A worry for some people is that if they become shareholders of a company, they could somehow become liable for the debts of the company.
This is not the case unless the shareholders give a personal guarantee or become directors of the company perhaps.
Bart invests in Barney Pty Ltd which is a construction company. The company has virtually no assets. One day one of the staff members is seriously injured and sues the company. The company collapses and Bart is worried ‘they will come after him’.
This is generally not possible because Bart is a separate legal person to the company. His shares will be worthless, but there is where it ends.
However, there are some limited exceptions to this rule those for cases of fraud, the company acting as agent for the shareholder, shadow director roles, shams, parent companies and subsidiaries – all of which are very rare.
The King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42
“The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…” (at 435)
A Bucket company is a company set up to receive profits from another entity – usually a discretionary trust. The bucket company usually does nothing else, except receive money and make loans or directly invest perhaps. Over time the value of the bucket company will rise as money is coming in but not going out. Therefore, it will become increasingly important to consider in regards to estate planning and asset protection.
One estate planning strategy is to set up one separate bucket company for each child so that when the controller of the companies dies each company’s control can be passed on rather than having multiple people inherit the control of one company.
Homer has 3 kids. He wants to leave them approximately the same amount of his assets 1/3.
Homer has decided to set up a discretionary trust to use to invest in shares. He seeks legal advice on the difficulties with leaving the control of the trust to more than one person so has that covered. But after a while the dividends of the share investments are building up so Homer sets up 3 bucket companies with 3 separate discretionary trusts with one trust holding the shares in each bucket company.
When the dividends come in, he causes the trustee of the share trust to distribute 1/3 to each company. Over a period of time the companies end up with large amounts of retained earnings which and then lent back to the share trust.
Each of the bucket companies is then passed to each child – actually nothing is passed but the control of the bucket companies is arranged so that Child A controls Trust A and Bucket Company A.
This way things will be easy to divide. There is no more than one child involved in one company so if they want to cause the company to make loans, invest, pay dividends or close down they can do so without the need to effect or even consult with their siblings.
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When registering the ownership of shares in private companies with ASIC trusts are not recorded. You might recall that a trust is not a legal entity, but it is a relationship where someone owns property on behalf of others.
This means the trustee is the legal owner of the shares.
However, on ASIC forms you can nominate whether the registered owner of the shares is holding the shares in their own right, or as trustee. This is done by a tick boxed labelled ‘beneficially held’.
‘Beneficially held’ means the person is not acting as trustee.
If they were acting as trustee then the shares would not be beneficially held (because the beneficial owners are others).
So, check your annual ASIC statements and confirm they are correctly listed on ASIC. If they are recorded incorrectly this could lead to expensive disputes upon your death or incapacity.
Written by Terryw of Structuring Lawyers – www.structuringlawyers.com.au