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The Importance of Due Diligence in the Acquisition of a Business

By Zeeshaan Nordien, Principal at Matthews Folbigg Lawyers in our Commercial Law Group

Due diligence is an integral step in the acquisition of any business, whether the transaction is an asset purchase or a share purchase.  If done correctly, due diligence helps mitigate the various commercial, financial and legal risks that a purchaser may otherwise be exposed to when acquiring a business.  Due diligence is the process undertaken by the purchaser of a business to perform an assessment of risks and compliance to ensure that the target business is, amongst other things, profitable, compliant with its legal, including contractual, tax and other obligations and operating with appropriate licenses and approvals. [...]  READ MORE →

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Estate Planning and Superannuation

ESTATE PLANNING and SUPERANNUATION – The importance of considering Superannuation as part of your overall Estate Planning

Estate Planning Decision: In D17-18/120 (2018) SCTA 24 the Superannuation Complaints Tribunal (“Tribunal”) had to consider an application by the Deceased three minor children for payment of the death benefit and whether the binding death benefit could be overruled.

Facts

  • The Deceased had two adult children with his first wife and three minor children with his second wife.
  • After being diagnosed with a terminal illness the Deceased signed a new Will and at the direction of his solicitor, a Binding Death Benefit Nomination (“BDBN”) ( six months prior to his death.)
  • Both the Will and BNBN were in favour of his two adult children in equal parts.
  • The evidence supplied was that the Deceased had not been in contact with his second wife for many years; however had a strong and close relationship with his adult children.
  • The second wife sought that the death benefit be split equally among all children.  This application was rejected by the Trustee.
  • The second wife/minor children brought an application to the Tribunal.  It was asserted that the BDBN was not valid as adult children were not considered dependants.   It was also asserted that the BDBN was invalid as a result of duress, coercion and undue influence.

Decision

  • The Tribunal had to consider whether the Superannuation Decision to pay the death benefit as per the BSBN was fair and reasonable.

Validity of the adult children as “dependents”

  • The Tribunal held that for the BDBN to be valid the nomination must be in favour of the legal personal representative or a ‘dependant’ of the Deceased.
  • Further, the Tribunal found that, under section 10A of the Superannuation Industry (Supervision) Act 1993 a ‘dependant’ of a child includes a child of the deceased member, whether or not that child is less than 18 years of age.  Therefore, the Tribunal held that the adult children were both considered dependents and consequently thebinding decision was valid.

Influence/coercion

  • The Tribunal placed great emphasis on the evidence supplied by the Deceased Member’s mother and the solicitor who took instructions and gave a statement regarding the Deceased capacity.
  • The Tribunal noted the solicitor’s statement… “The deceased had clear instructions and had full capacity at the time he attended the (solicitor’s offices)

The above determination highlights the importance of getting your Will properly drafted and the need to consider superannuation.  If the Deceased had not obtained legal advice and updated his Will and his BDBN, the outcome of this contested Death Benefit Payment may have been very different. [...]  READ MORE →

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Record Keeping for a SMSF

Record Keeping for SMSF’s

Introduction (SMSF)
Most SMSF trustees are aware that record keeping is important to ensure their fund remains compliant and eligible for tax concessions, but few trustees understand the actual ramifications of what happens when you don’t keep the right records.

Record Keeping Requirements
The ATO website contains a great deal of helpful information for SMSF trustees including the records a fund must keep. See https://www.ato.gov.au/super/self-managed-super-funds/administering-and-reporting/record-keeping-requirements/

For example, copies of annual returns must be retained for at least 5 years but records of changes of trustees and minutes recording investment decisions must be kept for at least 10 years.

Wrong Turns – Real Life Examples

1. Maintaining the Chain of Deeds
A and B set up the AB Super Fund in 1987.  They are the trustees of the fund in their own capacity.

In 1990 and again in 1998 they updated the provisions of their SMSF trust deed.  Their accountant arranges this for them.

In 2002 A and B move to another city.  They collect their records from their accountant and engage a local accountant to look after their fund.

That same year, A and B decide to change the trustee of the fund to a corporate trustee – AB Investments Pty Ltd.  Their accountant arranges this, but unfortunately A and B fail to hand over the most current trust deed, being the 1998 deed. The change of trustee is effected based on the provisions of the 1990 deed.

In 2013 the trust deed is updated yet again because the fund wants to enter into a limited recourse borrowing arrangement to purchase a property.  A and B find the 1998 deed at home and give it to the accountant.  The 2013 trust deed update is based on the variation provisions contained in the 1998 trust deed and is signed by AB Investments Pty Ltd.

A and B approach their financier in relation to the loan.  The financier reviews the chain of deeds and discovers the anomalies with the deeds which raises the following questions:

  • A and B purport that AB Investments Pty Ltd is the current trustee of the fund and the current governing provisions of the fund are contained in the 2013 trust deed.
  • The bank questions whether AB Investments Pty Ltd is actually the current trustee of the fund since it was appointed pursuant to the 1990 deed instead of the 1998 deed.
  • If AB Investments Pty Ltd is not the current trustee, then the 2013 trust deed is also invalid as it was executed by the company.
  • If this is the case, the current governing provisions of the fund are actually the 1998 deed which does not contain the appropriate provisions for the trustees to enter into a limited recourse borrowing arrangement.

The issues are complicated but are eventually the fund’s affairs are put back in order. In doing so the fund incurred legal and other costs and the property the fund was going to buy was sold to someone else.

2. Lost Deals
L and M are members of the L & M Super Fund and are the original trustees.  In 1993 a newly incorporated company called LM Holdings Pty Ltd was appointed trustee.

In 1997 the fund buys a property.  A title search for the property shows that ‘LM Holdings Pty Ltd’ is the registered owner.

In 2014 L and M divorce and M becomes the sole member of the fund. A new trustee, Life after L Pty Ltd is appointed. 

The appropriate forms are completed to change the name on the title of the property. An application is submitted to the Office of State Revenue (OSR) for concessional stamping. 

OSR requests evidence that LM Holdings Pty Ltd owns the property as trustee of the fund. The records showing that company’s appointment as trustee in 1993 have been lost.  The contract of sale (which showed ‘LM Holdings Pty Ltd as trustee for the L & M Super Fund’ as purchaser) has also been lost. 

Eventually other fund records were produced satisfying OSR that LM Holdings Pty Ltd own the property as trustee for the fund. However it would have been a much simpler and cheaper exercise if the original appointment of trustee and contract of sale records were available.

L and M were under no obligation to retain the above records as they relate to transactions occurring 20 years ago.  However, trustees should keep in mind that other authorities such as OSR and the titles office may require copies of documents to be produced from the very beginning of the establishment of the fund.

Prevention is Better than Cure
Most issues can be solved, however, they can cost the fund substantial time and money.

Problems are usually not identified until certain events occur such as divorce or the purchase of a property where time can be of the essence.

More Information
If you require assistance with your SMSF record keeping or have any other SMSF questions, contact the team at Matthews Folbigg Lawyers. Don’t delay!
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Do you know what PPSR interests affect your business?

Do you know what PPSR interests affect your business?

Selling
Selling your business can be both exciting and stressful at the same time. Once a purchaser is found the parties usually move as quickly as possible to enter into a sale contract and then to completion.

PPSR Considerations
An area often overlooked by a seller is taking the time to consider what security registrations (PPSR Interests) under the Personal Properties Securities Act (PPSA) may exist over the assets being sold including vehicles, stock, plant and equipment.

Standard Sale Condition
If the Contract for Sale of Business 2015 edition is being used:

  • a standard clause requires a seller to provide a release of each security interest that applies to the assets being sold (or such other statements or documents confirming the security interest does not apply to those assets
  • often a seller mistakenly believes that because they have already paid for various assets that they are not subject to any security interest
  • thus it can be quite a surprise to receive a PPSA search showing security registrations do in fact exist

The Sting
Inherent difficulties with obtaining a release of each security interest are:

  • a seller needs to make a request to the entity/person who has the benefit of the PPSR
  • that third party may not necessarily work to the same timeframes as a seller and purchaser
  • delays caused by that third party can affect the time for completion of the sale

Due Diligence Check
A search for a PPSR interest is inexpensive and by obtaining the search at or before the time the sale contract is being prepared it can eliminate future surprises and potentially costly delays.

More Information
If you would like more information about the PPSR, selling your business or any other legal matter, please contact the leading commercial lawyers in Parramatta, the Matthews Folbigg Commercial Law Team on 9635 7966 to speak with one of our commercial lawyers.
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Business Succession Planning

Business Succession Planning from the Perspective of a Commercial Lawyer

A Commercial Lawyer sees all sorts of businesses and deal with the effects of human nature in business on a daily basis. They document business ventures, estate and succession plans and we are often brought in to clean up the mess when things don’t go smoothly.
Planned Succession

Planning assumes there is time to plan. Often the business is closely tied to the founder who has a significant bank of knowledge which should be documented and communicated during the planning and handover process.
There are many issues to consider when preparing a succession plan:
– Will the owner leave completely or will the owner have some future involvement with the business?
– Who is to be the successor? This doesn’t matter if the business is being sold at arm’s length
– How will the owner conduct discussions with the preferred successor? Is there a backup successor?
– Will the owner appoint an independent person to lead the discussions and to chair meetings?
– Owners should set a realistic timeframe for planning, documenting, mentoring, transition, handover
– What are the risks to the business that may arise?
– How will the organisation structure change and how will other people’s jobs change as a result?
– What training is required for the successor and other people in the organisation
– What documents should be drawn up?
– What advisors will be involved – accountants, lawyers, spouse? [...]  READ MORE →

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The Importance of Record Keeping

COMMERCIAL LAWYERS UNDERSTAND THE IMPORTANCE OF RECORD KEEPING

As commercial lawyers we understand that in this electronic age it is tempting and we are often encouraged not to print documents. However it is often a good idea to have a printed copy of some records, as well as an electronic copy.

Good record keeping may sound rather Dickensian but here are a few pointers to make things easier for you as the years roll on, people move on or retire and memories fade. Nobody may remember what happened to that beige filing cabinet in the corner outside Jim’s old office and sometimes you will need is not the current document. [...]  READ MORE →

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Commercial Law – Selling Your Business? Beware the Warranty

By Natalie Gosper, a Solicitor in our Commercial Law team.

The standard conditions contained in the Contract for Sale of Business 2015 edition contain a number of warranties or promises made by the vendor about certain aspects of the business.

As they are contained in the ‘fine print’, they can’t be that important, right?

Wrong.  The vendor’s warranties and promises must be carefully reviewed to ensure the vendor knows exactly what they are stating about the business and how they will conduct the business between exchange and completion.   If a vendor makes incorrect representations or warranties, the purchaser may be able to make a claim for damages, rescind or terminate the contract. [...]  READ MORE →

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Commercial Law – Selling your business? Consider the PPSR

By Natalie Gosper, a Solicitor in our Commercial Law team

Selling your business can be both exciting and stressful at the same time.  Once a purchaser is found the parties usually move as quickly as possible to exchange.

An area often overlooked by vendors is taking time to consider what security registrations under the Personal Properties Securities Act 2009 (PPSA) may exist encumbering vehicles, stock or plant and equipment included in the business sale.

Under the most recent Contract for Sale of Business 2015 edition, a standard clause is included requiring a vendor to provide a release of each security interest (or such other statements or documents confirming the security interest does not apply to assets being sold). [...]  READ MORE →

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Implications – SMSF Record Keeping (or lack thereof)

Following on from the previous blog on record keeping, below is yet another example which highlights the importance of record keeping for SMSFs.

Where it can go wrong – another real life example

Lost Deeds 

L and M are members of the L & M Super Fund and are the original trustees.  In 1993 a newly incorporated company called LM Holdings Pty Ltd was appointed trustee.

In 1997 the Fund buys a property.  A title search for the property shows that ‘LM Holdings Pty Ltd’ is the registered owner.

In 2014 L and M divorce and M becomes the sole member of the Fund. A new trustee, Life after L Pty Ltd is appointed. [...]  READ MORE →

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Record Keeping (or lack thereof) for SMSFs

By Natalie Gosper, a Solicitor in our Commercial Law team

Most trustees of SMSFs are aware that record keeping is important to ensure their Fund remains compliant and eligible for tax concessions, but few trustees understand the actual ramifications of what happens when you don’t keep the right records.

The task of record keeping is often left to the Fund’s accountant or adviser, which should be a wise choice however there are records the trustees must retain which are often overlooked. [...]  READ MORE →

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Shareholder Disputes – Recent Case

Disputes between shareholders occur for many issues, from simple day-to-day business matters to complicated issues of corporate governance. A recent case demonstrates that a dispute can often escalate to litigation if simple rules of decision-making are not followed.

In Carolia Pty Ltd v Crompton, four director/shareholders established a joint venture business in accordance with a part written/part oral agreement. Over the course of the problematic joint venture, meetings were held and resolutions passed without the required notice, inadequate agenda, and in the absence of the agreed quorum. In response, the plaintiff/shareholders claimed that the agreement had been repudiated and sought damages. The court found that the breaches had serious repercussions which resulted in the loss of the value of the plaintiff’s shares and this amounted to repudiation. The plaintiffs were awarded damages for the proven value of their shares. [...]  READ MORE →