assets from day to day trading risks. Even getting the type of business structure right from the beginning (sole trader, partnership, company, trust or combination etc) can have a massive impact on your business.

It is possible to establish a company with a single director  and/or single shareholder. The company dealing with third parties, supplies, customers and the like is the entity that may be liable to them, not the shareholders.

The shareholders are only liable to the company for the unpaid amounts (if any) on any issued share capital. This liability is usually a nominal amount such as a dollar. Shareholders have no liability to third parties unless they agree to it, such as by giving a guarantee.

Company directors may have some liability but only in limited circumstances can the corporate veil be lifted. Courts may be prepared to lift the veil in limited circumstances, such as in the case of insolvent trading, fraud or misrepresentation, inappropriate transactions or where public policy requires it.

Charging assets (and properly recording the charge)

Before lending money to your business, a charge should be created in the correct form and that form recorded as against assets such as real property (by way of mortgage recorded at Land and Property Information or another State’s land titles registry) or against non-real estate assets (by way of a Specific or General Security Deed and making a registration on the Personal Property Securities Register (PPSR)) to secure repayment of that money in preference to other creditors should the business fail.

Having proper terms of trade

Most businesses, if they have them at all, have terribly inadequate terms and conditions of trade. Often they are just copied and pasted from other documents and not tailored, leaving businesses thinking they are adequately protected when they really are not covered at all.

T&Cs should be built to protect your particular business and should be a work in progress, tweaked to solve or prevent problems that have arisen in your business from occurring again,

Avoiding personal guarantees altogether

A guarantee is a contract by which a guarantor promises that another person or entity will comply with his, her or its obligations to a third party and if they don’t, the guarantor will. The most common example involves bank loans where a guarantor such as a parent promises to repay the loan of their child if the child defaults.

Becoming a guarantor can be extremely risky, particularly when large liabilities are involved. Under most guarantees, the guarantor becomes immediately and primarily liable to repay the debt (and the lender does not have to wait for attempt to recover from the borrower before calling on the guarantee).

As a practical matter, many businesses cannot obtain finance unless a personal guarantee is provided. If this is the case however, whenever the loan is actually repaid or if the business can prove it is financial stable and secure, the guarantee should be discharged so that the guarantor cannot continue to rely on it at a later date concerning subsequent transactions.

Managing staff

One of the biggest risks to your business is that of staff leaving, and worse still, taking valuable information and assets with them.

Having appropriately drafted Employment Contracts with restraints of trade in them is a must.

Superannuation contributions

In many circumstances, superannuation entitlements can be protected from bankruptcy trustees. There may be no protection for example where the payments are made for the primary purpose of defeating creditors.

Making contributions to super is getting harder and harder with the Federal Government’s recent changes to the superannuation laws however, this can be an effective long term tool for wealth creation and asset protection. This will also usually involve the assistance of your financial planner.

Business succession planning

If you are in business with another person, what happens to your business if you or your business partner gets seriously injured or dies?

Do you have an appropriate and valid Will, Enduring Power of Attorney and Appointment of Enduring Guardians in place?

Usually having these estate planning documents is not enough. Presumably your business partner would give all of his or her assets to their spouse on their death through their Will. What if you don’t want to me in business with your business partner’s partner?

You should have in place business succession documents to deal with this such as a Buy/Sell Deed with appropriate insurances, a Shareholders Agreement (for companies), Unitholders Agreement (for unit trusts) or a Partnership Agreement (for businesses operating through a partnership structure).

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting a new business, commercial law, business disputes or estate planning/business succession issues generally, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Setting up a new business

Before starting a new business, the first thing that you need to consider is the structure of the entity to operate the business.

There are numerous options to choose from, such as:

  • sole trader;
  • partnership;
  • company; and
  • unit trust.

This is when it can pay to get good accounting/taxation, financial planning and legal advice as there are advantages and disadvantages associated with each type.

WHICH STRUCTURE IS THE BEST?

There is no right or wrong answer to this necessarily, although some are preferred more than others.

To determine the most appropriate structure, you need to consider what is most important for you and your family and things such as what assets/business you already have interests in, whether you intend to be in business with others or you’ll go it alone, how you intend to run the business and whether it is a long term plan or whether you intend to quickly build and sell it.

Each option has different qualities, including:

  • simplicity vs complexity,
  • asset protection vs personal liability,
  • income going to one individual vs ability to minimise tax through income splitting,
  • taxation issues on sale such as CGT exemptions; and
  • business succession planning issues.

OTHER THINGS TO CONSIDER

Once the structure has been determined, and depending on the structure to be adopted, other things that need to be covered off include:

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting or buying a business, drafting business documents or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

Do you have a Shareholders Agreement?

CONSIDER THESE COMMON ISSUES

What would happen to your company if you or your business partner became so ill that one of you could no longer work – or worse still, died?

Would you still be paying dividends or making distributions of profit to that person even through he or she is not around, or to their spouse or family?

If they died and left their spouse everything in their Will (including their shares in your company), would you want to be in business with his or her spouse?

What if your business partner sold his or her shares in your company to a complete stranger or a competitor following an argument?

How are your shares to be valued and over what period will the purchase payments be made to your family? Or is there an insurance policy to fund the payment in a lump sum?

HOW CAN A SHAREHOLDERS AGREEMENT HELP?

A Shareholders Agreement can cover these not uncommon scenarios and tailor the rights and obligations of the shareholders of a company to fit your personal circumstances and your particular business to help avoid some of these potential problems for everyone’s ultimate benefit.

You may have a Will, but you may not have certainty in relation to what will happen to your family or your business in the event of your death or serious illness unless these matters are clearly dealt with in a Shareholders Agreement.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to business succession, estate planning, litigation and dispute resolution or any commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au