Unfortunately in these difficult times, some small business owners are faced with the question of trying to protect their hard-earned assets should the worst happen and their business fails. Our director John Warlow has many years of experience in bankruptcy, insolvency and asset protection matters. In this article John provides some key tips on asset protection, and explains why it is critical to act early if you think your business is likely to fail, as your options to rescue the situation and protect your assets reduce as time goes by.
1 Early action is critical – don’t leave it to the last minute
Liquidators and bankruptcy trustees can set aside some transactions and claw back certain payments. As a general rule, it is easier for them to do so where the payment or transfer of property was more recent. Or put another way, given the way the legislation is framed, the ability of a liquidator or bankruptcy trustee to set aside transactions becomes more difficult as time goes on.
Consequently, implementing asset protection measures sooner rather than later is critical, as a last minute scramble to pay selected people and transfer property is much more likely to be overturned, or possibly even constitute an offence if it was done with the intention of defeating creditors.
2 Know which creditors can attack you personally
Just because your company goes into liquidation doesn’t automatically mean you will go into personal bankruptcy and lose assets held in your personal name. Only creditors who you are personally liable to, can bankrupt you or force a sale of your personal assets.
Consequently, it is important to know who you are personally liable to, for example under personal guarantees you have signed. If it looks like your business might fail, try to minimise the amount owing to those creditors, and place extra focus on keeping them happy. But keep in mind that a liquidator might be able to clawback payments made to some creditors in preference to others. If in doubt, it is best to obtain advice.
3 Transfer assets for market value
Liquidators and bankruptcy trustees have wide powers to set aside transfers of property for less than market value. The ability to set aside undervalued transactions is at the heart of the powers held by liquidators and bankruptcy trustees.
Consequently, if you decide to transfer property to a related person or entity, make sure that fair market value is paid. And make sure that real money is transferred. Liquidators and trustees can obtain bank records, so a round robin transfer of funds will seldom work.
4 Some transactions can be set aside – obtain advice before transferring assets
In addition to the power to set aside undervalued transaction, liquidators and bankruptcy trustees can unwind unreasonable payment and transactions, especially if a related party is involved. They can also clawback payments which give priority to some creditors over others.
Consequently, it is wise to obtain advice on how best to protect your assets before taking steps to do so, otherwise you could be doing things which are destined to be unwound if a liquidator or bankruptcy trustee is appointed.
5 Smart asset structuring is critical
Key assets should be in the name of a person or entity who is not at risk. For example, a manufacturing business could have all of its plant, equipment and intellectual property owned by a separate legal entity which leases or licenses the plant, equipment and intellectual property to the at-risk trading entity. Similarly, a retailer could have its stock owned by a separate stockholding company which gives the stock on consignment to the at-risk trading entity.
The type of entity which holds the assets (and who holds the shares in that entity) is also important. There are variety of possible entities and each client’s situation is different. But in our experience, discretionary trusts are often the most effective form of asset protection.
6 Register security over at-risk property
If you implement a strategy where key equipment and stock is owned by a separate legal entity to your trading company, then be sure to register a security interest over the equipment and stock on the Personal Property Securities Register. Otherwise you could lose the equipment and stock to a liquidator, if the trading company in possession of the equipment and stock goes into liquidation.
7 Reach arrangements with creditors under the Bankruptcy Act and Corporations Act
Both the Bankruptcy Act and Corporations Act contain mechanisms which enable arrangements to be reached with creditors. Those arrangements can enable an individual to avoid bankruptcy and a company to keep trading rather than have its business wound up.
To utilise these mechanisms it is necessary to obtain the approval of the majority of creditors to the proposed arrangement. To obtain the approval of creditors it is invariably necessary to have sufficient money left in the kitty to put an attractive proposal to creditors.
Unfortunately many people leave it too late to put a proposal to creditors under the applicable legislation, by which time there are insufficient funds to make a proposal that is likely to be accepted by creditors. The moral of the story is – if you think your business is liable to fail, act early and obtain advice, as your options to save the business and protect your assets reduce as matters become worse and time goes on.
8 If the worse happens, appoint your own liquidator
If the worse happens, it is best to appoint your own the liquidator or bankruptcy trustee, rather than let creditors choose who is appointed. There is also sometimes scope to negotiate with the liquidator or bankruptcy trustee on certain matters.
For example, if your bankruptcy trustee wishes to sell a property which is registered in joint names with your spouse, then your spouse may be able to negotiate an agreement with the trustee whereby they purchase your interest in the property for 50% of the equity less the costs that would be incurred to sell the property and a discount for the risk the property might be sold for a low value.
Knowing what buttons to press to get the best outcome from the liquidator or trustee requires experience. Consequently, it is worthwhile obtaining advice on how best to negotiate and deal with the liquidator or bankruptcy trustee.
For more information contact John Warlow on 07 3002 7419.