Even where you operate your business through a company, you can, as a director, be personally liable for claims arising out of the company’s activities. The corporate shield has long been split asunder both by judge-made law and a myriad of statutes.
So, apart from taking out insurance for obvious risks (such as for personal injury, property damage and workers compensation), what can you, as a business owner, do to protect yourself from these personal risks?
In this short article we look at two specific responses that should be considered by directors.
Many directors and others have tried to sequester a portion of their assets in family discretionary trusts. A family trust can be a safe haven for property, except where property has been transferred with the intention of defeating creditors. In the high profile case, barrister John Cummins QC transferred the family home to his wife, and shares to a family trust. Both transfers were declared void, enabling the Trustee in Bankruptcy to claw back about $1.6 million.
Even if your family trust is safe from attack by the Trustee in Bankruptcy, it might not be safe if ASIC seeks a freezing order over assets held in trusts of which you are a beneficiary.
In the case of Richstar Enterprises Pty Ltd v Carey, ASIC sought an order that receivers be appointed to a discretionary trust of which the director defendant was a beneficiary. Ordinarily, because a discretionary beneficiary is not entitled to a fixed share of the income or property of the trust their interest in the trust is not property for the purposes of the Bankruptcy Act. However, in this case the Federal Court held that:
“where a discretionary trust is controlled by a trustee who is the alter ego of a beneficiary, a contingent interest may be identified as it is as good as certain that the beneficiary will receive the benefits of distributions.”
In short, a family trust can be effective to partition assets, however it requires three very important caveats:
- The transfer of property into the trust should have a commercial rationale, dealing with pre-existing property, and occur before any significant liability is incurred which could result in the transfer being categorised as one intended to defeat creditor and clawed back, as in the Cummins case;
- A corporate trustee should be appointed to the trust and any persons who may be exposed to the risk of bankruptcy should be excluded from being a director of the corporate trustee and from having the power of appointment of the trustee of the trust; and,
- The trust must at all times be properly administered to minimise the risk of the trust being seen as an alter ego of the at risk person.
The other popular safe haven is superannuation. However, contributions to defeat creditors can be unwound under section 128B of the Bankruptcy Act where a transfer of property, that would otherwise have been available to creditors, is made to the fund with the main purpose to prevent or delay the property becoming divisible among creditors.
- Ensure that super contributions are bona fide, not just last minute attempts to defeat creditors;
- Make regular contributions to support the position that any contributions are not attempts to defeat creditors; and,
- Not make one-off, lump-sum transfers.
Conclusion – A stitch in time saves nine
The personal risk of business owners is significant. The powers available to a trustee in bankruptcy are broad and sweeping, and well adapted to catch transfers aimed at defeating creditors. Asset protection advice should be obtained early and often, and should be in the mind of a director from the very outset and each time business and personal structures change.
Peter McNamara, Principal