Asset protection is a topic that should be revisited at every stage of the business life cycle. Your and your business’ priorities for asset protection are likely to change as your business grows. It is important to recalibrate your asset protection goals as your business circumstances evolve. Consider whether you have best protected your and your business’ hard earned achievements with the strategies below.
Protecting valuable intellectual property
As a business grows, its intellectual property is likely to become significantly more valuable. Often, intellectual property becomes the most valuable asset of a business and especially so for a modern day digital business. Many businesses recognise the value of their intellectual property, which correlates with the huge demand for protecting intellectual property.
For businesses operated by a company structure, an effective method to safeguard intellectual property is to separate the business operations from the holding of intellectual property. Thus, the business’ intellectual property such as trademarks and patents, are held by a ‘holding’ company which does not conduct trading activities. The ‘holding’ company may grant rights to the ‘operating’ company, which is licenced to use the intellectual property in the conduct of trading activities. The obvious value in adopting such a structure is that should the ‘operating’ company be exposed to any claims or creditors (or be wound up), the intellectual property is safely retained by the ‘holding’ company.
Some company-held businesses, especially during the start-up and growth stages, obtain loans from related parties; such as from its director, shareholders, a related entity or even family members of the director or shareholders. Companies also commonly advance loans to its directors or family members of the director. In any event, a properly drafted loan agreement is an effective tool to protect the assets of the respective parties, particularly when loans are made between a director and his or her company.
An oversight made by some directors is to personally advance monies to his or her company, or for the director’s family members to make loans to a company without confirming the basic particulars of the loan (or record the agreement in writing at all!). Such particulars include the terms of repayment, when/how the loan is payable and whether there is a requirement for interest to be paid. The resulting risk when there is a failure to document a loan is that the lender becomes vulnerable to not being able to prove and/or recover the loan amount come the external administration of the company.
Likewise, where a company is providing loans to its director and/or shareholders, there should be clarity on the terms of the loan arrangement. Directors of companies may even find himself or herself in breach of director’s duties for failing to properly document the transactions of the company.
To adequately protect the assets of the parties involved, a loan agreement must contain terms stating at the minimum, the amount of the loan, interest rates (if any), the terms of the loan, repayment strategy (payment plan or lump sum), repayment methods (cheque, cash, electronic funds transfer) and finally if there is any security for the loan (recommended!).
Recording on the Personal Property Securities Register
In the day to day dealings of a business, a supplier may commonly obtain security from its client as part of the payment terms of the supply. It is not sufficient to merely obtain a grant of security from the client, it is vital for the supplier to properly protect itself by registering its security on the Personal Property Securities Register (PPSR).
Registration on the PPSR creates a valid and enforceable security interest that provides notice of a secured party’s interest in particular collateral/assets and further establishes the order of priority in relation to competing claims against that collateral/asset. The statutory time frame for registering a security interest to protect an asset is either within 20 business days after an agreement is reached between the parties (and is in force) or 6 months before the guarantor enters liquidation or administration. Section 267 of the Personal Property Securities Act 2009 (Cth) states that the result of failing to register the interest within the timeframe is that the security interest will vest in the grantor for the benefit of all creditors generally and the secured creditor will lose the benefit of its security.
Gavin Parsons and Associates can assist you with any questions you have regarding asset protection. Please contact us today on (02) 9262 4471.