Keep your hands off my assets!
Many new directors are completely oblivious of their obligations and duties, thinking only of what they will make from the successes of their new enterprise. They do not consider the downside or risk, particularly their exposure, should things go wrong.
The cold hard reality is company directors face many and varied potential risks. Some examples were discussed in our newsletter article last month: Liquidation—the ugly side for directors.
To many people, asset protection is about separating adverse risk from a person’s assets – this means still being able to have some control over those assets even though the person does not legally own them, so if they are sued those assets won’t be available to creditors or a bankruptcy trustee.
While a well-drafted asset protection plan can go a long way in deterring a creditor from pursuing sometimes expensive litigation (due to the risk of ending up with an empty judgment), the Bankruptcy Act 1966 provisions impede those who desire to transfer or dispose of assets in the period leading up to the bankruptcy. Recognising that the Bankruptcy Act has evolved over literally hundreds of years, means slipping out of its traps is not easy.
When planning for asset protection it is obviously important to remember:
- There is no perfect asset protection structure, it is a matter of balancing priorities and determining what is most important.
- Asset protection planning evolves and therefore needs constant review.
- Asset structuring is far more effective if planned well in advance.
- Financial problems must be addressed proactively, and proceed on the basis that anything that has been done, in hindsight, can be undone.
- A complete asset protection strategy must consider not only business risk (and holding appropriate insurance cover to mitigate those risks), but also Family Law, Business Succession Planning, and Estate Planning.
Worrells created a comprehensive Asset Risk Exposure Checklist to provide guidance on the risks faced by those in business. While not exhaustive and without considering specific circumstances unique to each individual or the need to obtain professional advice, it helps to identify:
- Some key risks and exposures faced by those involved in a business enterprise.
- Whether your clients are exposed, and identify areas which may need to be managed.