What you need to know:
- Typically, the business owners may own shares in a company whose special purpose is to hold the primary assets of the business.
Operating a business in Uganda, or anywhere else for that matter, is always accompanied with risks, especially to its core, the assets. Assets are things of value which are beneficial to a business. They constitute the company’s capital base and are broadly categorised into tangible assets (such as land, cash, and inventory) and intangible assets (like intellectual property, accounts receivables or arguably even reputation).
The assets are inherently vulnerable to claims from creditors who may be lenders, suppliers, customers, or government authorities such as Uganda Revenue Authority and National Social Security Fund. As such, every business owner bares the responsibility to put in place measures which mitigate such asset loss exposure. Business owners should, therefore, be intentional about asset protection planning from the onset to create a formidable shield against creditors.
One of the effective techniques used to protect business assets is what is commonly known as “asset placement”. At its simplest, asset placement is the transfer of asset ownership from one entity to another for a specific reason. The reason in this case would be to transfer ownership from the entity which runs the day-to-day business operations to other entities which have been formed specifically to hold the assets.
Typically, the business owners may own shares in a company whose special purpose is to hold the primary assets of the business. This company is usually known as the holding company. Through the holding company a separate company known as the operating company is then incorporated specifically to run the business’ operations. The holding company would then grant the operating company licenses (usually exclusive) to utilise the primary assets.
An operating entity should not hold the primary business assets because it is more likely to be the subject of legal proceedings. If a court judgement is handed down against the operating company, the successful party is unlikely to reach any of the business’ assets which are held by a separate holding company. This is because of the legal doctrine of corporate personality. Under this doctrine, a company is recognised as a legal person separate from its shareholders. Therefore, the liabilities of the operating entity, cannot spill over to another, the holding company.
If properly structured by a professional, asset placement is a lawful technique which can successfully keep assets out of the reach of creditors. It has sometimes been referred to as the “tax avoidance for assets”.
Notably, the time when the assets are transferred to the preferred holding entities is crucial. Some transfers could be questionable if they are made at certain times or in certain circumstances. For example, if a transfer is made on account of an antecedent debt, or at a time when the company is unable to pay its debts or within the year preceding the start of liquidation or bankruptcy. Such transfers could be voided by a court of law under the insolvency laws on ground that the transfers were intended to deprive the business’s creditors of their right to realise their debts.
It is, therefore, crucial for businesses to contemplate implementing asset placement plans as early as possible. Preferably at the time of conceptualising the business ideas.
Ownership can be moved around at any time during the business’s growth journey as long as it is done within the ambit of the laws. How the business is legally structured greatly determines the extent of asset loss exposure. The goal should always be to alienate the primary assets from the arm of the business which is most exposed to creditors’ claims.
It is also key to note that implementing a very aggressive asset placement plan could sometimes make the operating company unattractive to financial institutions when the need for some debt financing arises. This is another reason why it is critical to seek the services of a professional .
The level of vulnerability of businesses to claims and lawsuits cannot be overstated. The increase in commercial disputes following the outbreak of the Covid-19 pandemic has become a thorn in many businesses’ heels lately. This should serve as a wakeup call to business owners that any business is prone to financial difficulty at any stage.
Angello G Walyemwa is an advocate of the High Court of Uganda.