Structuring for the future

The COVID-19 crisis is far from over. However, the gradual easing of lockdown restrictions now appears likely, so businesses can start to plan for the future and for the opportunities that it will hold.

As part of the recovery process, businesses may need to consider refinancing or restructuring their existing debt. Therefore, we encourage businesses to use this time to review their current structures to ensure they are ready, if they need to refinance.

Many businesses use a trust structure as their trading entity. A trust is a device by which one entity (a “trustee”) holds property for the benefit of another person(s) or entity (a “beneficiary”).

If your business trades through a trust structure, then, in order to prepare for a restructure or refinance of existing debt, you should consider the following:

  1. Make sure that you can locate a complete signed and stamped original of the trust deed and all variations to the trust deed. The financier is likely to request copies of these documents.
  2. Make sure that all of the records and financial statements of the trust are up to date, including copies of all trustee minutes, and any share and unit registers. The financier is likely to request copies of these documents.
  3. Review the trust deed (and any variations) to ascertain who the trustee is. The trustee in its capacity as the trustee of the trust will usually be the “borrower”, so you will need to communicate the details of the trustee to the financier at an early stage. A corporate or company trustee is usually preferable to an individual trustee.
  4. The financier may require the appointor and the potential beneficiaries to sign documentation. Therefore, as part of your review of the trust deed (and any variations), you should ascertain who the appointor and the potential beneficiaries are and make sure that they will be available if required by the financier to sign documentation.
  5. If the trustee is a company, then it is likely that the financier will require personal guarantees from the directors. Therefore, if there are any directors who will not provide personal guarantees, identify this early and communicate this to the financier.
  6. Review the trust deed and make sure that the trustee has the power to borrow and to provide any securities typically required by a financer; for example a guarantee or a mortgage. This ensures that the trustee is not acting in breach of trust by borrowing funds from, and providing security to, the financier. The trust deed should also give the trustee the power to operate and run the business.
  7. Review the trust deed and make sure that the trustee has the right to be indemnified (or compensated) out of the assets of the trust. This is important for two reasons. Firstly, because financing documents usually require the borrower to warrant or represent that the trustee has the right to be indemnified out of the trust’s assets. Secondly, trustees are personally liable for all debts incurred on behalf of a trust, so they need to make sure that they have a right to be indemnified out of the trust’s assets.
  8. Consider whether the trust owns any assets which you do not want to form part of the loan and any security provided for it. For example, the trust may also own another business. If there are any assets that you do not want to form part of the loan and security, then these assets will need to be specifically excluded from the loan. Ideally, separate trusts should be set up to hold separate assets.

If you have any questions, please reach out to Kimi Shah, Senior Associate (Estate Planning and Wealth Protection) or Denise Wightman, Partner (Structured Finance and Investment).