2. What we will cover
What is „asset protection‟?
What are the risks?
The three strategies
How to set up your companies
and trusts
What happens if it all fails?
3. What we won‟t cover
Asset protection is:
a state of mind; and
a longer-term way of
thinking
There are no quick fixes
Ask for first-hand
testimonials of success.
5. What is asset protection?
Keeping and protecting what
you have
In the context of our
businesses:
The „investment‟ which the
„equity‟ in our businesses
represents; and
The threat from our business
against our non-business
wealth.
6. The science of „risk management‟
Identifying, eliminating, lowering and managing risks
What could go wrong?
Is it likely to go wrong?
What would be the impact?
How can I avoid it going wrong?
If I can‟t avoid it, how can I lower the
chances of it occurring?
If I can‟t stop it occurring, how can I
manage the outcomes?.
7. Some history
„Modern‟ asset protection
started in the 1970s
The Crusades and the
Middle Ages „use‟
A natural human instinct.
8. Is it moral?
Is it fair to take positive
steps to protect what
you have?
Is there a limit to what
you should be able to
do?
Is it a „moral‟ argument?
Risk-taking v. irresponsibility
9. Irresponsibility
“Not meeting your obligations to creditors”
“Not paying your fair share of tax”
“Endangering your employees”
“Polluting the environment”
“Limited liability is „unprofessional‟”
There needs to be an incentive to take care.
10. You have financial and
moral responsibilities for
others, and if there are no
adverse consequences for
you (because your assets
are protected), then you
would act irresponsibly.
11. Risk taking – is it worth it?
We need to encourage
risk-taking
The best way to do this is
to give you the right to
limit what you are going
to risk when you go into
business
Also applies to other social
activities (charities, clubs..)
Most businesspeople
are very responsible.
12. Company directors are
currently subject to around 700
different laws at federal, state
and territory levels that impose
personal liability for their
company's actions
13. Federal Labor agrees...
…„an important deregulation initiative aimed at
encouraging wealth and job creation in Australia by
removing unnecessary compliance burdens from
company directors and corporate officers, where
appropriate‟ would be helpful
„Federal Labor Government is acting to cut red tape and
remove criminal liability provisions that are inconsistent
with principles of good corporate governance and
criminal justice‟
14. COAG agrees…
Miscellaneous Acts Amendment
(Directors' Liability) Bill 2012
(NSW)
Directors' Liability(Miscellaneous
Amendments) Bill 2012 (Tas)
Directors' Liability Reform
Amendment Bill 2012 (Qld)
15. Should the „phoenix‟ rise?
The „contrived‟ phoenix
The „genuine‟ phoenix
In Australia we generally
do not make the
distinction
Once a „failure‟, always a
„failure‟ – and probably a
crook…
17. Types of „threats‟
Operational threats
risks from the core operations
of your business
Internal threats
threats from within your
business
External threats
threats from things outside
your business.
18. Operational threats
Under-quoting (cost overruns)
Making a defective product
Giving someone the wrong
answer
Injuring an employee
Injuring a customer/client
Harming the environment.
19. Internal threats
Fraud or theft
Disclosure of IP, CI or KH
Allowing an employee to be
harassed
Loss of significant resources
(eg equipment and key
people) or operational
capacity.
20. External threats
Loss of debt funding
Arguing with your business
partner
Accusation of mismanagement
by shareholders
A change in the regulatory
regime or law
Separation or divorce
Physical or mental breakdown.
21. Are the risks real?
“Office Christmas party
comment costs
$A2.56million”
“Court gives former business
partners the right to pursue
$14 million claim against
DFO founders”
“Rich pickings top $5m”:
PwC v Christina Rich
28. The fundamentals
WAKE UP!
Operational asset protection
Minimise the risks
NEGOTIATE
Contractual asset protection
Share the risks
QUARANTINE
Structural asset protection
Quarantine the risks
Most people start with
structural asset protection
strategies. However, we
recommend that you start
at the other end – WakeUp!
30. Take some responsibility
These strategies limit and
manage the level of risk to
which your assets are
exposed through the actions
that you take within your
business
Most people do not have
„legal problems‟. They have
simply failed to avoid an
avoidable problem in the first
place.
31. The risk areas
The obvious:
A product liability claim
A workplace injury
An environmental issue
The more common:
A cash-flow crisis caused
by pilfering
The loss of a key
employee who does not
feel needed or mentored
appropriately
A disgruntled business
partner who does not
think you are pulling
your weight
Businesses get into trouble
when the owners and
managers get
comfortable, get lazy, or
drop the day-to-day
management ball.
32. The most positive action you can
take to protect your assets –
and particularly the assets
within your business – is to
refocus on your business
operations.
Take back responsibility!
33. Where things go wrong…
Are you getting the financial information you
need to run your business?
What are the key things about your business?
How much does it cost to open your doors?
Who are your biggest customers?
Who are your most important suppliers?
Who are your key employees?
What is your MIS like?
Start with a „blood test‟
How healthy is your cash-flow?
How long does it take to collect your debtors?.
34. …where things go wrong…
Does anyone have their fingers in your till?
Do you have systems in place to detect variances?
Who has authority to operate your accounts?
Next look at your stock levels and control
system
Is someone pinching your stock?
Do you have too much stock?
Is the stock too old?.
35. …where things go wrong…
Employees:
Do you have Job Specifications in place?
Are they trained appropriately?
Are they employed properly – terms, leave, etc?
Are they paid appropriately – awards, conditions?
Are they safe at work – OH&S?
Bigger picture issues
Are they the correct ones?
Are you exposed to a key employee leaving?
Do you need to sack anyone?
Is there a sense of negativity in your business?.
36. …where things go wrong…
A business does not last long without customers
Are you communicating with them?
Are you working for the right ones?
Are they asking too much of you?
Are you delivering on time and within budget?
Do you have terms in place, and are they paying?
Equipment
How old (café upgrade)?
How safe (for customers and employees)?
How efficient (computers, software)?.
37. …where things go wrong…
Identify your IP assets
Customer lists
Product specifications
Financial information
Marketing materials
Precedents/templates
Is you IP protected?
Is anyone else using it?
Are employees walking
out the door with it?
Are they registered?
Business partners:
Are they pulling their
weight?
Are you pulling your
weight?
Are expectations clear?.
38. …where things go wrong…
Do you have the right team of
advisers and mentors?
Are you doing enough marketing?
How is your health?
Physical
Mental
Strive for operational excellence.
39. Practical steps
Wake Up
Review the key areas of
operational risk with your
managers/employees
Make up a Risk Register
Apply risk management
techniques.
41. Share the load
These strategies relate to
managing risk by sharing
responsibility for the risk with
other parties – who are in a
better position to manage
those risks
Over the longer-
term, operational excellence is
not enough.
42. Terms of Trade
Choose the terms on which you do business with
other people
Key issues:
ACCA compliance
Limitation of liability and warranties
Passing of title/risk and insurance
PPSA compliance and retention of title
Guarantees.
43. Employment contracts
Share the load with your
employees
Protect your
customers, IP, phone
numbers
Include a reasonable
restraint
Use Job Descriptions
You cant „performance
manage‟ without them.
44. General insurance
Insurance is cheap – because it smooths
cash-flow, and cash is king
Read the fine print, or „pay‟ your broker
to do it for you:
What is covered?
Who is covered?
When is it covered?
What are the exclusions?
The legal consequence of
underinsurance
Get a good insurance broker
Ask them for advice
Maintain an „Insurance Register‟.
45. External threats..
Constitutions and Shareholder Agreements
Buy-Sell and Exit Agreements
Joint venture terms with other businesses
Binding Financial Agreements.
46. Practical steps
Agree terms with all customers
Agree terms with all suppliers
Have written agreements with all employees
Agree terms with all business/JV partners
Maintain a „Contracts Register‟
Get a good lawyer on retainer
Maintain an „Insurance Register‟
Retain a general insurance broker
Get a written insurance review
Maintain a „Guarantee Register‟.
48. Keeping things separate
Structural asset protection:
Creating a boundary between
your wealth and the business risk
you are exposed to while building
your wealth
These strategies seek to manage
risk by:
quarantining risks; and
keeping wealth out of harm‟s way
The „Armageddon defence‟ – not
the primary defence.
49. Getting it right the first time
It is important to make the correct structure choices
from the outset
There are a number of impediments to a
restructure, including:
Tax restructure costs (or impediments); and
The „relation back‟ rules under insolvency and
bankruptcy laws
The real benefits are in the details.
50. What is your motivation?
Any strategy that has „asset protection‟ as its
primary goal will be at risk of failure due to the
tests within the insolvency and bankruptcy rules
Any strategy that has „tax effectiveness‟ as its
primary goal will be at risk of failure under Part
IVA and other more specific anti-avoidance rules
So what is a legitimate motivation? Real Change.
51. The building blocks
You
Other people
A company
A trust
A combination of the above
52. Avoid trading in your own name
Personally responsible for all
business outcomes
The „Man of straw‟ strategy
works, but personal
bankruptcy is worse than
company insolvency
But if you make a habit of
being associated with insolvent
companies, then you will begin
to be excluded from other
activities personally.
53. Avoid partnerships
Your partners have your authority to get you into
trouble
You may not know what you are liable for
Avoid inadvertently entering into a partnership
Do not agree to share profit with others
Do not ask other people to do things for you.
55. An effective business vehicle
Separate legal identity
Limited liability for shareholders
Separation of ownership and
management
Structured management
principles and accountabilities
Structured relationship between
co-owners
Perpetual succession.
56. Companies
A company will quarantine
the risks within the business
from you personally, and
from your other investment
assets
Cheap life-time insurance
Will not protect you from
personal attack
59. Who will be a shareholder?
A shareholder is only responsible for the amount
they agree to subscribe (avoid partly-paid)
Shares in a company represent the value of the
underlying assets
Accordingly, the shares should be held by someone
who is not likely to be subject to attack
It may be an individual, or it may be a trust.
60. Who will be a director?
Limit the number of people who
are directors and choose with
care
Limit the opportunity for
someone to be a „shadow
director‟
Give „vetos‟ to the shareholders
which can protect their interest
without having to be a director.
61. Practical steps
Use companies to carry on businesses
Limit the number of directors
Hold the wealth in shares in a protected place.
63. Trusts
Can be used for business or
investments (but not both)
„Two-way‟ asset protection
Need to be set up correctly
to avoid the „alter ego
attack‟.
67. The state-of-play
(Chief) Justice French on a
rampage
Richstar, Cummins, Spry
„Benefit‟ and „Control‟ (direct and
indirect)
Non-exhaustive, special power.., but
still not „property‟
More care needed when the trust
is set up and administered
Still effective, and still popular.
68. Who should be the trustee?
Needs to be linked to a
company to carry on a business
At-risk individuals should not
be personal trustees
Trustees should not be
controlled by the appointor
and at risk-beneficiary
Directors of trustee should not
be controlled by the appointor
and at risk-beneficiary.
69. Who should be the appointor?
Ideally not just one person
Build in „succession‟ and therefore
hold the power with a „fiduciary
obligation‟ towards a family
70. Who should be the beneficiary?
Not the person who is a
trustee/appointor
The children of the client
Consider excluding the client
71. Contributions of wealth
Need to be careful how wealth
is put into a trust
Division 4A of Bankruptcy Act.
72. What does it all mean?
Back to the „Old-school‟
Role for professional trustees/
directors/ appointors who hold these
roles as a fiduciary on behalf of a
family line.
73. Practical steps
Use trusts to hold wealth
Use trusts in conjunction with companies
to carry on businesses
Set them up correctly, and avoid
creating an „alter ego‟
Keep trust deeds and constitutions up to
date.
76. „Assets‟ above „risk‟
Asset Entity
Business Entity
Business
Premises
Business
Assets
Asset Entity
Business Entity
Business
Premises
Business
Assets
79. Joint Ventures
Holding Entity
JV ActivityAsset Entity
General
Business
Business
Assets
Employees
Business
PartnersLess than 100%
80. Other principles
Keep your structure clean and
up to date. Liquidate defunct
companies (transfer loans etc.
to holding company)
Keep you employees away
from your business and
investment assets
Setting up your companies and
trusts with defence in mind.
82. Use security
Swap equity for debt
Borrow through risk
entities and use asset
entities to provide
guarantee security
Give security over your
risk entities first
Document secured loans
between your entities
Use holding companies
as „treasury‟ vehicles.
84. PPSA and „use‟ of assets
Holding Entity
Asset Entity Business Entity
Business
Assets
Business
Assets
‘Lease’ of assets
Ownership
85. Dealing with your bank
There is not a lot you can do
Keep assets in separate
pots, so that you can choose
how much to expose to bank
obligations
Watch out for standard „cross
collateralisation‟ clauses
Have your home mortgage with
a different bank to your
business overdraft.
86. Separate asset pools
Holding Entity
Asset Entity Business Entity
OLD Business
Assets
NEW Business
Assets
1st security in
favour of Bank
Loan
88. What equity?
Move „assets‟ to a new entity
Move „equity‟ to a new entity
Making distributions
Creating liabilities
Creating obligations
Impediments
Stamp duty/CGT
Insolvency laws
Bankruptcy laws.
90. Taking equity off the table
Regular distributions
to Holding Entity
Re-investment of debt
in Asset Entity
Security in favour
of Holding Entity
91. Taking equity off the table
Holding Entity
Asset Entity Business Entity
OLD Business
Assets
NEW Business
Assets
Regular distributions
to Holding Entity
Re-investment in
Asset Entity
Use of asset by
Business Entity
93. Forward and back in time
Long-term consequences
3, 5 or 8 years
Directorships, licences, finance…
They can go back in time and recoup
assets from:
your creditors
your spouse
your trusts
your super.
94. Up to 6 Months
Preference (s.122)
6 months
Claw-backs
Application for
„Sequestration Order‟
„Commencement
of Bankruptcy‟
Act of
Bankruptcy
Date Creditors
Petition presented
Undervalued Transactions
(s.120(1)) 5 years
Transfer to defeat creditors (s.121)
No time limit
Undervalued Transactions
(s.120(3)) 4 years – related entity and solvent
Undervalued Transactions
(s.120(3)) 2 years – solvent
95. Tightening of the screws on trusts
When?
If you have made contributions and
benefit (Div 4A)
If you have control and can benefit
(Richstar)
What to do:
Structure appropriately
Always pay full market value
Document solvency at time of transfer
New acquisitions are safer
At-risk person pay ‘other’ expenses
96. Use super
Statutory protection for lump
sums and life policies
Post-2006 contributions with
„main purpose‟ to defeat
creditors
Pattern of contributions
98. How to benefit from privacy
Do not:
open your mouth
drive a flash car
live in a nice house
There are ways that you can keep
things private:
Limit what you make public
Use nominees and trusts
Hold assets outside Australia
Adopt a „document retention‟ policy
99. The benefits of „offshore‟
Better privacy
Harder to enforce judgements
More flexible structures
Professional and experienced trustee
companies
Few tax benefits (without imprisonment)
Higher costs
„Non-jurisdictional‟ assets.
101. What if it all goes wrong?
Communicate
Don‟t take it personally
Don‟t trade while insolvent
Pay tax/SGC first
Keep your powder dry for next time
Best time to implement asset
protection is when it is not needed.
If you think it is or may be needed
shortly, then it is probably too late.
102. How we can help
Help review your business for
operational, contractual and
structural weaknesses
Review and update:
your contracts
your structures
Help you maintain your Registers
Defend you if you come under
attack.
Personal Liability for Corporate Fault Reform Act 2012 (Cth):The Bill’s accompanying speech and media release said that it was …According to Mr B Ripoll, Parliamentary Secretary to the Treasurer, the…
e.g. building industryproduct liability, e.g. carsprofessional negligence, e.g. auditingin the course of their workwithin your workplacewhen making a product or delivering a service
By an employee against you or a customerTo a third party, or ex-employeeAs a result of a fire, storm, flood or accident
Cut funding or the cost increased (GFC)Adversely impacts your business (e.g. a ban on live cattle exports, tort reform, changes to the tax system)By you or your business partnerDeath, disability, trauma, breakdown
Period of cover - Run-off insurance for directors liabilityExclusions - Part IVA advice, civil penalties, etcProduct liability Professional negligenceDirectors insuranceCartageEquipmentWorkcoverRisk cover (income and expense)
excluded from participating in certain activities, e.g. state licenses, etc, and effectively remain responsible for the pre-bankruptcy for the period of your bankruptcy, e.g. 5+ years.If you are a director of a company that has gone into liquidation:your personal responsibility is likely to be lessthe hurdles for people to jump over to make you personally responsible will be higher
Create a legal separation between where you hold assets and where you carry on business activitiesIP, licensing entity, services entityCreate a legal separation between:where you hold your business assets; andwhere you hold your investment assets
Separate discrete business activities into separate entities – so if one fails, the others surviveSeparate distinct risk levels into distinct entities
Consider using a separate contracting company for larger projects – SPVs
Do not enter into a JV with your main trading business.Set up a separate entity and put in what you are willing to contribute.Otherwise, when your business partner sues you, you will have everything to loose
Will have right of subrogation after guarantee enforced
Small business concessionsNo stamp duty relief
In other words, don’t look like you have wealth worth attackingBut maybe that is not how you want to live