Commercial Law on the Sale and Purchase of Businesses in Papua New Guinea (Second Part)
The Purchaser’s Lawyer should advise his or her client to insure the property immediately, as the property will be at the Purchaser’s risk as from the execution of the contract.
7.7 Business Premises
The Purchaser must ensure that he or she has security of tenure of the premises in which the business is carried on. The Solicitor for the Purchaser should peruse the lease and advise the client in respect of the following matters:
(a) The un-expired term of the existing lease;
(b) The rental;
(c) Whether or not there is an option for renewal;
(d) Any provision for review of the rental;
(e) Whether there is need for consent by a mortgage;
(f) The right to assign; and
(g) any covenant on the part of the lessee that require the expenditure of money, e.g. covenant to pay rates, or plate-glass insurance, or to paint at the regular intervals.
In due course the Lawyer for the Purchaser will prepare the necessary documents to transfer or assign the lease. If the lease is a registered lease it will be necessary to prepare a transfer in registerable form. The Lessor will normally require the transferee of the lease to enter into deed of covenant whereby the transferee covenants to observe and perform all the terms and conditions of the lease. Moreover, such as deed of covenant will also contain a power of attorney from the transferee in favour of the Lessor.
Instead of assigning the present lease, it may be necessary for the Purchaser to obtain a new lease of the premises. The contract should be conditional upon the Purchaser obtaining such a lease on terms and conditions reasonably satisfactory to the Purchaser.
7.8 Plant and Equipment
The Purchaser should be advised that it is in his or her interests to ensure that the plant and equipment is in good working order and condition at the date of the contract. The contract should also contain a warranty that such plant and equipment will be in good working order and condition at the date of completion.
7.9 The Trading Stock
Trading Stock fluctuates in quantity from day to day. If the Purchaser wants to take over trading stock, he or she may require a workable quantity to be available on the takeover. In such a case, practice is to provide in the contract price a fixed amount for trading stock and provision whereby variations above or below that amount will be added to or reduced from the contract price. The Purchaser may wish to impose some marginal above the fixed amount. The contract should provide for a stocktake on the takeover day, also for the production of dockets, invoices, receipts and other evidence of the value and payment.
The contract usually provides that the Purchaser will acquire the stock at valuation. It is in the interest of the parties that the stock-take shall be taken and a valuation made by an independent experienced stocker-taker. The contract should make provision for the basis of valuation e.g. landed cost into the premises, or as the case may be.
The Purchaser should enquire whether any of the stock is divided on consignment, or approval, or otherwise on credit.
Where the business is one which the proprietor performs services such as repairs, it is preferable that the Vendor completes all orders before takeover. If this is not practicable, then the contract should provide for the following:-
(a) a valuation of the work in progress;
(b) whether the Purchaser is required to pay this work; and when, and
(c) whether or not the Purchaser is to collect payment from the customers.
It is generally considered that the price paid for work in progress, which is not within the definition of trading stock, is capital in the hands of the Vendor. Similarly, payment by the Purchaser for that work in progress is a payment of a capital nature and no deduction will be allowed to the Purchaser for the cost of the work in progress. The Purchaser however will be assessable in respect of the fees actually rendered after completion of the work.
7.10 The Book Debts
Book debts are the accounts payable to the Vendor in respect of sales made by or services performed by the Vendor. It is generally considered inadvisable for a Purchaser to take any assignment of book debts. The Vendor is not entitled to deduction for bad debts arsing after sale.
If possible, the Vendor should be left to collect the book debts him or herself. However, there may be circumstances where it is convenient for the parties and in the interest of preserving the goodwill of the business for the Purchaser to collect the book debts as agent of the Vendor.
The Purchaser may decide to charge a fee for the service. This procedure ensures that the Vendor will be able to secure a deduction in respect of debts, which ultimately prove to be bad debts.
If an assignment of book debts must be effected then care should be taken to identify and write off bad debts before assignment. Debts which are assigned and which ultimately prove to be bad will not yield a deduction to the Vendor or the Purchaser.
A prudent Purchaser of the book debts should debts should not agree to pay their full face value for the reason:-
(a) The book debts may need to be discounted to allow for bad debts and double recoveries.
(b) The book debts may need to be further discounted having regard to the tax consequences of purchasing the book debts. If the Vendor of the business being purchased has been assessed to income tax on a receipts basis then in all probability the Purchaser of the business will also be assessable income in the hands of the Purchaser when the money is received. However, the price paid for the book debts will be a capital sum in the hands of the Vendor and non-deductable to the Purchaser. In that case the Purchaser should require a further discounting of the book debts having regard to the taxation liability being assumed in respect of those debts. There would appear to be similar disadvantages to a Purchaser of book debts where the proprietor of the business has been assessed on an earning basis.
If the book debts are to be assigned, this should be done by a formal assignment, and the Vendor should covenant:-
(a) that the debts are owing; and
(b) that the Vendor will , at the Purchaser’s expense, do all things reasonably required to enable the Purchaser to collect the debts.
The assignment should be an absolute assignment in writing and notices given to the debtors.
8 Licences and Regulations
Many businesses require that a licence or some form of registration to obtained in respect of the business. In such cases it is necessary to take the appropriate action to have the licence or registration transferred to the Purchaser. The Purchaser’s Solicitor should ensure that such licence or registration is free from any requisitions issued by the licencing or registering Authority.
Hotels, licenced restaurants, milk runs, butchers shops, hairdressers, second-hand shops, and convalescent homes are examples of businesses affected by legislations or regulations requiring licences or some form of registration.
9 Searches and Enquiries
In addition to the above matters there are certain searches and enquiries, which the Solicitor for the Purchaser will normally carry out.
If the Vendor is a private individual, then the Solicitor for the Purchaser will conduct a search to ascertain whether or not any bill of sale has been given by the Vendor over the business or any asset of the business. Such a search should be updated immediately prior to settlement of the contract.
If the Vendor is a company, then a search should be conducted to ascertain whether or not the company has given a charge over its assets. At settlement this charge would have to be released so far as it relates to the assets the subject of the sale.
The Solicitor for the Purchaser should check the Local Authority whether or not the local Authority has any outstanding requisitions in respect of the business or the business premises.
The Solicitor should also check the relevant town planning provisions to ensure that the business being carried out can be lawfully carried on the premises having regard to the zoning of the land upon which the premises is erected.
A check should also be made at the Department responsible for the Main Roads and Town Planning Authorities to ensure that there are no resumptions or road works, which affect the premises in which business is to be carried out.
Enquiries should be made to ensure that the premises are registered with the Department that is responsible for Factories and Shops, and that there are no outstanding requisitions by that department.
10 Stamp Duty
As per Section 54A of the Stamp Duty Act of Papua New Guinea, every person who acquires or agrees to acquire a business to lodge with the Collector for Stamp Duties a Declaration in Form S (a) within one (1) month after the acquisition or agreement to acquire. The section is intended to impose duty upon the transaction of an acquisition of or an agreement to acquire a business.
The acquisition or agreement to acquire is deemed to include all goods, livestock, vehicles and other moveable chattels and all leases, tenancies and licences and the goodwill appertaining to the business whether the same are included in the transaction by which the business is acquired or are the subject of another transaction or other transactions.