A couple of days ago, a financial adviser and I were looking at helping a client to implement an insurance funded buy-sell arrangement.
Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.
As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.
This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.
Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.
It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.
And no - a company can not own shares in itself.
Until next week.
Matthew Burgess
