Do you know where your Constitution or Trust Deeds are?
Most businesses these days are operated through a mix of corporate structures, which will invariably include the use of a company and/or a trust.
The busy and demanding nature of running your own business often means paperwork is low on the list of priorities. Whether you set up your structure using one of the numerous online providers or your accountant or lawyer did it for you, once the reams of establishment documents have been signed they are often filed and forgotten about.
However, it pays to take some time to ensure that you know where your essential paperwork is. The constitution of your company and the deed for your trust are the rule books by which you must operate. In the absence of knowing what these documents say about all manner of issues your business can be hamstrung.
Depending on any specific requirements put in place at the time of incorporation of your company, if you cannot locate your constitution your company may be able to modify or repeal its constitution by special resolution of shareholders, being a resolution passed by at least 75% of votes. If you cannot get a special resolution to address the issue an (costly) application may need to be made to the Supreme Court to rectify the situation.
Lost Trust Deeds
A lost trust deed can also have dire consequences, especially for discretionary (family) trusts.
In theory where any trust deed has been lost you should approach the court for a direction as to the rules of the trust and even the existence of the trust. In the absence of the original trust deed or a direction from the court, the trust is easily open to a challenge by any potential beneficiary (including potential death benefit beneficiaries). Of course, going to court will incur significant costs and sometimes it may be worth the parties bearing some risk as to a challenge being made to the rules of the trust hence an alternative approach may be viable.
A lost family trust deed unfortunately is particularly difficult to deal with. Firstly, you are not really able to determine who all the beneficiaries and potential beneficiaries of a family trust are if there is no deed. Secondly, changes to a family trust can easily lead to a resettlement that is subject to stamp duty and also probably CGT.
The options available where a trust deed has been lost include:
Do nothing. After all, you haven't had a deed for a while now and it hasn't been a problem (yet). Although this is a cheap and easy option it may become an issue if the deed is asked for by the bank, the ATO or worse still a court.
Do a deed of confirmation and adopt a new deed. This deed is made between the trustee and all of the beneficiaries of the trust. This is a relatively cheap option where the trust owns minimal assets and can readily identify all members/beneficiaries/potential beneficiaries. However, it is almost certainly subject to stamp duty as a new trust and a transfer of the assets from the old trust to the new trust may trigger a CGT event.
Wind the trust up and roll the assets into a new trust that is established with a clear set of rules. Again, there may be cost and tax reasons that mean you don't want to do this.
Go to the court to have the trust confirmed. This is a costly exercise but may be your only option.
As you can see although a simple house keeping issue, knowing where the documents establishing your corporate structure are located can be of fundamental importance. Using your accountants or lawyers to store your important documents (often free of charge) is a great strategy to ensure you are protected from the costly & stressful consequences of losing them.
If you find yourself in a situation where you cannot locate the documents establishing your corporate structure we suggest you:
- Arrange for all parties to conduct a thorough search for them or even a full, signed and dated copy;
- Contact the person (maybe a solicitor or accountant, or their firm) who arranged the documents in the first place to see if they have a copy;
- Ask the person (maybe a solicitor or accountant, or their firm) who arranged the documents if they have a similar document which they arranged around the same time as your documents were arranged;
- Seek advice from your lawyer and accountant as to whether you can use a similar document to replace your documents and if so what the consequences will be; and
- If none of the above options are available or can be agreed, then you may need to approach the court and apply for directions on how to administer the company and/or trust.