You may know someone who is having difficulty managing their financial affairs and has debts and liabilities which they cannot meet. They may be considering declaring themselves bankrupt. Before they do so, consideration should be given to some alternatives which are available aside from becoming bankrupt and which we have outlined below.

Informal agreement

An informal agreement is an arrangement made between a debtor and their creditors to settle their debts. Informal agreements are typically the first option considered by a debtor because they are less expensive to administer than formal agreements and allow a debtor to retain control of their financial affairs.

Informal agreements are most likely to proceed when there are a small number of creditors and the agreement is proposed as soon as the debtor is unable to meet their financial commitments.

Declaration of intention to present a debtor’s petition

An individual debtor can file a Declaration of Intention to Present a Debtor’s Petition (Declaration) to the Official Receiver. Filing a Declaration is a way of announcing that the person is considering declaring themselves bankrupt.

The effect of filing a Declaration is that a debtor does not have to pay their debts for a period of 21 days and any proceedings by creditors to recover their debts are stayed.

If a debtor is able to reach an agreement with their creditors within the 21 day period, the debtor does not have to proceed with filing for bankruptcy.

Creditor’s petitions and changes to bankruptcy laws pursuant to COVID-19

New temporary laws have been introduced to provide temporary relief from individuals facing insolvency issues due to financial pressures created by the COVID-19 crisis. These laws are proposed to apply for 6 months (once legislated) which will effectively:

• increase the threshold for the minimum amount of debt owed from $5,000 to $20,000 before a creditor can initiate bankruptcy proceedings;
• extend the timeframe for which a debtor must comply with a bankruptcy notice from 21 days to 6 months;
• in circumstances where a debtor has declared an intention to enter voluntary bankruptcy, extend the timeframe for which a debtor is protected from an unsecured creditor taking further recovery action from 21 days to 6 months.

Debt agreement

A debt agreement is a legally binding agreement between a debtor and their creditor to release them from their debts. The agreements are generally available to people with small debts, few assets and low incomes.

To be eligible to enter into a debt agreement, a debtor must:

• have income below a certain threshold;
• have debts below a certain threshold; and
• not have been made bankrupt in the past 10 years.

To initiate the process, a debtor must submit a written proposal to the Official Receiver for a binding agreement between the debtor and their creditors. The proposal must identify the assets of the debtor, how they shall be dealt with and who shall co-ordinate the debtor’s proposal (for example, the Official Receiver, a registered trustee or another person). Some examples of proposals include providing an undertaking to repay a smaller debt or payment of the debt by instalments.

If the proposal is accepted by the Official Receiver, the Official Receiver writes to the creditors asking them whether they accept the proposal. The proposal is accepted if a majority of creditors (by reference to the value of the debt) vote in favour of the proposal. The effect of a debt agreement is that creditors cannot take action to recover their debts. However, a debtor’s details will appear on the National Personal Insolvency Index and will be recorded by credit reporting agencies.

It is important to note that by making a proposal to creditors under a debt agreement a debtor commits an act of bankruptcy and if the debtor’s proposal is not accepted, a creditor can apply to Court to bankrupt the debtor.

Personal insolvency agreement

A personal insolvency agreement (PIA) is similar to a debt agreement, except there are no limits on income and assets owned by the debtor and the total debt owed. There are more significant costs involved in proposing a PIA and the arrangement is better suited to debtors with higher incomes and a number of assets.

The PIA is managed by a controlling trustee who undertakes an investigation into the debtor’s financial position and then calls a creditors meeting to vote on any proposal. The advantages of a PIA are that it allows a debtor to continue to carry on business (which is difficult for a person once declared bankrupt) and there is no requirement for a debtor to contribute property or income acquired after the PIA to their estate.

Again, a debtor commits an act of bankruptcy by signing the formal authority required to make a proposal to creditors.

Conclusion

Formal steps to manage bankruptcy should not be taken lightly, as they can have long term adverse effects on a debtor and their employment options and ability to obtain credit.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

A company constitution is usually drafted in a standard format and does not provide protection for shareholders in the event of a dispute between them or where issues arise not covered by the constitution. 

A shareholder agreement, which properly outlines the steps to be taken in the event of disputes and certain circumstances arising, can be an effective tool for avoiding the cost of litigation.

A shareholder agreement sets out up front how disputes and deadlocks are to be resolved and allows shareholders to resolve issues which arise – quickly and with finality.

What is a shareholder agreement?

A shareholder agreement is a private contract made between all the shareholders of a company, setting out the rights, obligations and liabilities of each shareholder. Such agreements do not have to comply with any set form or procedure. However they must be drafted so as to ensure that the agreement is valid and enforceable. 

A shareholder agreement needs the consent of all shareholders and, unless otherwise specified, all the existing shareholders must consent to any changes or alterations.

Do I need a shareholder agreement?

All proprietary companies must provide a constitution upon incorporation and it might be assumed that a company constitution is sufficient to address the rights and obligations of shareholders.

However, a company constitution is usually limited in scope and is focused on setting out the company’s objectives, activities and internal administrative matters. A standard company constitution will not protect a shareholder’s interests in the event of a dispute between the parties or where issues arise not covered by the constitution.

In contrast, a shareholder agreement can be an extremely useful legal document for managing any issues affecting shareholders, not covered by the constitution, which might arise in the future.

It is not compulsory to have a shareholder agreement but it is highly recommended for all companies, particularly smaller, privately held companies where there might be a close relationship between the owners (shareholders) and management.

When a company is created and there is goodwill between the shareholders, a shareholder agreement might not seem necessary. However, it is easier to negotiate a shareholder agreement at the start of a business venture when issues can be discussed amicably, rather than when parties are frustrated by disagreements down the track.

What to include in a shareholder agreement

For a shareholder agreement to be useful it needs to be customised to meet the specific requirements of the company and its shareholders.

Listed below are some common provisions which most shareholder agreements should contain.

Primacy of shareholder agreement over the constitution: in the event of any inconsistency between the shareholder agreement and the constitution, you would want the shareholder agreement to prevail.

Alternative dispute resolution: to avoid the cost and uncertainty of litigation, it is advisable that parties be required to try and resolve their disputes through alternative dispute resolution, before any formal litigation can be commenced.

Deadlock breaker: these provisions deal with circumstances where shareholders cannot agree on the management of the company. They can include:

• • A shotgun clause, which works by allowing a shareholder to break the deadlock by purchasing the shares of the other shareholder at a nominated price.
  • A chairman clause, which allows one shareholder to become the chairman and have the casting vote; or
  • A liquidation clause, which provides that the company is to be voluntarily wound up if the deadlock continues for a set period of time.

Pre-emptive rights: which imposes restrictions on the transfer of shares. A provision can require exiting shareholders to offer their shareholding to existing shareholders first, before the shares are offered to outside parties.

Drag-along, tag-along rights: are provisions which are aimed at balancing the rights of a majority shareholder and a minority shareholder. Under a drag along option, majority shareholders can require a minority shareholder to join in the sale of shares in the company. Under the tag along option, where a majority shareholder is selling shares in the company, the minority shareholder has the right to join the transaction and sell their minority stake.

Mandatory sale events: a provision which sets out triggers for the mandatory sale of shares in certain circumstances (for example, a director passes away, resigns or files for personal bankruptcy).

Share valuation methods: it is prudent to set out the method by which shares are to be valued in relation to pre-emptive rights and mandatory sale events. For example, shareholder agreements often provide for the appointment of an external valuer with set criteria for valuation.

Conclusion

A shareholder agreement is best prepared when a company is first incorporated, when there is goodwill between the parties and there have not been any disputes or disagreements about the management of the business.

It is a useful document, setting out the rights, obligations and liabilities of the shareholders and how risks and disputes are to be managed in the future.

A shareholder agreement should be professionally prepared as it needs to be tailored to the particular needs of the shareholders and company but should contain some of the key provisions set out above.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

The recent death (or purported death) of Gerald Cotton, former Chief Executive Officer of Canadian cryptocurrency exchange company, Quadriga CX, emphasises the importance of planning your electronic after-life.

Mr Cotton’s death in India at the age of 30, has not only raised suspicion as to its authenticity (and allegations of an exit scam), but reiterated the chaos that can be created if digital assets have not been considered in an estate plan. 

Mr Cotton was the sole custodian of encrypted passwords ‘protecting’ over $200 million worth of digital assets. His untimely death has left numerous Quadriga customers unable to access their assets with trading on the Quadriga platform suspended while authorities try to work out where to next.

Mr Cotton’s widow states that she played no role in the running of Quadriga and, despite efforts, has been unable to unlock the laptop used by Mr Cotton nor access any of his accounts.

The digital assets referred to in the Quadriga saga comprise cryptocurrency (virtual currency created and stored electronically such as Bitcoin, Litecoins and Ethereum). The cryptocurrency system is decentralised and not subject to a governing authority, raising unique challenges in identifying and ‘locating’ the assets.

Regardless of how the Quadriga saga unfolds, it is a timely reminder of how important it is to consider what happens (or should happen) to our digital assets when we die.

What are digital assets?

A person’s ‘digital life’ may encompass a range of online transactions, activities and accounts such as:

• cryptocurrency;
• financial assets including online bank accounts and shares;
• intellectual property attached to domain names or online literary works;
• online sporting and gaming accounts;
• loyalty programs such as Flybuys, Rewards and Frequent Flyers;
• online shopping accounts such as eBay and Amazon;
• personal / business social media accounts such as email, Facebook, Linked-In.

All should be considered, and included, in an effective estate plan.

Issues unique to certain digital assets

Traditional cash-based assets such as money deposited in a bank, shares or other paper-based investments are held by title to the owner and can be transferred to the beneficiary of a deceased person with the relevant documentation. Ownership of digital assets like Bitcoin, however, is anonymous with owners accessing their cryptocurrency with private keys which are used to unlock and deal with the assets. This information may be held on a computer device (via a digital wallet), on a USB, or printed separately. These assets can easily be overlooked or ‘keys’ misplaced, representing unique challenges when it comes to administering an estate.

Many digital assets are also held globally and may therefore raise jurisdictional issues from an estate planning perspective. In most instances, there is no uniform legislation governing access to a deceased person’s online accounts, so it is imperative that these matters are dealt with specifically in an estate plan.

Following are some steps you can take to ensure your online life is appropriately dealt with when you are gone.

Identify your digital assets

You should start by making a list of your digital assets (including online accounts) and determining what you would like to happen to them when you die. 

Keep records of your online accounts and subscriptions including user names and passwords and store this information in a secure place.

Remember your online accounts and login details are likely to change frequently and your list should be maintained accordingly.

Understand your online accounts

Understanding how various accounts are dealt with by service providers will help to determine the type of action you would like taken when you die. 

For example, Facebook account holders can advise in advance whether their account is to be deleted or memorialised. A memorialised account can provide a place for family and friends to share memories after a person dies on the deceased’s profile, and any content shared by the deceased person remains visible to those with whom it was shared. Nobody can log into a memorialised account.

Some loyalty programs such as Frequent Flyers may not be transferrable or redeemable after a person dies, so it may be wise to keep tabs on these types of accounts to utilise benefits regularly. 

Include digital assets in your Will and appoint a technology custodian 

Your Will should define and identify important digital assets and provide executors and trustees with appropriate directions and powers to deal with them.

Assign your executor or other trusted person, who is familiar with technology, the role of managing your online life after you die and ensure this direction is included in your Will. 

Record your after-life technology instructions with respect to each account separately and ensure these instructions are secure, but accessible to your technology custodian. Never disclose passwords in your Will.

Online maintenance

Online accounts contain personal information which should be protected. Technology presents a real risk of identity fraud and unmonitored accounts can be particularly vulnerable. Regular monitoring and unsubscribing or deleting unused accounts can help minimise risk and keep your technology life tidy.

Regularly downloading photos and videos from your mobile to a storage device can ensure that memories are accessible to your family when you die.

Consider incapacity

It is also important to consider what happens to your online life in the event that you are incapacitated. Appointing a trusted person to manage your online affairs and including specific instructions in an enduring power of attorney is a logical step to ensure the appropriate management of your digital wealth if you are incapacitated. 

The instrument making the appointment should be specific to the jurisdiction in which the assets are held, and in this respect, more than one document may be required.

Consider trusts

It may also be beneficial to hold substantial digital assets through a trust structure, if possible, for greater protection and better taxation outcomes. In doing so, the trust must be considered and dealt with under the Will, which should nominate beneficiaries of the trust or shares in the trustee company and include provisions to ensure the trust can achieve the desired objectives.

Conclusion

It has become increasingly difficult for executors, lawyers and family members to ascertain and access online assets after a person dies, with many financial and other institutions operating in a ‘paperless’ environment. Certain digital assets such as cryptocurrency can present additional problems for a deceased’s family.

Inaccessible online accounts make it difficult to identify assets, and leaving online accounts open indefinitely raises concerns of potential identity theft.

Good online management and ensuring your digital assets are included in your estate plan will help your executors and family manage your online life after you are gone.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

Superannuation in Australia is governed by the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and Income Tax Assessment Act 1997 (Cth) (ITA Act).

Superannuation is a tax-effective way to save for your future. The SIS Act provides for the formation of a Self-Managed Superannuation Fund (SMSF). These funds are subject to strict compliance requirements however, they also allow members flexibility and control over the choice and management of their investments.

The potential benefits of having an SMSF cannot be achieved without sound planning and administration. This includes having in place a valid Binding Death Benefit Nomination (BDBN). This is often overlooked by fund members resulting in unintended and undesired consequences after the member’s death.

What is a Binding Death Benefit Nomination?

A BDBN is a direction to the trustee of your superannuation fund to pay your death benefits to an eligible beneficiary or beneficiaries, or to your estate. Essentially, the BDBN overrides the decision of the trustee so that benefits are paid in accordance with your wishes rather than at the trustee’s discretion.

Superannuation does not automatically form part of your estate so without a BDBN, the beneficiaries would otherwise be decided by the trustee under the terms of the fund and relevant legislation.

Fortunately, most funds allow you to nominate your intended beneficiaries provided the nomination complies with the legislation and provisions of the trust deed.

The trust deed for a SMSF can include provisions allowing members to make BDBNs. Many trust deeds already have these provisions in place however if not, your lawyer can assist to formally amend the trust deed to allow for a BDBN.

A BDBN can also be tailored to take account of various contingencies. They can have cascading provisions which provide for an alternate beneficiary if one or more beneficiary predeceases the fund member, identify a specific asset for a beneficiary and, where permitted, nominate how benefits are to be paid such as by lump sum or pension.

 

Who can I nominate?

Death benefits can only be paid to a dependant of the fund member or to the member’s legal personal representative (the executor or administrator of the estate). 

A ‘dependant’ includes a spouse (including a de facto partner of same or opposite sex), a person with whom the fund member had an interdependency relationship, a child of any age or a person who is financially dependent on the member. A child includes a biological child, adopted child, step child and ex-nuptial child.

A ‘dependant’ under the ITA Act (unlike the SIS Act) does not include financially independent adult children. This means that although adult children can be paid from the fund, they may be taxed higher than other beneficiaries. The choice of beneficiary is therefore an important consideration when making a BDBN. The overall estate must be considered – sound financial and legal advice can make a big difference in the tax consequences to the person inheriting.

What is a valid BDBN?

The SIS Act and Regulations provide rules for making BDBNs which generally include that:

• members are given sufficient information to understand their rights to require the trustee to provide the benefit;
• trustees must pay the benefit in accordance with the nomination provided those nominated are a member’s dependant/s or legal personal representative;
• the rules of the fund must allow members to make a nomination;
• the nomination must clearly indicate the portion of benefit payable to each beneficiary;
• the nomination must be in writing, signed and dated by the member and witnessed by two adults (who are not beneficiaries) who must declare that the nomination was signed in their presence;
• a member giving notice may amend, revoke or affirm the notice after it is made;
• the nomination lapses after three years. 

It is generally accepted that not all of these rules apply to SMSFs, although there has been uncertainty surrounding this issue for some time. Accordingly, when preparing a BDBN for a SMSF it is necessary to look closely at the trust deed to ensure that a BDBN is permitted, that it is prepared in conformity with the deed, and does not fall short of those parts of the SIS Act and Regulations that should apply. Your lawyer can review the trust deed to ensure that the appropriate provisions are included and that the proposed BDBN will be effective.

Similarly, although the SIS Act provides that a BDBN will lapse after three years, it is considered that a BDBN made under a SMSF can be non-lapsing and last indefinitely. Despite this, it is highly recommended that all BDBNs be reviewed at least annually and in the event of a significant change in personal or financial circumstances (of both the member and anticipated beneficiaries).

Case studies – the importance of estate planning and reviewing a BDBN

It cannot be over-emphasised how important it is to regularly review your estate plan – this includes your Will your SMSF and BDBN. It’s hard to imagine the difference that one document, often only one page in length, could make to the distribution of your estate.

A 2005 case shows the consequences of leaving the distribution of your superannuation funds to your trustee’s discretion. In Katz v Grossman [2005] NSWSC 934 the deceased’s Will provided for equal distribution of the estate to his son and daughter. Considerable assets were held in an SMSF of which the daughter was trustee.

The daughter paid the entire SMSF balance (approximately $1 million) to herself rather than dividing it with her brother. Unfair you say? Probably, however despite the provisions in the Will, the Court determined that the daughter (a trustee and dependant under the SMSF) was legally permitted to pay herself.

More recently in Ioppolo and Hesford v Conti WASCA 45 [2015] unintended consequences were the result of not considering an overall estate plan and the interplay between a Will, superannuation fund and a BDBN.

In her Will, the late Mrs Conti left her superannuation benefits to her children. She and her husband were trustees of an SMSF with considerable assets. After Mrs Conti died the trustee was replaced with a corporate trustee (a company controlled by the husband) which paid the deceased’s benefits to the husband. The Court held that the decision of the SMSF trustee to pay Mr Conti was a valid exercise of the trustee’s discretion.

Despite specific instructions in Mrs Conti’s Will that her husband was not to benefit from her interest in the SMSF, the Court found against the children’s claim to the funds.

Conclusion

Unless specific directions are made through a BDBN for the payment of your death benefits, the beneficiary of your superannuation fund could be determined by a trustee and a contrary direction in your Will may be ousted.

Regular review of your SMSF with your financial and legal advisors can assist in achieving maximum benefits from your fund. Just like having a routine health check-up, your SMSF should be monitored, analysed, and, if necessary, adjusted to achieve optimum performance. This includes having in place a BDBN that accurately reflects your testamentary wishes and reviewing it regularly to ensure it takes account of your changing financial and personal circumstances.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

If you are considering buying a business there are many things you need to do from a legal, financial and general business perspective.  Getting the right advice from the start is important. The structure of and issues involved in the sale are quite different if you are buying the business assets only, compared with the shares in the company that owns the business.

In this article we will highlight some of the key issues to be considered.

Making sure you follow the right process before signing any documents is a key component of a successful business purchase. 

The main things to do before signing a contract are:

• Research
• Get professional advice
• Review & understand all documentation

Research

Proper research involves checking the records of the business and other information to ensure:

• Sales are as good as the owner says they are 
• The business systems are sound and documented
• The business does not have any problematic legal obligations or liabilities
• All necessary information, rights and assets will be included in the sale
• Cash flow is sustainable
• Employees will be happy with a new owner 
• Customers will remain loyal once you take over
• You understand the operation of and opportunities in the market/industry

Research should, where possible, be carried out before you sign any contracts. 

Professional advice

You should always consider briefing and engaging legal and accounting advisers to assist you in conducting due diligence and documenting the transaction, to avoid legal and financial (including tax-related) “surprises” and arguments down the track. 

You might also consider whether there are any industry specific experts that may be useful.

Review and understand the documentation

When purchasing a business there is a lot of documentation to be gathered, read and understood. 

The seller may require you to sign a confidentiality agreement to stop you from using confidential information for any purpose other than buying the business. You should make sure you fully understand the agreement before you sign it.

Some of the information you should gather and review is outlined below.

Documenting the transaction

After completing your due diligence you will need to have the transaction documented with a legally binding contract. There are many issues to consider.

Conclusion

Buying a business can be a complex transaction. You need to make sure you have done adequate research, understand the risks and have received the right advice.

If you are considering buying a business and would like some help please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.