Who bears the burden for business losses: To what extent are liability issues of business structures taught in Australian accounting degrees

Transcription

1 UNSW Business School School of Taxation and Business Law Who bears the burden for business losses: To what extent are liability issues of business structures taught in Australian accounting degrees Dale Boccabella, UNSW Dr Brett Freudenberg, Griffith University

2 1. Introduction, Background, Aim of Paper and Conclusion 1.1 Thanks you for your attendance, and thanks to the conference organisers for allowing us to present this work here 1.2 Apologies for Brett not being here 1.3 This paper is the second in [we hope] a series of papers The first paper was essentially a curriculum audit ( stocktake ) of business law courses at Australian universities Results published in B Freudenberg and D Boccabella, Changing use of business structures: Have university business law teachers failed to reflect this in their teaching (2014) 9 Journal of the Australasian Tax Teachers Association 180

3 1. Introduction, Background, Aim of Paper and Conclusion 1.4 Background to this research (i.e. curriculum audit or first paper) 1.5 Curriculum audit revealed under-coverage of the law of trusts, and overcoverage of company law 1.6 This [second] paper attempts to move the debate along, or add to it Key question: Is there a justification for the current position? Looked at another way, if we were starting with a clean sheet (e.g. new university (Clive Palmer University) establishing a business law program), would we recommend the current curriculum coverage?

4 1. Introduction, Background, Aim of Paper and Conclusion 1.7 Method or approach in this paper: in addressing the justification issue, this paper focuses on the most important consideration in the choice of entity question, namely, the rules regarding liability for entities debts The paper sets out the liability rules for each entity, with the aim of facilitating a comparison in terms of: (i) simple awareness of rules (ii) clarity in the rules and (iii) predictability of outcome 1.8 Conclusion: For many reasons, this is an important issue At its lowest, all stakeholders ought to be concerned with the current curriculum coverage position On another level, one has a solid base to argue, there has been collective neglect

5 2. Some Basic Data/Facts 2.1 Data re number of entities in se in Australia Sole traders: 1,067, Partnerships: 360, Trusts 750, Companies: 820, Choice of legal structure (business vehicle) is an important question Why important? Could attract different tax rules, and therefore different tax liabilities (and not necessarily just income tax)

6 2. Some Basic Data/Facts Could attract different rules re who is accountable for debts and liabilities of the operating entity Different accountability reporting rules Miscellaneous issues: 2.3 Accountants are heavily involved in the choice of legal structure question There is considerable evidence that accountants are the most heavily consulted professional adviser on this question

7 2. Some Basic Data/Facts At times, they may not be the central provider of advice Where not the central or sole provider of advice, it is suggested that they will often be in a conveyor of advice role 2.4 Coverage of the law of the various legal entities in accountants business law curriculum Low coverage of the law of trusts Low coverage of liability issues re trusts

8 3. Liability Rules Re the Various Entities 3.1 Unlimited liability, limited liability, asset protection, etc 3.2 Certainty of outcome from rules is desirable? Allows for informed decisions on risk taking Caution though as suppliers to, and creditors of, a business will often not have full information 3.3 Some constraints Multiple entity structures not considered Focus is on the non-insolvency and non-bankruptcy situation

9 3. Liability Rules Re the Various Entities 3.4 Sole trader Unlimited liability for debts and liabilities Caution: Asset not in my name 3.5 Partnership (general partnership) Partners have unlimited liability for debts and liabilities of the partnership Exceptions to the unlimited liability rule (where wrongdoing partner transacts)

10 3. Liability Rules Re the Various Entities 3.6 Trusts Step One: Trustee primary liable for debts and liabilities incurred by trust Trustee is a principal Trust is not recognised as an entity at all Therefore, trustee is contracting party The common law does not recognise the representative capacity of the trustee Circumstances where trustee not be liable on contract Trustee as agent for beneficiaries Trustee not agent for settlor and settlor not liable for trust debts Trustee may limit liability to creditors through contract Trustee claiming she/he/it is contracting as trustee is usually not enough to remove personal liability

11 3. Liability Rules Re the Various Entities Step Two: Trustee s right of indemnity against trust fund Purpose is to overcome the [harshness of] trustee liability rule, and nonrecognition of the representative capacity of the trustee What is it? Right to obtain recoupment of costs properly incurred in carrying out the trust Sources or potential sources of the right of indemnity rule Rules of equity State trust/trustee legislation Trust deed

12 3. Liability Rules Re the Various Entities Can this right of indemnity be excluded by express words in trust deed? Why would a trustee be happy to have this right excluded? Remember that excluding the indemnity means the trustee cannot have recourse to the trust fund to meet trust expenses. Defer this question to later There is no clear-cut answer to this question. There is support in the cases pointing both ways Debate is clouded by the fact that: (i) some states allow the statutory right of indemnity to be excluded (ii) some states do not allow the statutory right of indemnity to be excluded and (iii) in some of the cases, judicial comments appear to be related solely to the statutory right of indemnity The other complicating factors are: (i) does the statutory right exclude the general law right (i.e. exclusive code or codify general law right) and (ii) does the legislation in the ouster states also contemplate ouster of the general law right

13 3. Liability Rules Re the Various Entities Step Three: Trustee s right of indemnity against beneficiaries Rule of equity Not provided for under state trust legislation Usually not provided for in a trust deed Better view is that this right, where it otherwise exists, can be excluded by the trust deed

14 3. Liability Rules Re the Various Entities In certain circumstances, trustee s indemnity extends to beneficiaries Scope of this indemnity is not clear. However: (i) will exist where there is a single adult beneficiary who is absolutely entitled owner (fixed trust) (ii) will not exist where there is an under-age beneficiary (iii) will not exist re objects/beneficiaries in a discretionary trust (iv) a bit unclear where there are multiple absolutely entitled adult beneficiaries Step Four: Trust creditor rights In the first instance, limited to personal action against trustee There is no right against trust assets or beneficiaries Perilous position of creditor where $2 corporate trustee or where trustee is a natural person of straw

15 3. Liability Rules Re the Various Entities Right of subrogation may correct for the above Central idea is that the creditor is placed in the position of the trustee so that the creditor can exercise the trustee s right of indemnity against trust assets The better view is that it can also extend to the right of indemnity against beneficiaries Right of subrogation is a derivative right. The creditor can only have what the trustee could have had Hence the importance of the question as to whether the trustee s right of indemnity against trust assets can be excluded by the trust deed

16 3. Liability Rules Re the Various Entities Step Five: Section 197 of the Corporations Act 2001 may correct for perilous creditor rights Directors liable for trustee corporation s debt where: (i) company has not paid the liability and (ii) the company has lost its right of indemnity against trust assets solely because of at least one of the following: (a) breach of trust by corporation; (b) corporation acting outside its powers; (c) the trust deed denies or excludes the corporation s right of indemnity

17 3. Liability Rules Re the Various Entities Some observations Section 197 assumes [perhaps incorrectly] that trustees right of indemnity against trust assets can be excluded Section 197 does not apply to a natural person trustee Section 197 cannot apply where the trustee s right of indemnity against beneficiaries has been excluded If mere insufficient assets is the reason for non-payment, s 197 will not help the creditor

18 3. Liability Rules Re the Various Entities 3.7 Companies General position Company itself Shareholders in company Company actions attributed to shareholders (piercing corporate veil) Indoor management rule 3.8 Some observations on the four entities in regard to liability issues

19 4. Evidence of Advisor Misunderstandings Re Items Related to Trust Liability Rules 4.1 Caution before drawing conclusions 4.2 Trust is an Entity 4.3 Capacity in which entity owns property, enters into contracts

20 5. Recommendations 5.1 Accountants need an appropriate level of systematic education re the law of trusts 5.2 A debate should be had and/or a cost-benefit analysis should be undertaken, as to whether this is best done at university, or in continuing professional development programs 5.3 Relevant professional bodies should be engaged in this debate 5.4 Relevant academics should be engaged in this debate

21 6. Conclusion 6.1 Important issue for many reasons Responsibility to our students Responsibility to the profession that we serve Responsibility to consumers of particular accounting services 6.2 In part, the issue may go to our credibility as academics, and as universities It is not a good look when university curricula appears out of date with real world developments in a disciplinary area in which we claim to be key educators

22 7. Comments, Questions and Discussion We welcome your feedback