Corporate Trustee Companies

One type of problem I often encounter in practice are disputes between shareholders in corporate structures. These problems are usually exacerbated when there are other complicating elements, such as subsidiary companies or associated trusts.

It seems that more often than not, the shares in trustee companies does not reflect how units in the relevant unit trust are owned. I have encountered many instances where 4 "partners" had 25% of the units in a unit trust each, but the shares in the associated trustee company were all in the name of only one of the unitholders. This means that the controlling unitholder can sack the other 3 unitholders as directors of the trustee company at any time, as well as deal with things like bank accounts, signing contracts, etc all in the name of the trust and without recourse to the others.

In most cases, the oppressed unitholders have a legal remedy, but must go to Court in order to do so. Importantly, many of the statutory rights and remedies available to shareholders are not automatically available to unitholders in trusts.

As with most of these issues, the right advice at the startup stage can save a fortune in legal fees down the track. I have no idea how the corporate divorce rate compares with the marital variety, but I suspect that they are at least comparable enough to make a corporate "pre-nup" (a shareholders' or unitholders' agreement) a wise investment.

Not a Guarantee

I am constantly surprised at the number of company directors that have no idea how many personal guarantees they have given on behalf of their companies, or to which suppliers they have been given.

At its most basic level, a guarantee is a promise to pay or be liable for the debts of another.  Today, most financiers and other providers of commercial credit (such as landlords and trade suppliers on terms) require that directors of small proprietary limited companies as a condition of advancing credit.  This is used to protect them against company insolvency.

Given that one of the primary reasons that businesses choose to incorporate is to take advantage of "limited liability" (ie the "Ltd" part of the company's name), providing personal guarantees effectively surrenders this advantage and opens up the asset base of the director to a company creditor.

However, what really does my head in is the number of directors that have no idea who they have made this sort of promise to.  In the event of a company insolvency (which is the point that the guarantee is going to be relied upon by a creditor), it is almost impossible to structure some protection for directors if they do not know who they have personally promised to pay.

I have seen otherwise prudent directors become bankrupt from such an oversight.

Ideally, directors should avoid giving personal guarantees at all.  In the real world, however, you can at least mitigate the risk by keeping good records of who you have given guarantees to and constantly monitoring the trading activity with these entities.

Depending on your trading record and your bargaining position, it is also possible to request that previously given guarantees be returned.