Commercial Law on the Sale and Purchase of Businesses in Papua New Guinea
An appropriate method of dealing with the tasks undertaken by a Solicitor in relation to a sale and purchase of a business is to divide the treatment of the subject into two part:-
a. The role of the Solicitor acting for the Vendor, and
b. The role of the Solicitor acting for the Purchaser.
Part A: The Role of the Solicitor acting for the Vendor
The Solicitor for the Vendor will normally prepare the contract of sale, although in some instances the selling Agent will prepare the contract. Even when the selling Agent prepares the contract, the prudent Vendor will have the contract of sale perused and settled by a Solicitor prior to signing the same.
Leased Premises and Chattels
Transfer of lease of premises
In the case of a leasehold business it will be necessary for the Vendor to obtain the consent of the Lessor to the Assignment or transfer of the lease of the premises to the Purchaser. This is rendered necessary by virtue of the fact that most leases contain a provision prohibiting the transfer or a assignment of a lease without a consent of the Lessor. The Solicitor for the Vendor will normally write to the Lessor advising him or he of the details of the proposed assignment and formally requesting the landlord's consent to the assignment.
In due course the Solicitors for the Purchaser will forward to the Vendor's Solicitors the necessary documents in relation to the transfer or assignment of the lease. The form, which these documents take, will depend on whether the lease is registered or unregistered.
The liability of the Vendor under the lease is not discharged upon assignment of the Lease unless the landlord expressly agrees to so he or she obtains an indemnity from the Purchaser against any liability, which have Vendor might incur the Lease after the date of completion of the Sale.
There may be certain chattels in the business, which are leased by the Vendor, such refrigerators. The Vendor's Solicitor will arrange for the owner of such leased chattels to the transfer of the lease of the chattels to the Purchaser. Again the Vendor should obtain an appropriate indemnity from the Purchaser against any liability, which Vendor might incur under the lease after the date of completion of the sale. A preferable course of action would be to have the owner of the leased chattel agree to determine the lease with the lease with the Vendor and to enter into a new lease with the Purchaser.
The Solicitor for the Vendor will advise his or her client with respect to the apportionment of the purchase price and suggest that the client discuss with the client's Accountant the valuation of plant and fixtures included in the contract of sale.
The general rule is that where on the sale of appreciable property the sale price exceeds the depreciated value then the amount in excess of the depreciated value allowed is assessable incomes; where it is less than the depreciated value the deficit is an allowable deduction property, the Commissioner of Taxation is bound by that apportionment.
Where, however, no specific sum is approtioned to such item, the Commissioner of Taxation may determine the value to be allocated to it. It is therefore important for the Vendor in selling a business to apportion to a specific value to each item of appreciable property and, it possible, to apportion a value not more than its depreciated value. It is desirable to state specially in the agreement that the amount attributable to each item is the value thereof for the purpose of the agreement.
The Vendor should be advised to notify the authorities and the various people with whom he or she deals that the business is sold. It is wise to advice the postal and telephone authorities, the suppliers of gas, electricity, and water. The Vendors should also write to the persons from whom the business obtains goods or services so that they will know that any arrangements made with the purchaser of the business are not the responsibility of the Vendor.
I is also advisable to forward a copy of the sale agreement to the Vendor's Accountant, as he will probably require it for completion of the Vendor's Income Tax Returns.
Part B: The Roles of the lawyer acting for the Purchaser
The Solicitor for the Purchaser should obtain instructions from the client as to how the business operated or is going to operate and the Purchaser's intentions in relation to the business so that the solicitor can better advise the client what should be in the contract. The Solicitor also needs to know this information as as to be make the necessary inquiries and searches in relation to the business.
The Solicitor may also be called upon to advise the Purchaser in relation to the best vehicle to purchase and carry on the business, be it partnership, company or trust.
7.1 Books of Account
The Purchaser will probably have examined the books for the business, which will have undoubtedly influenced the decision to purchase the business. Accordingly, the accounts for the business, going back to for say three (3) years, should be annexed to the contract a warranty given by the Vendor that the accounts are true and accurate, and given a true and fair view of the financial position of the business. If the Purchaser wishes to have the accounts examined by an Accountant. it may necessary to make the contract conditional upon the Accountant for the Purchaser being satisfied with the state of the accounts within say seven (7) days after the date of the contract.
If the Vendor is selling goodwill, he or she will generally seek to make the goodwill the highest component of the sale price, since the value of the goodwill is not taxable in his or her hands. However, this will not necessarily coincide with the Purchaser's interests, particularly if the business assets being sold include plant and equipment.
The contract may contain a further warranty by the Vendor as to the previous net income of the business. It should, be pointed out to the Purchaser thst such a warranty has limitations, if the income was partly related to the personal goodwill of the Vendor. The contract should provide that the Vendor will introduce the Purchaser to the client of the business, and that the Vendor will transfer to the Purchaser the business name (if any). The 'transfer' is effected by notifying Commissioner for Corporate Affairs of the change in the persons carrying on the business by lodging Form 4 pursuant to the Business Names Act 1963 of Papua New Guinea.
To reserve the goodwill between the date of the contract and the date of completion it is essential that the business be carried on in the usual and proper manner by the Vendor. The contract should provide accordingly.
7.3 Protection of Goodwill by Covenant in Restraint of Trade
To preserve the goodwill of the business, the Purchaser should imposing upon the Vendor a restraint of trade. The common law and Trade Practices Act 1974 impose certain restrictions upon the extent of such a covenant in restraint of trade.
The covenant should restrain the Vendor not only as an individual proprietor but also as a partner or officer of a company or as an employee or servant from engaging directly or indirectly in competition with the Purchaser.
7.4 Wages and Holiday Pay
The contract of sale should provide that on the date of completion of the contract the Vendor shall pay to the staff of the business all wages and holiday pay accrued and due as at the date of completion.
7.5 Long Service Leave
Where an employee immediate commences employment with the new employer (owner) on the transmission of the business, the new owner is required to pay long service leave entitlements to the employees in respect if the whole period of their services with the same business, irrespective of who the employer, that is the owner of the business, may have been from time to time. The service of the employee is continuous for the purpose of long service leave despite the transmission of the business, and there is deemed to be no termination of service on transmission where the employee immediately commenced employment with the new owner.
The contract should therefore attempt to make provisions for the fact that the Purchaser will become liable to pay long service leave to employees of the business at the some time after completion of the purchase. It is reasonable to suggest that the Vendor should pay or allow to the Purchaser an amount equal to the long service leave entitlement of those employees who are at the date of sale then entitled to long service leave. The Purchaser should attempt to negotiate some satisfactory arrangement to cover the imminent liability to pay long service leave to those employees who are entitled to long service leave at the date of sale but who would shortly after completion of the sale become so entitled.
Take note: We will continue from 7.6 to 7.10 in my next article.
Mr. Mek H. Kamongmenan LLB, the author.