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COVID-19 : Businesses Are Deserted

Blog & Articles, Commercial Law, Tang Law

In fear of infection, public places are deserted,
businesses are deserted, but this is only the start

There is no cure, yet, to this coronavirus.

We do not know how long will this last before people feel safe to go back into public places.

We do not know when businesses will go back to normal, or can it?  Is it possible for businesses to return back to normal?

Mounting Debts

Rent is due, salary and wages are due, superannuation is due, tax is due, but business is bad and almost zero during this fearsome period, and overdraft is fully drawn.

The Government has announced relief packages for relief small businesses.  It is yet to be seen whether this assistance is adequate to save your business.

Some of this assistance is merely asking a mortgagee (and maybe a landlord in the future, maybe) to delay payments.  It does not mean no payment.  Business owners are still liable to pay them at some point in time in the future.

IMPORTANT: If you allow yourself to lose track of these mounting debts, you will risk trading whilst insolvent.  Be warned that insolvent trading is one of the situations where the corporate veil will be pierced and directors can be made personally liable.

Tips on How to Reduce the Long-term Impact

Take control now, be pro-active.  Start planning your strategies.  Here are some of the steps you could take to reduce the long-term impact of the current situation.

  • Have a well thought-through plan on how to potentially negotiate out of the situation with your mortgagee (or landlord).  What do they want to see before they are prepared to put a hold on enforcing the debt against you?  Do you have a cashflow projection?  Have you prepared your business case to bring about a strong recovery?  Note that you must exercise care in preparing these documents.  You must not express opinion that is unreasonable or unfounded, as this could be seen as your “misrepresentation”.
  • Can you plan for ways to increase your business cashflow, whether through capital raising or debt raising.  Do you have a convincing and realistic business plan to attract investors or financiers?  There are specific rules under the Corporations Act 2001 in raising capital.  Please obtain legal advice before conducting, or attempting to conduct, raising for funds.
  • Stress-test your business for survival and prepare for the worst case scenario.  At what point in time will you need to start taking steps to scale down your operation, or to close your business (in order to avoid personal liabilities)?   Think and plan, in advance, on what you can do to crystallise your losses?   You need to look at all the business contracts and work out the implications of terminating them BEFORE you decide to “walk away” from the business.
  • Do you have a sellable business?  How do you make it sellable when the business turnover is suffering?  The most valuable part of the business is its “goodwill”.  Goodwill can comprise of a few things, including location goodwill, special rights goodwill, and system or IP goodwill.  It is the core things that give a business the drivers to trade and to create income.  You should be amplifying these drivers now.  Turn them into your goodwill, sellable goodwill.

About Writer

Kelvin Tang has over 18 years’ experience practising law in Western Australia. He is the founder of Tang Law based in Perth, Western Australia. Kelvin is a Registered Migration Agent (MARN: 1386452) and has extensive experience in providing migration advice to clients, advising on “Eligible Businesses” within the definition of the Migration Regulations. Kelvin also has extensive experience in civil litigation, commercial and corporate law matters.

Gabriel Wong is a senior lawyer at Tang Law and holds Bachelor’s degrees in both Law and Commerce. Gabriel was admitted to legal practice in early 2001. Gabriel has over 18 years’ experience and extensive knowledge in advising clients in relation to property, general commercial, trusts, and wills and estate matters. He regularly provides advice to in relation to the acquisition, development (both greenfield subdivision and multi-level mixed use strata developments), leasing and sale of residential, commercial and rural land.

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SHAREHOLDERS DISPUTE – FROM PROFITS TO LOSSES

Blog & Articles, Commercial Law, Commercial Lawyer, Dispute Resolution, Tang Law

Statistics show that up to 70% of business partnerships ultimately fail.

Many companies start out with the best of intentions between friends or colleagues, unified by a common goal of making profit.  Inspired by optimistic outlook, the necessity of formal agreements are often overlooked. However, when disputes between partners get out of control, it can turn a profitable business into losses – not just monetary loss, but also loss of reputation.

What are the reasons for failing?

Firstly, doing business with friends or family is risky.  Friends or family members often fail to maintain a separation between business and personal relationships.

Other common reason for failure include:

  • Unequal contributions by the partners. Nobody likes lazy partners!
  • Personality clashes
  • Loss of trust in each other
  • Differing values and visions.

A simple handshake to start a business is simply not good enough.  The sad thing is that when business fails, the relationships between friends or family will also turn sour.

Incorporated Business – Potential Problems

Where business partnership is undertaken via a company structure, it can become more complex due to the division of management (board of directors) and owners (shareholders).  Under our Company Law, owners have no right to manage the company.  Hence the first potential problem is that shareholders have no control.   If the company, controlled by the director, fails to carry out the objectives of the shareholders, what can the shareholders do?

Moreover, if you are a minority shareholder and the company decides to dilute your shares, what can you do?   In a company where there are 2 equal shareholders in 50/50 arrangement, if there is a deadlock, what can be done?

Case Study – Director’s Misconduct

Our Client was one of 2 shareholders in a company incorporated to pursue investment opportunities in Australia. The other shareholder was the sole Director responsible for the daily running of the company.  The Sole Director used his authority to transfer approximately $500,000.00 from the company for his personal purpose over the period of approximately 3 years.  Our client only became aware of it after several years.  Our client was denied access to the company books.  This is a classic case of director’s misconduct.

There were no formal documents in place to enforce a system of checks and balances on the Director’s conduct and to hold him accountable to shareholders. There are no mechanisms in a formal document to displace the Director for misconduct. What can the shareholder do against the director?

Shareholder v Director

As a shareholder, you have certain rights under the Corporations Act.  Where there is director misconduct, you may have resort to the following:

  • Statutory Derivative Actions – in the event where you suspect or have knowledge of possible skullduggery on the part of one or more of the directors, they may be willfully acting in disregard of the duties owed by a director to their company and shareholders. This may entitle you to apply to the Court to sue the directors in the company’s name.
  • Compensation – where the directors, through a breach of their duties have cause the company to experience loss, a claim for compensation may be available from the Court to address this wrong.
  • Account of Profits – where the breach if directors’ duties has caused the directors to make a gain or profit at the company or the shareholders’ expense, you may apply to the Court to strip them of the gains made in breach of their duties.
  • Disqualification – in circumstances where a director has acted in breach of their duties through quite egregious conduct, the Court may use its power to issue the directors with a ban on managing future companies for a certain time.

Shareholder v Shareholder

Where the dispute is between the shareholders themselves, the following remedies may be available:

  • Oppression Remedies – in the event you are in a dispute with either majority or minority shareholders, and that dispute is connected with unfair or oppressive behaviour, you may be able to seek a large variety of remedies including compulsory buy-outs and amendments to the constitution.
  • Winding Up – an extreme remedy in many cases, entailing the placement of the company into liquidation and selling all of its assets and ending with the company’s eventual de-registration. This remedy is sparingly used and reserved for situations where the Court believes that it is not able to operate further as in the case of deadlocks and other more drastic disputes.

Time to Gain Control

Commercial disputes are an intricate and complex area of law, especially in company law.   Experience and knowledge of your lawyer is extremely important.  Deploying effective litigation tactics can help you gain control of a losing situation.

ABOUT THE WRITER

Stephen Mintz joined Tang Law in November 2017 and was admitted at the Supreme Court of Western Australia as Barrister and Solicitor in 2018. Stephen enjoys working in environments that allow him to use all areas of legal knowledge at his disposal to assist and guide clients to develop creative, practical and effective means to achieve their aims.

Stephen has extensive experience in assisting with the provision migration advice in connection with visa applications, as well as, appealing cancelled or refused visas, including, the preparation of relevant documents and submissions for applications for merits review before the Administrative Appeals Tribunal. He has extensive experience in advising clients in the areas of Commercial Law, Criminal Law, and Civil Litigation matters before the Supreme and District Courts of Western Australia, as well as, the Federal Court of Australia.

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Case Study: How Did Our Lawyers Handle Complex Case involving Commercial Transactions & Migration Law?

Blog & Articles, Business Disputes Perth, Business Migrants, Commercial Disputes, Commercial Law, FIRB, Immigration Law, Migration Law, Perth Immigration Lawyer, Tang Legal, Visa 132

The Story

Mr Lee and his family was granted permanent resident visa.  To get the grant of the visa, Mr Lee entered into an agreement with the State that he will, amongst other conditions:

11) Invest at least $1,500,000 into an “Eligible Business” in the State;  and
22) The “Eligible Business” must employ at least five (5) full time employees who are either citizen or permanent residents of Australia.
Mr Lee looked at many possible investments in the State but repeatedly encountered these problems:
1.       Language barrier – Mr Lee does not speak or understand English.  Communication was a huge barrier.
2.       Cultural difference – Mr Lee operates a large enterprise in Asia and he has many personnel under him to manage and run his businesses for him. He was surprised to learn that owner of the business here is very often key person to the business.  He will not be able to commit 100% into the business due to his other commitments.  Mr Lee is also concerned about the safety of his investment.
3.       Constant uncertainty as to whether the business is in fact an “Eligible Business” and whether it can help him satisfy the migration requirements.

 

Mr Lee finally decided to invest with a property developer.  Mr Lee’s instructed us to advise and represent him.

 

Solution

We advised Mr Lee that his proposed venture and transaction must be structured to achieve the overarching purposes of:
11) Complying with Commonwealth migration requirements and Mr Lee’s Agreement with the State; and
22) Securing his commercial interests and his capital.
In terms of Commercial Law, Mr Lee took the following steps with our advice:
1.       Formation of legal structures for Mr Lee to undertake the investment.
Amongst other issues, segregation of risk, protection of personal assets, complying with migration requirements, and tax implications are important considerations in undertaking this task.
2.       Negotiation and formulation of the transaction structure with the property developer.
Amongst other considerations: 
·         Specific focus on ownership structure, investment vehicle, investment structure, key personnel required, role and obligations of Mr Lee and the property developer is important for migration compliance. 
·         Control of project and funds, security or collaterals, timing of project, possible variations, and terms and conditions of investment are important considerations for protection of capital.
·         Transfer duty and tax implications must be considered PRIOR TO entering into formal agreements.
3.       Prepare and advice on the formal agreements required in order to put together the transaction.
4.       Carried out due diligence on the proposed investment and the property developer.
5.       Completion and settlements of the agreed transactions.

In Migration Law:

 

11) We conducted a full review of Mr Lee’s initial business plan and Agreement with the State, and we advised Mr Lee that given the changes to his agreement with the State, he needs to notify and obtain approval from the State for the variation.  Note:  The formal agreements between the parties were made subject to Mr Lee obtaining an approval to amend Agreement with the State.
22)  IMPORTANT issue to overcome: Investment in property is very often seen as a passive investment and does NOT qualify as an “Eligible Business”.   Special attention must be given to how the transaction is structured to avoid complications.
33) Also given his increase in the amount of investment into the “Eligible Business”, we advised that he could negotiate with the State for a more lenient requirement on the number of full time employees.

Outcome

Mr Lee and the property developer were successful in reaching an agreement.   We strategically structured mechanism into the transaction to achieve the overarching purposes of satisfying the migration requirements and protecting his commercial interests.

Upon our conduct of legal due diligence and comprehensive checks on the proposed investment and the property developer, Mr Lee was satisfied with the results.
Mr Lee also obtained approval and a more favorable agreement with the State for the proposed investment, as we were successful in negotiating with the State in reducing the number of employee from five (5) to two (2).  

The property project has since commenced.

About The Writer 

Kelvin Tang has over 14 years’ experience practising law in Western Australia. He is the founder and Principal Partner of Tang Law based in Perth, Western Australia. Kelvin is a Registered Migration Agent (MARN: 1386452) and has extensive experience in providing migration advice to clients, advising on “Eligible Businesses” within the definition of the Migration Regulations, assisting migrants (investor of the business) with satisfying migration requirements, making visa applications and appealing cancelled or refused visas in the Federal Court of Australia, Administrative Appeals Tribunal and Migration Review Tribunal. Kelvin also has extensive experience in civil litigation, commercial and corporate law matters.