Succession planning is an area every company will need to undertake, especially for small businesses where every member of staff is taking on a number of different roles and responsibilities.
However, succession planning is also something many businesses are struggling to manage, at least according to a recent study from Stanford University.
The research found that organisations with an effective succession plan in place are in a minority. In fact, only 46 per cent of companies that took part in the study have a programme in place to train individuals for high-ranking positions.
On other measures, the study recorded even lower results. When asked whether they have people to assume a leadership role like a CEO position, only 25 per cent reported that they met this condition.
To resolve this issue, the study’s authors suggested companies need to refine their succession plans so that there is a ready pool of candidates available for high-ranking positions. In particular, the study suggested seeking strategic assistance to navigate the succession planning process.
Scott Saslow, one of the authors of this research, emphasised how many businesses are unprepared for handling the succession process.
“[Many companies] fail to recognise the need for a strategy for this critical business process, they haven’t had great exposure to what other organisations are doing, and they haven’t thought through what their own organisation should be doing given its unique set of circumstances,” said Mr Saslow.
“This is more than lost upside opportunity; it puts many organisations at risk of having unstable executive leadership.”
For small businesses that want to be sure they are handing over their business effectively, having processes in place to manage this transition is going to become increasingly important in the future.
Many business owners will reach a point where they have put in a lot of hard work into their business and have established their organisation within a given sector. At this point, owners may find themselves looking to move on to their next challenge – which will mean either implementing a succession plan or selling the business.
For those who choose the latter option, there are a number of different steps that will need to be taken before you can hand over the keys to a new owner. Here are three of the most important steps:
1) Valuate your business
The first step to selling your business is calculating the value of your entire operations. There are a number of different factors that will need to be included in this price, including:
Once these different areas have been calculated, business owners will have a clear idea of how much their business is worth and what a fair asking price would be when they move to sell it.
2) Prepare a sale contract
Whenever a business is sold in Australia, there needs to be a sales contract which will lay out the legal rights and obligations that both parties have during the sale process. This will record the assets and liabilities associated with the business and how they are treated in the sale, along with any further information or conditions, such as: a restraint on the owners preventing them from competing with the new buyers, a requirement that the landlord agree to assign the lease and GST treatment.
Because of the number of legal requirements that accompany this process, it is advisable to have a lawyer draft this document for you.
3) Any final issues
Once the ownership of a business has been transferred, there are still a number of other areas which an owner will need to consider. These include any tax and GST from the sale process, any training you are obliged to provide to the new owner, the transfer of any licences or leasing agreements, business names and cancelling your Australian Business Number.
When your business has begun to grow, one of the most important steps for companies to take is to start hiring staff. For most businesses, their staff are the biggest investment, which makes hiring the right people in the right way an essential part of any growing organisation.
So, what do business owners need to know if they have never encountered the recruitment process before? Here are three areas to consider when you begin taking on your first employee:
Can you afford the expense?
One of the first questions any small business owner should ask themselves is whether they can afford the cost of taking on a new staff member. While it can be tempting to assume that a new employee will pay for themselves through increased productivity, business owners still need to be sure their company can handle this change.
It also pays to think about why you are hiring a new staff member. Ideally, your new employee will be able to make your business more profitable by expanding your operations.
Do you understand your employment contracts?
One of the most important steps in securing a new employee is ensuring that their employment contract is in order. As well as consulting with a legal firm that has expertise in commercial law, business owners will also need to be sure they have taken the time to understand the legal obligations that come with hiring.
Whether it’s understanding the difference between a contractor and a permanent employee, or calculating leave and other mandatory employee benefits, understanding an employment contract can bring big benefits to small business owners.
What skills are you looking for?
In a small business, hiring the wrong person can be even more damaging to an organisation’s productivity than not hiring anyone at all. Having the wrong person – either because they don’t fit the culture of your business or don’t have the right skills – can take a significant toll on overall performance.
The solution is to plan ahead for your hiring and be sure to have a concrete list of skills that you want to see from a new staff member. This should cover the skills they need and also the personal qualities you want from a new hire.
Christmas is a time that we reflect on the year gone by and celebrate with our family members. For some this can mean a get together at home or travelling overseas or interstate to spend time with family members. Everyone should have an estate planning strategy in place and the lead up to the Christmas season is the perfect time to consider your situation. Enjoy your holiday in the knowledge that, if the worst does happen, you have a plan which protects your assets, keeps your businesses and trusts running smoothly in the right hands and provides for your family in the long term.
A well drafted Will with Discretionary Testamentary Trust can achieve your estate planning goals in a manner that offers your beneficiaries maximum asset protection and minimum income and capital gains tax liability.
Where your beneficiary has reached the age of 25 (or another age that you choose, called the ‘preservation age’) they can choose to take their inheritance outright (as a gift) or they can choose to take it through a trust. Where your beneficiary is under the preservation age, their share of your estate is automatically held in a testamentary trust until they attain the preservation age with directions that the capital be preserved for the beneficiary’s education, reasonable maintenance and welfare and medical and dental treatment.
A testamentary trust provides a greater level of asset protection than an outright gift. This is because the trustee, and not the beneficiary, is the legal owner of the asset. A trust therefore allows you to protect your family assets from various threats, including a beneficiary’s wasteful habits or addictions, claims by creditors in bankruptcy proceedings or claims by spouses in a marital breakdown.
One of the most significant and arguably most underappreciated benefits of a discretionary testamentary trust is its tax effectiveness. A discretionary testamentary trust allows a beneficiary to split and stream income and capital to the potential beneficiaries of the trust. The tax effectiveness of testamentary trusts arises out of the fact that rather than paying marginal rates of tax on the income generated by their inheritance (as would be the case under a simple Will), when assets of a testamentary trust are sold, or where income is generated from trust
assets, the trustee has the ability to strategically pass out such taxable income to those beneficiaries who will pay the least tax (the income being assessable in the hands of the recipient beneficiary). This becomes particularly tax effective where the beneficiary has a spouse that does not work (or is on a lower tax rate) or where they have minor children (a testamentary trust treats distributions to minors as if they were adults).
Example:
Mary dies with a simple Will leaving an investment property and cash to her son John. In that income year, John’s inheritance generates $40,000 in income. John works as an accountant and is on the top marginal rate. He will pay $18,600 in income tax for that income year and for each year thereafter (assuming that the income remains constant).
Let’s assume Mary sought advice on her estate planning and had a Will with discretionary testamentary trusts prepared. Mary’s Will offers John the option of taking his inheritance outright or via a testamentary trust. John elects to take his inheritance in the trust. As John has two children, he is able to have trust income distributed equally between his children. John distributes $20,000 to each of his children and since they are able to receive $20,452 tax fee after applying the low income rebate, he is able to receive the entire $40,000 tax free. John has made a tax saving of $18,600 and that is only in year one.
As many people go travelling over the holiday break, it is also important to appoint someone who can act on your behalf in the event that you become incapacitated. If you do not do this then somebody (for example, your spouse) must apply to the ACT Civil and Administrative Tribunal for a guardianship order over you. There is no guarantee of success, and the process can be lengthy and stressful. Appointing an attorney before you lose capacity is a simple matter of filling in a form and specifying the matters (financial, medical and personal care)
over which you want your attorney to have power.
Make putting in place an estate planning strategy your new years resolution and ensure that should the unexpected happen, you will have provided for your family members in a tax and asset protective manner.
Vik SundarPractice Manager – Private Wealth Chamberlains Law Firm.
Vik advises accountants, financial planners, private business owners and private wealth clients on taxation, estate planning and business restructuring issues.
In 2010, a Senate inquiry suggested that ASIC and AFSA should be combined into a new organisation in order to efficiently align corporate insolvency and bankruptcy processes and regulations. This movement toward a single regulatory body for both bankruptcy and corporate insolvency was rejected by the government. Despite this rejection the Senate inquiry led to other alignment-focused changes to insolvency law that were included in the Insolvency Law Reform Bill 2013. This Bill was revised and is now known as the Insolvency Law Reform Bill 2014. Most of the changes are similar or identical for each area of practice. In addition to aligning practice areas, the Bill has also bolstered the creditor-focused nature of Australian insolvency law by giving creditors additional rights during external administration.
Changes
The Bill proposes many changes to multiple pieces of legislation. If you would like to read the explanatory material, review the Bill, or make submissions or comments on the Bill to the Department of Treasury, click here: http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2014/ILRB-2014.
The Bill is lengthy and detailed therefore this update will not go through every change but rather give an overview of two broad areas that are of interest to both insolvency practitioners and creditors:
Registration and disciplinary framework
A large part of the Bill is devoted to aligning the registration and disciplinary process for both trustees and liquidators. The Bill provides that a committee will be convened to consider the registration of a practitioner. The committee will interview the practitioner and may require the practitioner to sit an exam. The Bill also allows for registration of that person subject to conditions. The practitioner may apply to vary those conditions. The registration lasts for 3 years, after which the practitioner must apply for a renewal. The practitioners must have evidence of proper indemnity and fidelity insurance in order to both register as a practitioner and to renew that registration. The Bill also provides for a committee to examine various disciplinary issues and allows for an industry body to give notice that there are reasonable grounds to take disciplinary action against a practitioner. The changes are designed to improve the competence and confidence in insolvency practitioners as well as streamline processes. The Bill generally enhances ASIC’s powers to investigate practitioners and also includes tougher powers over directors.
Creditors
The Bill also reinforces creditors’ positions during external administration. Creditors will be able to request court orders to direct a practitioner to handle money in a certain way during external administration. Creditors may request auditing of books in an external administration. Creditors and members can request that the practitioner provide information to them. Liquidators have to provide information to creditors within 10 business days in the case of a voluntary liquidation. This would replace the creditors’ meeting held within 11 days of the resolution to wind up the company. Creditors (or ASIC or the court) can resolve to review the liquidator’s remuneration in external administration. The reviewer would also be a registered liquidator. Creditors also have the power to replace a liquidator. The changes support creditor involvement and communication during external administration.
Taking Effect
The Department of Treasury will take comments and submissions in relation to the Bill until 19 December 2014. It is currently estimated that the final version of the changes will not take effect until early 2016.
For most Australian businesses enterprise bargaining is unwarranted because the Fair Work Act 2009 has removed the benefits of bargaining, imposes significant costs on those who bargain, and made bargaining an inferior option for workplace flexibility and engagement when compared to common law arrangements.
The need and flexibility has gone
Enterprise bargaining provides little benefit because the need to bargain has been reduced and the potential flexibilities from bargaining have vanished.
Why the need has gone
Enterprise bargaining used to be a mechanism for overcoming Award complexity where organisations were governed by multiple awards. This need has vanished, or is disappearing, following modernisation of the Award system. Granted, most Awards are still difficult to understand, even if their application is more certain. The Fair Work Commission (“FWC”) retained too much of the old language in its rush to modernise. But it is to be hoped FWC will be wise enough to progressively address these problems. And Agreements are limited in their ability to solve what problems remain because their flexibility has also gone.
Why the flexibility has gone
No Agreement can adjust the National Employment Standards (the “NES”) and all Agreements must make all covered employees better off overall (the so-called “BOOT”) compared to any applicable Award. These twin restrictions imply near-zero flexibility in enterprise bargaining. For example: leave cannot be paid in advance, or cashed out into a single hourly rate; penalty rates and overtime pay cannot be averaged out across the workforce through higher average hourly rates for all; and long service leave cannot be standardised across national businesses. Everyone must receive at least the NES and at least the Award, so flexibility only goes in one direction – paying more to everyone.
Enterprise Agreements are costly
Agreements impose significant costs on organisations because the bargaining process is overly-technical, and because having an Agreement carries the hidden cost of robbing employers of their Award-enshrined rights to withhold pay from employees who do not give the required notice when they resign.
Bargaining costs time, money and patience
Under the Fair Work Act, bargaining is a highly technical process that places form above substance. Employers need professional advice to assist them through this process, and that advice can be substantial and costly, especially if unions become involved. And the process is designed to give unions the maximum ability to become involved. They are the default bargaining agent of their members. They must be consulted, even if you do not know you employ union members. They can frustrate, and even wholly de-rail, registration if you fail to consult with them. It can be a frustrating and enervating process, especially when the ultimate benefits are so anaemic.
Bargaining involves a loss of the right to withhold notice
This is a sleeper: most employers would not be aware of this problem.
Modern Awards tend to allow employers to withhold pay from employees who resign without the required period of notice. This deduction is expressly authorised in the Fair Work Act. But the Fair Work Act prohibits the same rights from being replicated in an Agreement.
Under an Agreement, an employer can only deduct money if the employee agrees to the deduction in accordance with a process laid out in the Agreement – the Agreement itself cannot authorise the deduction, it can only authorise an agreement to agree to a deduction.
So, the Award right to deduct ungiven notice appears to vanish the moment an Agreement is registered. Even incorporating the provisions of the Award into the Agreement by reference does not fix the problem. The incorporated provisions have effect as a term of the Agreement, not as a term of an Award. So what was an enforceable right under the Award becomes unenforceable when it is adopted into an Agreement.
Common law contracts might be enough, if not better
Given these restrictions, Agreements do little that cannot be achieved through common law contracts using offset clauses. An off-set clause expressly allows an employer to credit over-award payments against award obligations. They are common and have been used for years. All contracts and letters of engagement should include an off-set clause, just in case.
To replicate enterprise agreements through common law contracts, an employer could:
This suite of common law arrangements can provide a mechanism for establishing organisation-wide employment conditions without the technical complications and costs of formal bargaining. An employee can never be paid below the Award and can never be paid contrary to the NES – but Agreements face the same restrictions, so nothing is lost in using common law contracts. Further, the employer does not lose the right to withhold pay from employees who resign without notice. It also makes organisation-wide changes to employment conditions easier to implement by simply adjusting the common conditions.
Some observers might complain that common law contracts are an individualistic approach that excludes the perceived benefits of collective bargaining and consultation. This complaint is invalid. There is nothing to stop an employer from consulting with staff about employment obligations in their organisation-wide common law arrangements. Indeed, employers might agree to only alter the common set of provisions after consultation with staff or in accordance with some agreed process.
If unionised, all bets are off
Of course, these arrangements are unlikely to be successful in unionised industries. In such industries, bargaining will be about protecting the organisation from industrial action and earning a de-facto licence to operate in the relevant industry. That is the reality and it is unlikely to change anytime soon, especially for smaller businesses.
But for most organisations, and certainly most small businesses, enterprise bargaining is costly and unnecessary. Most would probably be better served by sticking with Awards and seeking flexibility through common law contracts that off-set over-Award payments against Award obligations, combined with non-industrial forms of employee engagement and consultation.
If you need advice or assistance with your employment issues please contact us:
Chamberlains Law Firm
P: 02 6215 9100
E: scott.chamberlain@chamberlains.com.au
In the past it has been difficult for a supplier to recover a product that, once delivered to the buyer, has been mixed in with other similar or identical products. Goods of this type are known as “commingled goods”. A typical example of such goods would be grains that are mixed together for the purposes of storage upon delivery to the buyer’s premises.
This difficulty stemmed from the common law principle that once mixed, the goods could not be separated. Under this principle suppliers could not recover those goods if the buyer took delivery and then later failed to pay.
However the Personal Property Securities Act 2009 (PPSA) provides a mechanism for suppliers to recover commingled goods.
Although it will not be possible to identify the individual load of commingled goods, the supplier can recover the amount of product originally contributed, even if the form has changed through processing, manufacturing or assembly.
How can a Supplier Recover Commingled Goods?
Suppliers can take advantage of this change by:
By registering the contract with the PPSR, the supplier’s interest becomes a security interest and is recoverable. This also means that if the buyer is subsequently wound up, the supplier’s interest is ranked ahead of ordinary unsecured creditors.
It is essential that supply contracts are drafted to include a right to recover goods in accordance with the PPSA. Suppliers who have older style terms of trade agreements will need to update their contracts to take advantage of the PPSA.
If you require legal advice in relation to commingled goods, terms of trade contracts or PPSA, we advise that you seek advice from Chamberlains Law Firm. We can draft a terms of trade contract with the appropriate PPSA clauses and can register the contract in the PPSR for the supplier.
Article by Sayward Brest
Contact:
Stipe Vuleta – Practice Manager – Dispute Resolution, Insolvency & Reconstruction
E stipe.vuleta@chamberlains.com.au
P 02 6215 9100
In the recent decision Ozsoy v Monstamac Industries Pty Ltd [2014] FWCFB 2149 the Full Bench confirmed that an unfair dismissal application lodged one day late would not be accepted for lodgement.
The facts
The employee was dismissed for serious misconduct on 13 May 2013. In his letter of dismissal the employer advised that they had received advice from the Fair Work Ombudsman (FWO) in relation to his conduct. The employee contacted the FWO and lodged a complaint against his employer. The FWO referred him to the Fair Work Commission (FWC). He received a letter to this effect from FWO on 31 May 2013. He lodged his application with FWC on 4 June 2013 at 5:01 pm, making the application beyond the 21 days specified in section 394(2) of the Fair Work Act 2009 (Cth) (FWA). Pursuant to section 394(3) the discretion to extend time is only exercised in exceptional circumstances. Deputy Commissioner Gostencnik declined to extend the time.
The appeal
The employee appealed this decision on various grounds, including disputing the finding that he had not adequately explained the delay in lodging his application. The FWC is required to take the matters listed in section 394(3) into account, including the reason for the delay. The Full Bench agreed with the Deputy Commissioner that there was no satisfactory explanation for the delay between 31 May and 4 June. The fact that the application was only one day late did not make it an exceptional circumstance.
Implications
The Fair Work Commission will look at the entire length of the 21 day period. Any explanation for delay must explain the whole time period. The employee was unsuccessful in establishing the reason for the delay despite the fact that he was delayed when he first lodged his complaint with the FWO instead of FWC. This earlier delay did not adequately explain why he failed to lodge his application with the correct organisation until 4 June.
Employers should state clearly in termination letters when dismissal takes effect and keep a copy of the letter for future reference. If an unfair dismissal application is lodged against the employer outside of the 21 days, this date can be raised in defence to the application.
Employees should note that date when dismissal takes effect and lodge applications within the 21 days in order to ensure the application is accepted by FWC.
Article by Sayward Brest – Chamberlains Law Firm
A major risk factor in instituting legal proceedings, for any claimant, is the risk of unrecovered legal fees. Unfortunately the cogs of the law tend to grind slowly and expensively and often even the winning party rarely recovers all it has been spent on a matter. In the insolvency context the interests of creditors and insolvency practitioners, amongst others, must also be considered in addition to solely the interests of the applicant creditor. It is accordingly key that all participants, be they solicitors, claimants, creditors, debtors or insolvency practitioners are aware of the risks that insolvency related proceedings may expose them to, particularly regarding recovery of legal costs, so they can take appropriate steps to minimise such risks.
Winding Up Applications
In successful winding up applications, the Court will generally order, in accordance with the Corporations Act (Cth) (Act) that applicant’s have their costs paid by the company being wound up. Two factors affect what the applicant actually recovers from the costs of winding up the company. Firstly, the costs will normally not cover the total legal costs and expenses that the applicant has spent due to the method the court uses to calculate costs. Secondly, the costs order forms a claim in the winding up as an unsecured debt and is therefore subject to the priority rules in the Corporations Act.
Calculating Costs
The calculation of costs by the court will be done according to the court’s rules on costs assessment. These are called assessed costs or taxed costs. Generally this will result in the total being lower than what the applicant actually spent on his legal fees.
Priority Claims
Secured creditors may realise their security in priority to the unsecured creditors. Then section 556 of the Act provides a list of priority in paying out unsecured claims in the winding up. In this priority list the cost of the winding up application comes after the costs and expenses of the liquidation. If the company has no assets left, then the applicant may recover none of the costs of the application. Therefore the amounts paid to both secured creditors and the liquidators will affect whether the applicant’s costs get paid.
Investigations
Under s 596A of the Act liquidators may conduct examinations in court in order to examine parties involved with a company in liquidation. This can include both creditors and the applicant in the winding up application. The court normally will not make costs orders, unless it determines that the examinations were improper. Therefore the person who is being examined will normally have to cover his own costs, which may include legal costs if the person chose to have a lawyer represent him at the examination.
Company Claims
The company may seek to recover debts or damages through legal proceedings. The general rule in legal proceedings is that the costs follow the event; ie the successful party’s costs are paid by the unsuccessful party. This is subject to some exceptions, including that if the unsuccessful party made an offer earlier that was the same or better than what was ultimately recovered, the successful party may be ordered to pay costs to the unsuccessful party.
There is a risk that court orders for costs will not be complied with, especially when the party who is ordered to pay is in liquidation. For example, a company in liquidation may sue to recover a debt. The defendant may successfully defend the action and be awarded costs, but the company may have no assets and therefore the defendant ultimately receives nothing despite the order.
Additionally Courts have powers to order persons who are not parties to the proceedings to pay costs. This would be targeted at those behind the litigation such as creditors of the company. The other party can apply for orders that they provide security for costs.
Issues for Liquidators
A liquidator may be vulnerable when he is not a party to the proceeding due to the court’s power to order costs against non-parties. However as discussed in Macks v Hedley [1999] FCA 1208, liquidators are given special protection and such orders are only made when the proceedings were without merit or were brought with an improper purpose.
Liquidators may wish to recover preference payments from creditors, but these proceedings must be brought by the liquidator, not the company. This means the liquidator is vulnerable to costs orders just as any party would be. The liquidator will generally institute proceedings in his capacity as liquidator in order to limit liability to costs orders, but the court may be unwilling to limit the orders. Liquidators can be at risk of having their professional fees and expenses deferred behind costs orders. The liquidators should agree to the costs orders forming part of the winding up expenses and will be paid by the company.
Take Home Message
Parties involved with a company in liquidation need to be aware of their risks associated with the proceedings. The Chamberlains Law Firm Dispute Resolution, Insolvency and Reconstruction team can assist and advise anyone with these issues.
Article by Sayward Brest – Law Graduate – Dispute Resolution, Insolvency and Reconstruction
P 02 6215 9100
E sayward.brest@chamberlains.com.au
Self Managed Super Funds (SMSF) are an increasingly popular form of retirement fund, and one of the fastest growing sectors. They offer a high level of flexibility and allow members a wider range of investment possibilities and a greater level of control over their retirement benefits.
However, as with any family arrangement, a SMSF can give rise to uncertainty in how benefits will be paid and create disputes between family members if appropriate care is not taken.
Superannuation benefits usually pass as follows:
A recent decision handed down by the Supreme Court of Western Australia emphasises the importance of ensuring that you have a current binding death benefit nomination in place.
Ioppolo & Hesford v Conti [2013] WASC 389 concerned a dispute regarding the distribution of a deceased member’s interest in her SMSF. Mrs Conti and her husband, the first defendant, had created a SMSF by deed in 2002. The couple were the only trustees and members of the SMSF. Mrs Conti then made a Will in 2005 in which she directed that her children receive her entitlements under the SMSF. She specifically stated that she did not want her husband to receive those funds.
When Mrs Conti died in 2010, she did not have a current binding death benefit nomination. Her husband became the only trustee and member of the SMSF. By deed of appointment in 2011 a company, the second defendant, was appointed trustee of the SMSF. The second defendant disregarded the direction in Mrs Conti’s Will and determined that her entitlements should be paid to her husband, a determination that her children, the plaintiffs, then challenged. Their relevant arguments were, firstly, that the first defendant was obliged to appoint one of the executors of Mrs Conti’s estate as trustee of the SMSF; secondly, that the second defendant did not exercise its discretion in good faith; and thirdly, that the trustee’s determination should be reviewed and overturned
In finding against the plaintiffs, the court held that:
This decision serves as another reminder that superannuation is a non-estate asset that does not automatically pass in accordance with the Will of a member. Therefore a current and valid binding death benefit nomination is crucial to ensure that your benefits pass to your intended beneficiaries.
The case is not ground-breaking; in 2005, the Supreme Court of New South Wales made a similar decision in Katz v Grossman, finding against a plaintiff who alleged an improper exercise of power by the trustee of a SMSF. This case involved a contest between two siblings in relation to the control of a SMSF established by their late father, Mr Katz. Mr Katz had made a non-binding death benefit nomination indicating that he wanted his benefits to be split equally between his two children. When he died, his daughter (Mrs Grossman) became sole trustee and quickly appointed her husband as additional trustee. As trustees of the SMSF they disregarded the non-binding nomination and paid 100% of Mr Katz’s benefits to Mrs Grossman. Although Mr Katz’s son challenged this exercise of discretion, Mrs Grossman and her husband had acted properly as trustees and were entitled to disregard the non-binding nomination.
Chamberlains Private Wealth provides the following checklist for SMSF trustees and members to ensure that their benefits pass to their intended beneficiaries: