2. What we will cover
ī¨ What is âasset protectionâ?
ī¨ What are the risks?
ī¨ The three strategies
ī¨ How to set up your companies
and trusts
ī¨ What happens if it all fails?
3. What we wonât cover
ī¨ Asset protection is:
ī¤ a state of mind; and
ī¤ a longer-term way of
thinking
ī¨ There are no quick fixes
Ask for first-hand
testimonials of success.
5. What is asset protection?
ī¨ Keeping and protecting what
you have
ī¨ In the context of our
businesses:
ī¤ The âinvestmentâ which the
âequityâ in our businesses
represents; and
ī¤ The threat from our business
against our non-business
wealth.
6. The science of ârisk managementâ
ī¨ Identifying, eliminating, lowering and managing risks
ī¨ What could go wrong?
ī¨ Is it likely to go wrong?
ī¨ What would be the impact?
ī¨ How can I avoid it going wrong?
ī¨ If I canât avoid it, how can I lower the
chances of it occurring?
ī¨ If I canât stop it occurring, how can I
manage the outcomes?.
7. Some history
ī¨ âModernâ asset protection
started in the 1970s
ī¨ The Crusades and the
Middle Ages âuseâ
ī¨ A natural human instinct.
8. Is it moral?
ī¨ Is it fair to take positive
steps to protect what
you have?
ī¨ Is there a limit to what
you should be able to
do?
ī¨ Is it a âmoralâ argument?
Risk-taking v. irresponsibility
9. Irresponsibility
âNot meeting your obligations to creditorsâ
âNot paying your fair share of taxâ
âEndangering your employeesâ
âPolluting the environmentâ
âLimited liability is âunprofessionalââ
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 â is it worth it?
ī¨ We need to encourage
risk-taking
ī¨ 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
ī¨ 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...
âĻâan important deregulation initiative aimed at
encouraging wealth and job creation in Australia by
removing unnecessary compliance burdens from
company directors and corporate officers, where
appropriateâ would be helpful
âFederal Labor Government is acting to cut red tape and
remove criminal liability provisions that are inconsistent
with principles of good corporate governance and
criminal justiceâ
14. COAG agreesâĻ
ī¨ Miscellaneous Acts Amendment
(Directors' Liability) Bill 2012
(NSW)
ī¨ Directors' Liability(Miscellaneous
Amendments) Bill 2012 (Tas)
ī¨ Directors' Liability Reform
Amendment Bill 2012 (Qld)
15. Should the âphoenixâ rise?
ī¨ The âcontrivedâ phoenix
ī¨ The âgenuineâ phoenix
ī¨ In Australia we generally
do not make the
distinction
ī¨ Once a âfailureâ, always a
âfailureâ â and probably a
crookâĻ
17. Types of âthreatsâ
ī¨ Operational threats
ī¤ risks from the core operations
of your business
ī¨ Internal threats
ī¤ threats from within your
business
ī¨ External threats
ī¤ threats from things outside
your business.
18. Operational threats
ī¨ Under-quoting (cost overruns)
ī¨ Making a defective product
ī¨ Giving someone the wrong
answer
ī¨ Injuring an employee
ī¨ Injuring a customer/client
ī¨ Harming the environment.
19. Internal threats
ī¨ Fraud or theft
ī¨ Disclosure of IP, CI or KH
ī¨ Allowing an employee to be
harassed
ī¨ Loss of significant resources
(eg equipment and key
people) or operational
capacity.
20. External threats
ī¨ Loss of debt funding
ī¨ Arguing with your business
partner
ī¨ Accusation of mismanagement
by shareholders
ī¨ A change in the regulatory
regime or law
ī¨ Separation or divorce
ī¨ Physical or mental breakdown.
21. Are the risks real?
ī¨ âOffice Christmas party
comment costs
$A2.56millionâ
ī¨ âCourt gives former business
partners the right to pursue
$14 million claim against
DFO foundersâ
ī¨ âRich pickings top $5mâ:
PwC v Christina Rich
28. The fundamentals
ī¨ WAKE UP!
ī¤ Operational asset protection
īŽ Minimise the risks
ī¨ NEGOTIATE
ī¤ Contractual asset protection
īŽ Share the risks
ī¨ QUARANTINE
ī¤ Structural asset protection
īŽ Quarantine the risks
Most people start with
structural asset protection
strategies. However, we
recommend that you start
at the other end â WakeUp!
30. Take some responsibility
ī¨ These strategies limit and
manage the level of risk to
which your assets are
exposed through the actions
that you take within your
business
ī¨ Most people do not have
âlegal problemsâ. They have
simply failed to avoid an
avoidable problem in the first
place.
31. The risk areas
ī¨ The obvious:
ī¤ A product liability claim
ī¤ A workplace injury
ī¤ An environmental issue
ī¨ The more common:
ī¤ A cash-flow crisis caused
by pilfering
ī¤ The loss of a key
employee who does not
feel needed or mentored
appropriately
ī¤ 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 â
and particularly the assets
within your business â is to
refocus on your business
operations.
Take back responsibility!
33. Where things go wrongâĻ
ī¨ Are you getting the financial information you
need to run your business?
ī¤ What are the key things about your business?
ī¤ How much does it cost to open your doors?
ī¤ Who are your biggest customers?
ī¤ Who are your most important suppliers?
ī¤ Who are your key employees?
ī¤ What is your MIS like?
ī¨ Start with a âblood testâ
ī¤ How healthy is your cash-flow?
ī¤ How long does it take to collect your debtors?.
34. âĻwhere things go wrongâĻ
ī¨ Does anyone have their fingers in your till?
ī¤ Do you have systems in place to detect variances?
ī¤ Who has authority to operate your accounts?
ī¨ Next look at your stock levels and control
system
ī¤ Is someone pinching your stock?
ī¤ Do you have too much stock?
ī¤ Is the stock too old?.
35. âĻwhere things go wrongâĻ
ī¨ Employees:
ī¤ Do you have Job Specifications in place?
ī¤ Are they trained appropriately?
ī¤ Are they employed properly â terms, leave, etc?
ī¤ Are they paid appropriately â awards, conditions?
ī¤ Are they safe at work â OH&S?
ī¨ Bigger picture issues
ī¤ Are they the correct ones?
ī¤ Are you exposed to a key employee leaving?
ī¤ Do you need to sack anyone?
ī¤ Is there a sense of negativity in your business?.
36. âĻwhere things go wrongâĻ
ī¨ A business does not last long without customers
ī¤ Are you communicating with them?
ī¤ Are you working for the right ones?
ī¤ Are they asking too much of you?
ī¤ Are you delivering on time and within budget?
ī¤ Do you have terms in place, and are they paying?
ī¨ Equipment
ī¤ How old (cafÊ upgrade)?
ī¤ How safe (for customers and employees)?
ī¤ How efficient (computers, software)?.
37. âĻwhere things go wrongâĻ
ī¨ Identify your IP assets
ī¤ Customer lists
ī¤ Product specifications
ī¤ Financial information
ī¤ Marketing materials
ī¤ Precedents/templates
ī¨ Is you IP protected?
ī¤ Is anyone else using it?
ī¤ Are employees walking
out the door with it?
ī¤ Are they registered?
ī¨ Business partners:
ī¤ Are they pulling their
weight?
ī¤ Are you pulling your
weight?
ī¤ Are expectations clear?.
38. âĻwhere things go wrongâĻ
ī¨ Do you have the right team of
advisers and mentors?
ī¨ Are you doing enough marketing?
ī¨ How is your health?
ī¤ Physical
ī¤ Mental
Strive for operational excellence.
39. Practical steps
ī¨ Wake Up
ī¨ Review the key areas of
operational risk with your
managers/employees
ī¨ Make up a Risk Register
ī¨ Apply risk management
techniques.
41. Share the load
ī¨ These strategies relate to
managing risk by sharing
responsibility for the risk with
other parties â who are in a
better position to manage
those risks
ī¨ Over the longer-
term, operational excellence is
not enough.
42. Terms of Trade
ī¨ Choose the terms on which you do business with
other people
ī¨ Key issues:
ī¤ ACCA compliance
ī¤ Limitation of liability and warranties
ī¤ Passing of title/risk and insurance
ī¤ PPSA compliance and retention of title
ī¤ Guarantees.
43. Employment contracts
ī¨ Share the load with your
employees
ī¨ Protect your
customers, IP, phone
numbers
ī¤ Include a reasonable
restraint
ī¨ Use Job Descriptions
ī¤ You cant âperformance
manageâ without them.
44. General insurance
ī¨ Insurance is cheap â because it smooths
cash-flow, and cash is king
ī¨ Read the fine print, or âpayâ your broker
to do it for you:
ī¤ What is covered?
ī¤ Who is covered?
ī¤ When is it covered?
ī¤ What are the exclusions?
ī¨ The legal consequence of
underinsurance
ī¨ Get a good insurance broker
ī¤ Ask them for advice
ī¨ Maintain an âInsurance Registerâ.
45. External threats..
ī¨ Constitutions and Shareholder Agreements
ī¨ Buy-Sell and Exit Agreements
ī¨ Joint venture terms with other businesses
ī¨ Binding Financial Agreements.
46. Practical steps
ī¨ Agree terms with all customers
ī¨ Agree terms with all suppliers
ī¨ Have written agreements with all employees
ī¨ Agree terms with all business/JV partners
ī¨ Maintain a âContracts Registerâ
ī¤ Get a good lawyer on retainer
ī¨ Maintain an âInsurance Registerâ
ī¤ Retain a general insurance broker
ī¤ Get a written insurance review
ī¨ Maintain a âGuarantee Registerâ.
48. Keeping things separate
ī¨ Structural asset protection:
ī¤ Creating a boundary between
your wealth and the business risk
you are exposed to while building
your wealth
ī¨ These strategies seek to manage
risk by:
ī¤ quarantining risks; and
ī¤ keeping wealth out of harmâs way
ī¨ The âArmageddon defenceâ â not
the primary defence.
49. Getting it right the first time
ī¨ It is important to make the correct structure choices
from the outset
ī¨ There are a number of impediments to a
restructure, including:
ī¤ Tax restructure costs (or impediments); and
ī¤ The ârelation backâ rules under insolvency and
bankruptcy laws
ī¨ The real benefits are in the details.
50. What is your motivation?
ī¨ Any strategy that has âasset protectionâ as its
primary goal will be at risk of failure due to the
tests within the insolvency and bankruptcy rules
ī¨ Any strategy that has âtax effectivenessâ as its
primary goal will be at risk of failure under Part
IVA and other more specific anti-avoidance rules
ī¨ So what is a legitimate motivation? Real Change.
51. The building blocks
ī¨ You
ī¨ Other people
ī¨ A company
ī¨ A trust
ī¨ A combination of the above
52. Avoid trading in your own name
ī¨ Personally responsible for all
business outcomes
ī¨ The âMan of strawâ strategy
works, but personal
bankruptcy is worse than
company insolvency
ī¨ 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
ī¨ Your partners have your authority to get you into
trouble
ī¨ You may not know what you are liable for
ī¨ Avoid inadvertently entering into a partnership
ī¤ Do not agree to share profit with others
ī¤ Do not ask other people to do things for you.
55. An effective business vehicle
ī¨ Separate legal identity
ī¨ Limited liability for shareholders
ī¨ Separation of ownership and
management
ī¨ Structured management
principles and accountabilities
ī¨ Structured relationship between
co-owners
ī¨ Perpetual succession.
56. Companies
ī¨ A company will quarantine
the risks within the business
from you personally, and
from your other investment
assets
ī¨ Cheap life-time insurance
ī¨ Will not protect you from
personal attack
59. Who will be a shareholder?
ī¨ A shareholder is only responsible for the amount
they agree to subscribe (avoid partly-paid)
ī¨ Shares in a company represent the value of the
underlying assets
ī¨ Accordingly, the shares should be held by someone
who is not likely to be subject to attack
ī¨ It may be an individual, or it may be a trust.
60. Who will be a director?
ī¨ Limit the number of people who
are directors and choose with
care
ī¨ Limit the opportunity for
someone to be a âshadow
directorâ
ī¨ Give âvetosâ to the shareholders
which can protect their interest
without having to be a director.
61. Practical steps
ī¨ Use companies to carry on businesses
ī¨ Limit the number of directors
ī¨ Hold the wealth in shares in a protected place.
63. Trusts
ī¨ Can be used for business or
investments (but not both)
ī¨ âTwo-wayâ asset protection
ī¨ Need to be set up correctly
to avoid the âalter ego
attackâ.
67. The state-of-play
ī¨ (Chief) Justice French on a
rampage
ī¤ Richstar, Cummins, Spry
ī¨ âBenefitâ and âControlâ (direct and
indirect)
ī¤ Non-exhaustive, special power.., but
still not âpropertyâ
ī¨ More care needed when the trust
is set up and administered
ī¨ Still effective, and still popular.
68. Who should be the trustee?
ī¨ Needs to be linked to a
company to carry on a business
ī¨ At-risk individuals should not
be personal trustees
ī¨ Trustees should not be
controlled by the appointor
and at risk-beneficiary
ī¨ Directors of trustee should not
be controlled by the appointor
and at risk-beneficiary.
69. Who should be the appointor?
ī¨ Ideally not just one person
ī¨ Build in âsuccessionâ and therefore
hold the power with a âfiduciary
obligationâ towards a family
70. Who should be the beneficiary?
ī¨ Not the person who is a
trustee/appointor
ī¨ The children of the client
ī¨ Consider excluding the client
71. Contributions of wealth
ī¨ Need to be careful how wealth
is put into a trust
ī¨ Division 4A of Bankruptcy Act.
72. What does it all mean?
ī¨ Back to the âOld-schoolâ
ī¨ Role for professional trustees/
directors/ appointors who hold these
roles as a fiduciary on behalf of a
family line.
73. Practical steps
ī¨ Use trusts to hold wealth
ī¨ Use trusts in conjunction with companies
to carry on businesses
ī¨ Set them up correctly, and avoid
creating an âalter egoâ
ī¨ Keep trust deeds and constitutions up to
date.
76. âAssetsâ above âriskâ
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
ī¨ Keep your structure clean and
up to date. Liquidate defunct
companies (transfer loans etc.
to holding company)
ī¨ Keep you employees away
from your business and
investment assets
ī¨ Setting up your companies and
trusts with defence in mind.
82. Use security
ī¨ Swap equity for debt
ī¨ Borrow through risk
entities and use asset
entities to provide
guarantee security
ī¨ Give security over your
risk entities first
ī¨ Document secured loans
between your entities
ī¨ Use holding companies
as âtreasuryâ vehicles.
84. PPSA and âuseâ of assets
Holding Entity
Asset Entity Business Entity
Business
Assets
Business
Assets
âLeaseâ of assets
Ownership
85. Dealing with your bank
ī¨ There is not a lot you can do
ī¨ Keep assets in separate
pots, so that you can choose
how much to expose to bank
obligations
ī¨ Watch out for standard âcross
collateralisationâ clauses
ī¤ 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?
ī¨ Move âassetsâ to a new entity
ī¨ Move âequityâ to a new entity
ī¤ Making distributions
ī¤ Creating liabilities
ī¤ Creating obligations
ī¨ Impediments
ī¤ Stamp duty/CGT
ī¤ Insolvency laws
ī¤ 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
ī¨ Long-term consequences
ī¤ 3, 5 or 8 years
ī¤ Directorships, licences, financeâĻ
ī¨ They can go back in time and recoup
assets from:
ī¤ your creditors
ī¤ your spouse
ī¤ your trusts
ī¤ your super.
94. Up to 6 Months
Preference (s.122)
6 months
Claw-backs
Application for
âSequestration Orderâ
âCommencement
of Bankruptcyâ
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 â related entity and solvent
Undervalued Transactions
(s.120(3)) 2 years â solvent
95. Tightening of the screws on trusts
ī¨ When?
ī¤ If you have made contributions and
benefit (Div 4A)
ī¤ If you have control and can benefit
(Richstar)
ī¨ What to do:
ī¤ Structure appropriately
ī¤ Always pay full market value
ī¤ Document solvency at time of transfer
ī¤ New acquisitions are safer
ī¤ At-risk person pay âotherâ expenses
96. Use super
ī¨ Statutory protection for lump
sums and life policies
ī¨ Post-2006 contributions with
âmain purposeâ to defeat
creditors
ī¨ Pattern of contributions
98. How to benefit from privacy
ī¨ Do not:
ī¤ open your mouth
ī¤ drive a flash car
ī¤ live in a nice house
ī¨ There are ways that you can keep
things private:
ī¤ Limit what you make public
ī¤ Use nominees and trusts
ī¤ Hold assets outside Australia
ī¨ Adopt a âdocument retentionâ policy
99. The benefits of âoffshoreâ
ī¨ Better privacy
ī¨ Harder to enforce judgements
ī¨ More flexible structures
ī¨ Professional and experienced trustee
companies
ī¨ Few tax benefits (without imprisonment)
ī¨ Higher costs
ī¨ âNon-jurisdictionalâ assets.
101. What if it all goes wrong?
ī¨ Communicate
ī¨ Donât take it personally
ī¨ Donât trade while insolvent
ī¨ Pay tax/SGC first
ī¨ 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
ī¨ Help review your business for
operational, contractual and
structural weaknesses
ī¨ Review and update:
ī¤ your contracts
ī¤ your structures
ī¨ Help you maintain your Registers
ī¨ Defend you if you come under
attack.
Personal Liability for Corporate Fault Reform Act 2012 (Cth):The Billâs accompanying speech and media release said that it was âĻAccording to Mr B Ripoll, Parliamentary Secretary to the Treasurer, theâĻ
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 â so if one fails, the others surviveSeparate distinct risk levels into distinct entities
Consider using a separate contracting company for larger projects â 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, donât look like you have wealth worth attackingBut maybe that is not how you want to live