Legal Health Check

We often see businesses suffer or not grow to their full potential because the legal health of the business is inadequate. What is the legal health of a business?  It is simply the adequacy of the legal structures, policies, procedures and systems that a business has in place.

Just like your personal health, the early diagnosis of any issues your business may experience is important. However, preventing those issues from arising in the first place will always lead to a better outcome.

But it’s not all about prevention.  It is also about having the right legal foundations in place to facilitate growth and to maximise value on any future sale. A prospective purchaser will generally pay a premium if they have confidence in what they are buying. Would your business in its current form survive a purchaser’s due diligence investigations?

The Pointon Partners Business Legal Health Check is a four step process which is aimed at enhancing your business’ legal health to prevent risk, facilitate growth and maximise value as follows:

1.    Examination of current structures, systems and policies

Once you have started thinking about the key issues that affect your business’ legal health (see below), we would be happy to assist with any components of your review that you have identified.

Alternatively we can organise a workshop with you where we will collaboratively discuss and examine your business’ current legal structures, policies, procedures and systems.

2.    Diagnostic report and recommendations

If you decide  for us to organise a workshop, then following it we will provide you with a comprehensive diagnostic report of your business’ legal health and provide any recommendations  for improvement.

3.    Implementation of recommendations

Once you have reviewed our diagnostic report, we will organise a conference with you where we will discuss the practical implementation of our recommendations. We will work with you to provide practical solutions that work for your business.

4.    Periodic check-ups

Like your personal health, periodic check-ups are important. Future check-ups will refine current practises as required, but are unlikely to involve in any fundamental changes.

Before we get involved, it is important that you start thinking about your business’ current structures, systems and policies. We have set out a number of key issues to guide your thinking in the document that follows

1. BUSINESS STRUCTURING MATTERS

 1.1. Preliminary Matters

• How do you trade your business? For example:
  • as a sole trader;
  • in a partnership;
  • in a joint venture;
  • as a company;
  • as a trading trust (with individuals or corporate trustees).
• Is the trading entity part of a structure or does it stand alone?
• If the trading entity is part of a structure, then does it solely carry on the business or are multiple entities involved with defined business tasks? For example, do you have a trading entity, asset holding entity, intellectual property owning entity, service entity, lending entity, franchising entity or sales entity? If so, then refer to Part 1.7.
• Where appropriate, has there been a clear separation of the business assets from the personal assets of the stakeholders in the structure?
• Has banking separation between the business and the personal stakeholders’ interests been canvassed?
• Are there any issues of privacy due to commercial issues and have they been appropriately addressed in respect of the choice of the structure?

 1.2. Constitution,  Trust Deeds, Minutes and Returns

• If your trading entity is a company, is the company constitution signed and dated?
• Are all board minutes available and up to date?
• Have all books, records and company registers been properly kept? Are they are up to date with true and accurate entries and records?
• Has the business complied with all requirements for the filing of returns, particulars, notices and other documents with all government and regulatory authorities?
• If the company acts as trustee of a trust, then is the original trust deed signed, dated and stamped?
• Have the terms of the trust deed been regularly reviewed and updated (i.e. to ensure they enable you to, for example, to allow income streaming and setting aside unpaid entitlements on sub-trust)?
• Is there a reminder system in place to ensure that the appropriate trust resolutions are made with the required information and time to consider prior to the end of the taxation year in respect of discretionary trust entities and any other trust entities where the terms of the trust do not distribute the income by the terms of the trust (i.e. where there is no automatic distribution)?

 1.3. Shareholders and Interest Holders

• Is the company’s share register / entity’s unit register and ASIC record up to date?
• Have all share certificates / unit certificates been properly issued and to the correct entity?

 1.4. Shareholders Agreements, Unit Holders Agreements and Partnership Agreements

• Is there a shareholders, unit holders or partnership agreement in place?
• Are there any acquisition/allotment agreements in relation to issued or unissued shares or units?
• If there is an agreement, have all shareholders, unit holders or other interested parties signed the document or a subsequent deed of accession relevant to a later joining party?
• If there is a shareholders or unit holders agreement, does it cover:
• Issues that require special or unanimous voting approval?
• Right to appoint directors?
• Drag/tag along rights and/or pre-emptive rights?
• Good leaver/bad leaver provisions?
• Funding issues?
• Structure of the Board and procedural issues in respect of meetings?
• Deadlock issues?
• Insurance (including in relation to the death or permanent disability of shareholders or their key personnel)? If insurance is contemplated, have the taxation consequences of the insurance and also the commercial purchase price, if affected by a successful insurance payout, been addressed?
  • Are there any pre-emptive rights, options or other encumbrances affecting the transfer or issue of shares or units, including under separate option or subscription arrangements?
  • Are there any charges or other encumbrances or claims relating to the company’s shares or the trust units or the parties’ interests in the entity?

 1.5. Solvency (if business is operated by a company)

• Have any statutory demands, winding up notices, schemes of arrangement or other steps in relation to administration or insolvency been taken in relation to the company?

Note:  If the outstanding PAYG or SGC liability is not paid or if company  has not reported the PAYG and SGC liability within 3 months after it became due and the company has gone into voluntary administration or liquidation the director may not be able to take any action to absolve personal liability.

 1.6. Related Party Transactions

• Is there any contract or other arrangement between the business / entity and any related party? If so, is the contract or arrangement reduced to writing?
• Are there any indemnities or guarantees provided to or for the benefit of any directors and/or shareholders /unit holders of the business / entity?
• Where any related party transactions have occurred, were they accompanied by stakeholder approval (where required)? Has such approval been reduced to writing and properly documented?
• If multiple entities are involved in conducting the business, then have the issues of internal loans that may cross over in respect of these separate entities been regularly reviewed particularly regarding amounts lent.
• Have trading terms been considered and has the issue of security (including registration on Personal Property Securities  Register (PPSR)) been addressed?
• If there has been clear separation of the entities, have the appropriate licences, leases and management agreements between the respective entities been addressed and documented? If so, where there is a lease of personal property, have issues associated with PPSR been addressed to ensure that the title to the property is protected?
• Is there a method to ensure that any statutory demands are appropriately dealt with within the time limit of 21 days?

 Note:  If the the demand is still in effect after the time limit of 21 days then the company will be presumed to be insolvent and winding up procedures may be commenced.

• Have any directors penalty notices served on directors by the ATO been addressed?

 

2. MATERIAL CONTRACTS

 2.1. Contracts

• Are the business’ material contracts signed and valid? Material contracts include:
• contracts with suppliers, clients and distributors;
• sale, agency, distribution, marketing and advertising contracts;
• product or service warranties;
• leases of real or personal property to which the business entity is a party, either as lessor or lessee.

Note: leases of personal property may result in a security interest being registered on the PPSR over the business entity. Have you undertaken a PPSR search to ensure that the secured party has registered their interest correctly (i.e. and not registered it as a general security interest over all present and after acquired property which may affect your entity’s ability to borrow money)?;

• customer service, software design and supplier contracts;
• government contracts or tenders;
• guarantees or indemnities made by or given on behalf of the business;
• service contracts or other contracts with customers;
• research and development contracts or IT (hardware  or software) design contracts or website/e-commerce development or design contracts;
• licensing contracts;
• marketing, sponsorship, premium or advertising contracts;
• intellectual property  agreements.  If your entity is licensed to use intellectual property, do the agreements specifically reference such intellectual property, for example by reference to trade marks?; and
• agreements in relation to insurance.
  • Do the contracts adequately protect the business’ interests, such as:
  • Payment terms?
  • Security for payment? For example, by obtaining directors’ guarantees from customers.
  • Retention of title (including in respect of registration of ‘Purchase Money Security Interests’ (PMSI) on the PPSR?

Note: PMSI’s create a super priority in favour of the secured party, but such super priority may not be effective if the registration is deficient.

• Limitation of liability?
• Warranties?
  • Are there any material agreements entered into orally on behalf of the business? If so, then these should be reduced to writing.
  • Are there any material contracts which have not been fully performed or have been breached?
  • What are the risks associated with the above?
  • How can the risks be mitigated?
  • Is your business unnecessarily exposed?
  • If your business is unnecessarily exposed, are there measures that can be taken to limit that exposure (for example terminating partly performed contracts without liability)?
  • Has consideration been given to preparing a prioritised list of risk and exposure and measures to mitigate and deal with such risk and exposure?

Note: this is commonly referred to as a Risk Heat Map.

 2.2. Trading & PPSA

• Does the business have trading terms and conditions?
  • Are they up to date?

Note: this is important if you sell on a retention of title basis as you will need to specifically contract out of some of the provisions contained in the Personal Property Securities Act 2009 (PPSA).

• Are the terms enforceable?
• Have they been reviewed by lawyers since the introduction of the PPSR?
• Does the business trade under a business name? Is it registered?
• Is the business name registered to the trading entity? If not, should a licence agreement be put in place between the owner of the business name and the trading entity?
• Does the business sell goods on a hire purchase basis or does it lease goods? If so, does it need to register any security interest on the PPSA?

Note: your business may be entitled to the ‘super priority’ introduced for retention of title arrangements under the PPSA, but only if it has the relevant documentation in place and has undertaken the required registration steps.

 

3. REGULATORY AND REPORTING

 3.1. Financial reports (if the business is operated by a company)

• Is the company a large or small proprietary company?
  • A proprietary company is defined as large for a financial year if it satisfies at least two of the following paragraphs:

∆   the consolidated revenue for the financial year of the company and any entities it controls is $25 million or more;

∆   the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $12.5 million or more, and

∆   the company and any entities it controls have 50 or more employees at the end of the financial year.

• If the company is large, then it will need to lodge financial and directors’ reports with ASIC and may also be required to be audited.
  • Is this a problem? If so, a restructure may be necessary to limit the reporting requirements.
  • Is your accountant capable of performing audits if necessary?

 

 3.2. Compliance with Laws, Licences and Permits

• Does the business require any licence or approval? For example, a liquor licence, a food permit or an Australian Financial Services Licence?
  • Is the licence or approval up to date?
  • Are there any limitations/restrictions? Can these restrictions be minimised by applying for a higher grading of licence or approval?
• What systems are in place to ensure that the business is conducted in compliance with all applicable laws, orders, regulations, by laws and other requirements?
  • Have the systems been tested recently?
  • Are there any specific contractual requirements whereby the business is required to comply with the laws of a nation outside of Australia?
• Is there any industry specific legislation which the business must comply with? For example, building regulations and codes.
  • What are the requirements and do you review these requirements on a regular basis?

Note: regulations may change and your business may be exposed if it does not conduct regular reviews.

• Is there a system in place to trigger reviews of these requirements?
• What mechanisms do you have in place to ensure that the requirements have been met?
• Is the business entity party to any arrangements or understandings (existing or pending) with competitors or potential competitors?

Note: such arrangements should be entered into with great care so as not to infringe the Competition and Consumer Act 2010 or otherwise be viewed unfavourably by the ACCC.

• subject of any communications with the ACCC?
• made any applications under the Trade Practices Act 1974 / Competition and Consumer Act 2010 (eg. authorisation or notification)?

 

4. INTELLECTUAL PROPERTY

4.1. Trade Marks, Designs, Patents

• Are all trade marks, designs and/or patents used in relation to the business registered?
  • If not registered, then is it capable of registration or is it desirable for it to be registered?
  • Is it exposed to risk of infringement?
  • If third parties use it, then have the terms of such use been properly document (for example by way of a licence agreement, see below)?
• Do you know what address IP Australia has on file to serve important notices regarding your trade marks, for example renewal notices? Do you have a register of trademarks and are you aware of when they need to be renewed? Do you have a process in place to ensure they do not expire?

4.2. Copyright

• Does the business entity have copyright in any works?
• What policies and procedures are in place for ensuring its protection?

4.3. Confidential Information & Trade Secrets

• How does the business entity ensure that confidential information and trade secrets are protected?
• Does the business entity receive or provide to a third party any confidential information, know-how or technical services?
  • If so, how is it protected?
  • Are there appropriate termination clauses in the event of breach?
  • Is the provider indemnified against any loss arising from unauthorised disclosure?
  • Is the recipient of the confidential information required to ensure that third parties protect the confidentiality of the information?

4.4. Domain Names

• Do you have a register of domain names? Are you aware of their renewal dates? Do you have a process in place to ensure they don’t expire?

4.5. Other intellectual property matters

•  Has any third party been granted rights to use any of the business’ intellectual property?
  • Are the rights documented?
  • Are there appropriate termination clauses in the event of breach?
• Are there any unregistered names, marks, logos, devices or get-up that are material to the business?
  • How are these protected?
• Does the business grant or use any third party licences for names, marks, devices or get-up?
  • Are the terms of the licence documented?
  • If the licence is a valuable component of the business, is the licence easy to terminate?
• Do agreements with employees and / or contractors deal with the ownership of any intellectual property developed in the process of performing services for the business?

 

5. LITIGATION RISK

•  What are the default and termination provisions under each of the material contracts?
  • Are the default provisions likely to be triggered? If so, what is the estimated quantum of any claim?
  • Are there notice requirements under the default and termination provisions?
  • What happens after termination due to default?
  • Do the material contracts limit the business entity’s liability for breach?
  • Do any of the contracts need to be renegotiated?
• What is the risk of the business entity or any of its officers or employees breaching any law, regulation, licence or permit applying to the business (as identified above)?
  • What are the potential consequences of any breach?
  • What strategies can be implemented to limit the risk of any breach?
  • Is there a training program in place to ensure all employees are aware of their obligations in respect of this?
• Have you considered making a Risk Heat Map (see earlier discussion regarding material contracts)?

 

6. PROPERTY & LEASES

•  Are there adequate records of ownership of or interest in all major assets used in the business, such as freehold titles, leases etc?
• Is any of the business’ property used or occupied by a third party?
  • Does the business need to register a security interest on the PPSR? Note: failing to register a security interest can result in the property being forfeited to a liquidator if the grantor enters liquidation.
  • Is the use or occupation properly documented?
• Has there been any breach of any leases or occupancy arrangements by the business entity?
• Is the current use of the business premises lawful and in accordance with local government regulations and planning laws?
• Is the lease of the business premises required to be registered with the relevant State authority (note: this is relevant in most States, but not Victoria)?
• Are you aware of the lease renewal dates, if applicable, and also the procedure of renewal? Note that you generally need to give notice of renewal to a landlord at least 3 months prior to the expiry of the current term.
• Are you aware of the make good requirements at the end of the lease of the business premises?
• Have any guarantees been granted to a landlord in relation to any lease, licence or sub-lease or other arrangement presently on foot in relation to the business premises?
  • Do the guarantors own any significant assets? If so, have you considered restructuring the guarantors’ personal affairs?
  • Are the guarantees enforceable?
  • Are the guarantees limited to a particular amount?

 

7. EMPLOYMENT

7.1. Awards

• Are you aware of the Modern Award(s) and National Employment Standards that apply to the business’ employees and may override any contract with employees?
• Do you have a system in place to ensure that a review of any relevant awards is undertaken on a regular basis?

7.2. Employment Contracts

• Has the business’ standard employment contract been reviewed recently to ensure that it complies with the above?
• Are there adequate termination provisions in the business’ standard employment contract, including summary dismissal?
• Are there adequate post-termination provisions, such as set-off, return of business property, use of confidential information etc.?
• Where applicable, have provisions concerning the assignment of intellectual property created by the employee been assigned to the business entity?
• Are employees adequately restrained from competing with the business or soliciting customers, suppliers or other employees after termination of their employment? Note: courts often find such clauses unenforceable if they have not been drafted carefully.
• Where applicable, have ‘garden leave’ provisions been considered?

7.3. Performance Incentives

• Do the key employees participate in performance/share incentives?
  • Are you aware of the taxation consequences of such schemes, both for the business entity and its employees?
  • More specifically, are there any fringe benefits tax consequences for the schemes you have in place?
  • Has the business’ scheme been structured properly?

7.4. Contractor  Arrangements

• Does the business have adequate policies and procedures in place to ensure that it properly classifies employees and contractors?
• Are you aware of the difference between employees and contractors?
• Are you aware of the potential tax and superannuation liabilities for incorrectly classifying employees as contractors?
• Do the business’ contractors have their own ABN, pay their own tax and their own superannuation?
• Are their requirements on the business’ contractors to supply their own equipment or tools and have in place their own insurance? This is particularly important given the extension of personal liability to directors for unpaid and unreported PAYG and superannuation guarantee charge liabilities.
• Do the business’ contractors have an ability to sub-contract or can they allocate their employees to perform their obligations under the arrangements?

7.5. PAYG & Superannuation

• Is the business entity complying with its PAYG and superannuation withholding requirements?
• Are you aware of the potential personal liability to directors for failure to comply with the withholding rules? Note: see above comments in relation to the recently expanded director penalty regime, including in relation to directors penalty notices.

 

8. DIRECTORS & KEY INDIVIDUALS

• Are the directors and/or key individuals of the business aware of their personal potential liability as a result of business’ activities? For example, directors can be made personally liable under the insolvent trading provisions of the Corporations Act 2001 or under the recently reformed director penalty regime in relation to certain taxation debts enforced by the Australian Taxation Office (discussed above).
• Do the directors and/or key individuals of the business own any significant assets?
• Have the directors and/or key individuals considered restructuring their personal affairs?
• Do the directors and/or key individuals own any real property jointly with their spouse? If so, have they considered transferring the title for asset protection purposes?
• Are the directors and/or key individuals at risk of being sued for activities outside of the business? If so, does this have any implications for the business?
• Are there ‘key-person’ insurance policies to insure against the death or permanent disability of key personnel? Is there an agreement in place between shareholders which sets out what happens to the shares of a shareholder if the shareholder’s associated director dies or becomes permanently disabled?

8.1 Directors and Officers (if business is operated by a company)

• Are the details of all directors and senior management of the company, including details of their years of service, remuneration and service agreements up to date?
• Are there any material arrangements between the business and any director or associate, such as the provision of loans or services? Are the terms of such arrangements reduced to writing? If there are loans from the company to shareholders or their associates or from trusts to beneficiaries, have you considered the implications of Division 7A of the Income Tax Assessments Act 1936 (Cth) and whether such loans ought to have specific terms and / or be documented in a particular way?
• Are the ASIC records correct in respect of the address of each director? Do you have a reminder system in place for each director to update these records or do you wait until the annual return arrives and hope your company secretary remembers the address change?

 Note: it is very important that a director’s personal address is correct on the ASIC register.  If the address is incorrect and the ATO serves a directors penalty notice, then the director will be deemed to have been served the notice. This is more important than ever given the recent changes to the directors penalty regime, which extends personal liability to directors for PAYG withholdings and the superannuation guarantee which remain unpaid and unreported for 3 months or more after their due date.

•  Is each director aware of the procedure for lodging the BAS for the business, and the potential effect on them personally if they are not lodged in time (i.e. within 3 months)?
• Is each director aware of their director responsibilities at law as summarised by ASIC in ASIC Regulatory Guide 217?

 
We want to see your business grow, and we are here to assist in any way that we can.

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