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Avoiding Transactions That Expose Assets 2020.pdf
- 1. Full service law firm Commercial - Banking & Finance – Securities - Property
- 2. Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com What is the issue? n By engaging in commerce personal assets can be exposed to be taken n Lawyers have devised means of protecting personal assets ¨Trading through corporations ¨Using Trusts to protect assets
- 4. CORPORATE VEIL n company n separate legal entity with own ¨ assets ¨ liabilities ¨ contracts members • own shares but not a proprietary interest in the company’s assets • may also be a creditor, debtor or director of the company VEIL Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 5. SALOMON’S CASE SALOMON V SALOMON (1897) HOUSE OF LORDS Issue: Could Salomon get priority for (residual) £1,000 secured by his debentures? Facts: Salomon’s shoe business Pty Ltd sold debentures cash Salomon 20,001 shares family 6 shares (as Salomon’s nominee) Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 6. LIFTING THE VEIL ¨ Existence of veil can be abused consider the position of: – unsecured creditors – tort claimants ¨ Because of abuses, the veil is sometimes lifted to impose liability on: – controllers – Directors (s588G) – holding/parent company (eg, s 588V) Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 7. STATUTORY EXAMPLES ¨ Statute contains an express provision which imposes liability/penalty ¨ Under the Corporations Act, examples are – insolvent trading (ss 588G, 588V, 596AC) ¨ Other legislation (eg, taxation [Director Penalty Notices] occupational health and safety, environmental protection and various regulatory regimes) Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 8. Director Penalty Notices n Income Tax Assessment Act – Fix once issued. Cannot avoid liability once issued. n Tax Administration Act 1996 (NSW) Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 9. Future Risks n DPN to apply to superannuation payments n Personal liability to apply once 3 months passes and tax due not paid (proposal is without notice to the directors) n Phoenix Trading Legislation Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 10. www.etiennelaw.com Settlor/ Initial Unit Holder Beneficiaries Trustee Establishes trust Duties & rights of parties usually set out in the trust deed Refresher of the Parties to a Trust
- 11. www.etiennelaw.com PURPOSES FOR USE OF TRUSTS n Privacy n Spendthrift protection n Wills and Estate Planning n Charities n Superannuation n Investment Structuring – Trading n Asset Protection n Tax Planning
- 12. www.etiennelaw.com Difference between an interest in a fixed trust and share in a company n Shares no legal interest in the assets of the company n Beneficiaries of a fixed trust have a proprietary interest in all of the trust property: Charles v Federal Com’n Of Tax (1954) 90 CLR 598
- 13. www.etiennelaw.com UNIT TRUSTS n Each unit entitles the holder to an undivided share in the income of the trust and a fixed proportion of the trust property on dissolution. The extent of this interest is determined by the proportion of the total units issued and held by the unit holder:Costa & Duppe Properties Pty Ltd v Duppe [1986] VR 90
- 14. www.etiennelaw.com DISCRETIONARY TRUSTS USES IN PROTECTING ASSETS n A beneficiaries interest in a discretionary trust is not a right of property to any interest in the trust but is if anything a chose in action to see that their expectancy is considered – Gartside v IRC [1968] AC 553
- 16. Hardoon v Belilios n Care must be taken as beneficiaries can be liable to indemnify trustees for debts incurred by them on the trusts behalf: Balikin v Peck (1998) 43 NSWLR 707; J W Broomhead (Vic) Pty Ltd (in liq) v J W Broomhead Pty Ltd & ORS — 9 ACLR 593 Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 17. www.etiennelaw.com Half the money I spend on advertising is wasted; the trouble is I don’t know which half. Half the money I spend on asset protection is wasted; the trouble is I don’t know which half. Advising Clients on Asset Protection
- 18. J.W. Broomhead (Vic) Pty Ltd (In Liq) v J.W. Broomhead Pty Ltd (1985) VR 891 n Construction company n 42% JW B Pty Ltd; 10%, 24%, and 24% n Company became trustee of a unit trust in stated proportions n Directors represented unit holders n Company liquidated n Liquidator recovered from defendants Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 19. Countryside (No.3) v Best/Lawson [2001] NSWSC 1152 n Brunswick Unit trust established 20/12/83 n Rokolat Pty Limited was manager of Trust n Lex subscribed for 1 unit n Parties did not define role of trustee/manager clearly n In principle liability could arise but not on facts in this case Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 20. S197 Corporations Act A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation: (a) has not discharged, and cannot discharge, the liability or that part of it; and (b) is not entitled to be fully indemnified against the liability out of trust assets solely because of one or more of the following: (i) a breach of trust by the corporation (ii) the corporation’s acting outside the scope of its powers as trustee (iii) a term of the trust denying, or limiting, the corporation’s right to be indemnified against the liability. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. Note: The person will not be liable under this subsection merely because there are insufficient trust assets out of which the corporation can be indemnified. Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 21. How it is to work in practice n Trust no assets n Right of indemnity capped at $5,000 n Bona fide debt of $3,000 incurred n Director of Corporate trustee NOT personally liable n Trust assets $0.5m n Right of indemnity capped at $0.25m n Bona fide debt of $0.3m incurred n As indemnity capped Director likely to be personally liable Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com
- 22. Conclusion n No clear cases on s 197 (so far) n Fixed and Unit trusts are not always protection of assets n No case law on discretionary trusts but obiter suggests personal liability might arise n Limit providing personal guarantees n Limit directorships n Protect assets n Avoid insolvent trading Steve Brown, Sbrown@etiennelaw.com www.etiennelaw.com