Planning and implementation of creditor-proofing strategies can only be undertaken when a business is solvent and operating in the ordinary course of business. Attempts to creditor-proof during insolvency are subject to significant legal challenge through a number of Legislative Acts.
Here are seven risk management strategies:
- Operating through the auspices of a corporation provides protection for assets outside of the business such as, personal assets of the business owner. This is general common knowledge with most dealerships operating within the corporate format.
- Separate ownership of valuable assets from the dealership operating business should always be considered. For example, dealership real estate and equipment assets can be held in a separate holding company and leased to the operating company. Also, in the case of rental dealership, consider positioning the dealership lease in a separate company whereby a sub-lease can be arranged with the dealership.
- Consider a holding company to accumulate the rights to the equity of your dealership company. There are a number of structures that can be utilized depending on your circumstances. The proper structure can allow for the payment of dividends from the operating company to the holding company to strip out and protect the accumulated retained earnings of the dealership company. If necessary, the funds can be loaned back to the dealership company.
- Where loans have been made to the dealership company (including loans from holding companies, related companies or individual shareholders), consider the execution of a General Security Agreement (GSA) that is registered under the Personal Property Security Act in Ontario to secure the assets of the dealership. However, be advised that registration of your security would generally rank behind the financial institutions that have provided loans to your dealership company.
- Where possible reduce, eliminate or avoid personal guarantees.
- Consider structuring share ownership of your companies through a Trust and/or other family members, especially where your personal guarantee for loan financing is necessary.
- Consider arranging ownership of valuable personal assets through structures outside of your personal name, for example through a trust arrangement or with other family members. For instance, your principal residence can be owned outright by your spouse.
It’s never too early to look at creditor-proofing strategies. As experienced in 2008, we are all very aware of the significant financial impacts of a major downturn in the auto industry. Implementation of strategies while a company is insolvent may not be successful. In fact, actions taken may be illegal.