What is a ‘large proprietary company’?

What is a ‘large proprietary company’?

A policy objective adopted by lawmakers is to reduce the cost of doing business in Australia.

In Australia there are 2 main categories of companies – proprietary or private companies and public companies. Most small to medium-sized businesses choose to register as a proprietary company however, they are restricted to not more than 50 non-employee shareholders. A public company may be listed on the stock exchange.

Pursuant to the provisions of the Corporations Act 2001 (the Act) ‘proprietary companies’ are defined as either large or small depending on their consolidated revenue, asset value and number of employees.

Small proprietary companies are protected from the full raft of reporting obligations imposed on large proprietary companies and public companies including the lodgement of annual financial reports, a director’s report, the appointment of an auditor and lodgement of an auditor’s report.

Effective 1 July 2019 2019 the Corporations Amendment (Proprietary Company Thresholds) Regulations 2018 (the Regulations) modernise the thresholds by doubling them as follows:

  • increasing the annual consolidated revenue threshold to $50 million or more;
  • increasing the value of gross assets to $25 million or more; and
  • increasing the maximum employee size to 100 employees or more.

The stated objective of the regulation is to ensure financial reporting obligations are targeted at economically significant companies, while reducing costs for smaller sized companies that would no longer be required to lodge audited financial reports with ASIC.

It is essential therefore that the change in the thresholds are considered by directors of proprietary companies before 1 July 2019, so consideration can be given as to whether they are likely to satisfy at least 2 of the threshold requirements and take steps to plan for accounting and reporting standards required by the Act.

Am I an ‘officer’ for the purposes of the Corporations Act 2001?

Am I an ‘officer’ for the purposes of the Corporations Act 2001?

 

An ‘officer‘ of a company owes statutory and common law duties to both the Company and to persons with whom the company deals.

 

Undischarged bankrupts are disqualified from engaging in the management of a company by section 206B of the Corporations Act 2001; who then is an officer the purposes of that provision?

 

The answer may be found in King v Australian Securities and Investments Commission [2018] QCA 352In that case the Queensland Court of Appeal was required to determine whether a person was ‘officer’ of a Company and breached duties owed to the company. The court considered competing views expressed by the Federal Court and the High Court which are, essentially, a consideration of form versus substance.

 

In Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296 the Full Federal Court held that for a person to be an ‘officer’ it was implicit that they hold an office within that company referring to the express provisions of the Corporations Act 2001 where the word ‘officer’ is used in conjunction with terms such as ‘position’ or ‘office’.

 

The alternative view considered by the Queensland Court of Appeal were comments made by the High Court in Shafron v Australian Securities and Investment Commission (2012) 247 CLR 465 where it was said that the term ‘officer’ applied to a broader class of people than those who hold a particular ‘office’.

 

The High Court noted that in Corporations Act sub-paragraphs 9(i) and (ii) define ‘officers’ by what they do and that it follows therefore that the inquiry must be directed to ‘what role the person in question plays in the corporation’, rather than whether they hold an nominal ‘office’ in the company.

 

The Court of Appeal did not follow the High Court’s observations in Shafron as it considered the comments obita dicta and instead followed Grimaldi. It followed therefore that the ASIC were required to prove Mr King acted in an ‘office’ of the company in order to be considered an ‘officer’.

 

The Court of Appeal held that for a person to be deemed an ‘officer’ of a company that person must ‘act in an office’ of the corporation ‘in the sense of a recognised position with rights and duties attached’.

 

(obiter dicta are observations by a judge or legal question suggested by a case under consideration but not arising in such a manner as to require decision. The observations are therefore not binding is a precedent however when made by a superior court like our High Court are often considered persuasive)

 

A very helpful summary of the King decision relied upon by me in this post appears in the Queensland Law Reporter published 25 January 2019: https://mailchi.mp/queenslandreports/your-weekly-queensland-law-reporter-m8chjfsqke-1483353?e=b451bce4f5.

SAFE HARBOUR REFORMS – A BETTER OUTCOME FOR WHOM?

SAFE HARBOUR REFORMS – A BETTER OUTCOME FOR WHOM?

 

Much has been published about the ‘Safe Harbour Reforms’ recently enacted into Australian law. Its stated goal is to protect directors and officers of companies who believe that their company is or may be insolvent and on satisfaction of certain preconditions may make a proposal to restructure the company and continue to trade within the ‘Safe Harbour’ provided it can be demonstrated that the proposal is likely to achieve ‘a better outcome for the company’.

 

But who was ‘the company’? What does a better outcome for the company really mean – is it a better outcome for creditors, if so, is it the secured creditors or unsecured creditors or all of them? Is it shareholders? What of other stakeholders including employees in the community as a whole?

 

Clearly the survival of a trading entity is vastly superior outcome to a typical external administration – if ‘a better outcome’ is treated as a reference to a better outcome for a broader group of stakeholders than simply shareholders and creditors, such an outcome is clearly in the public interest and to be applauded.

 

The survival of a trading entity leaves the community as a whole better off. It provides an opportunity to sustain the enterprise which would be lost in a conventional external administration – the maintenance of jobs, both within the entity and suppliers (witness the effect of the withdrawal of the car manufacturers in Melbourne and Adelaide), the payment of accumulated but unpaid employee entitlements, the maintenance of the goodwill, intellectual property and expertise built up by an enterprise, an opportunity for unsecured creditors to receive payment and avoids the sale of valuable assets by secured creditors resulting extraordinary losses and of course, the generation of tax revenue is a worthy goal.

 

These are highly leveraged values – spiral down if lost – spiral up on survival.

 

The return to health of a trading enterprise in our community is clearly ‘a better outcome’.

DIRECTORS AND OFFICERS LIABILITY

DIRECTORS AND OFFICERS LIABILITY

 

  1. Why should you listen to me?
  • There are over 30 Commonwealth Statutes and over 100 Queensland State Statutes that impose personal liability on Directors and Officers in addition to the Corporations Act;
  • Many impose strict liability, i.e. there is no defence with criminal pecuniary penalties applying;
  • Some result in significant personal liability for the Company’s conduct or the Company’s debts;
  • Of course you can agree to be personally liable for a Company’s debt by giving a personal guarantee but that is your choice.

 

  1. What am I going to tell you that will make you understand why you should listen?
  • Although we engage in a diverse range of businesses with different professional or general compliance standards, there are a number of common threads that will render a Director or person acting as a director personally liable, e.g.
  • Crime (Taxation Offenders) Act – entering into an arrangement with the intent of securing a position where a company is unable to pay its tax;
  • Income Tax Assessment Act – Director’s penalty notices creating personal liability for failing to remit PAYG – this is going to be extended shortly to include the whole of the liability on the integrated account;
  • Superannuation Guarantee Administration Act – relating to a failure to cause a company to remit superannuation to funds nominated by employees;
  • Competition and Consumer Act – offence with pecuniary liabilities and personal civil liability where an individual concerned is in breach of the Act;
  • Corporations Act 2001 – Directors have a duty to avoid insolvent trading. The ASIC has published regulatory guide 217 to assist directors in determining what their obligations are.  A liquidator can bring proceedings for an order for compensation for loss suffered by a company as a result of insolvent trading – Section 588m.  The ASIC can also seek criminal compensation pecuniary penalty orders for the conduct.
  • Corporations Act 2001 – Failing to keep proper books and records is a breach of a director’s duty and can result in the company being deemed insolvent from the time the records weren’t kept properly.

 

  1. How can you avoid personal liability as a director or an officer?
  • Obtain adequate compliance, e.g. employ a bookkeeper, provide them with the best software, regularly produce accounts including profit and loss, aged debtors and aged creditors ledger to monitor ongoing insolvency and cash flow available to conduct the business;
  • If you consent to be a director and accept the responsibility assert your right to remain informed – do you know whether the company is trading solvently? It is your duty to know the answer to that question each day you are on the company record as a director;
  • Make sure your name and address record with the ASIC is correct – do you want to receive that notice that the Tax Office might send you if the company has not paid remitted PAYG tax? – you wish you had – you only have 21 days to take a step to avoid being personally liable;
  • Take advice when you are setting up or restructuring the business to assess your risks and adopt the best structure to avoid personal liability – the corollary avoiding personal liability is protecting assets;
  • Get Directors and Officers insurance;
  • Again, get good advice from a competent consultant to set up systems to ensure compliance with;
    • Account preparation;
    • Debtors recovery – many businesses fail through failing to collect their money;
    • Aged creditors;
    • Payroll and superannuation compliance.
  • Avoid being deemed to be a director if you are merely a contracted advisor or employee, have a clear written agreement as to your role and that you are not required to act as if you are a director.

BUYING A BUSINESS

BUYING A BUSINESS

 

  • Before you sign the contract, make sure you know who the buyer should be – obtain the advice of your solicitor and accountant as to the best structure to adopt.

 

  • The buyer will be dictated by the type of business structure you adopt and is a decision based on a mix of tax effectiveness and asset protection.

 

  • Obtain legal advice on the terms of the contract before it is signed. For example, if a business is purchased on a “walk-in-walk-out” basis, no stocktake is required and the seller can simply run down stock as handover approaches; the employer may have a number of long term employees that you do not wish to re-employ upon completion of the contract.  Contracts commonly provide that the buyer must compensate the seller for any redundancy payments made to the seller’s employees named in the contract; is GST payable on the price?  Getting these questions wrong can cost an uninformed buyer valuable working capital.

 

  • After a contract is signed by the right purchasing entity on terms vetted by your solicitor, “due diligence” begins and is comprised of:-

 

  • Conducting a close examination of the business, whether its assets are complete and in working order, owned by the business, or subject to a mortgage or other defect in title;
  • Is the business being conducted at a place in accordance with the town planning regulations?;
  • Is the business profitable?
  • Is the lease of premises on reasonable terms for a remaining term that will give you security of tenure for your valuable instrument?

 

  • Before the price is paid and the business is handed over to you, decisions have to be made about which employees are to be re-employed, how the purchase price will be funded and taking those steps necessary to ensure you get the benefit of the business.

 

  • Buying a business is a complex task for which you must obtain expert advice. The cost of good advice will pay for itself many times over.

 

ASSET PROTECTION

Asset Protection

 

  • What assets? When advising an individual – the individual’s assets and, it follows, when advising a company the company’s assets.

 

  • From whom? – we commonly focus on protecting our clients’ assets from their creditors e.g. suppliers, the Australian Taxation Office and others. However, you may wish to protect your assets from your business partner, husband, wife or de-facto.

 

  • How you hold your assets and protect them is not always a question of tax effectiveness. Significant costs can be saved by developing effective asset protection strategies before the asset or business is acquired.

 

  • There are many structures available that provide a balance between tax effectiveness and asset protection in respect of the long reach of a trustee under the Bankruptcy Act or a liquidator under the Corporations Act 2001, both of which contain detailed provisions to set aside transactions which have been entered into for the purposes of putting assets beyond the reach of creditors.

 

  • To beat the effect of the Bankruptcy Act, Corporations Act and the Property Law Act, you can take advantage of a range of strategies including:

 

  • Use of licence agreements supported by laws relating to the provision of a personal property security under the Personal Property Securities Act 2009 – if you lend, rent or lease assets to your business;
  • The grant of a mortgage – if a family member lends you money or you lend your own company money, why not protect it with a mortgage?

 

  • An effective strategy can be put in place within 24 hours for a relatively modest fee.

 

  • If you intend to take a risk or you are the director of a company that takes risks, contact us today and let us develop a tax effective means of protecting your assets.

 

  • The costs of developing an effective asset protection strategy are ‘small change’ compared to what you stand to lose.