What is a Deed of Covenant and Assurance?
The Deed of Covenant and Assurance (the Deed) is a gazetted document which forms part of the Financial Requirements for Licensing Board Policy, and must be read in conjunction with that document.
It allows Licensee's who do not have sufficient Net Tangible Assets in their own right to rely on assets of certain related parties to meet NTA requirements.
How does the Deed of Covenant and Assurance work?
The Deed of Covenant and Assurance creates a legal obligation on both parties and that is the reason for the requirement for both the licensee and the assurer to receive legal advice. The main elements of the Deed are that the Deed will only become enforceable on the bankruptcy of an individual licensee or the appointment of a liquidator to a corporate licensee.
If either of the above events occur, the trustee in bankruptcy or liquidator may make a demand on the assurer to pay the amount stated in the last Independent Review Report or Audit Report. The Deed contains a charging clause that assurers should have explained to them prior to the execution of the Deed. Assurers and licensees should also be aware that there is a specific revocation process stated in the Deed.
Who can provide a Deed?
Table C - Possible Assurers provides information about who can provide a Deed based on structure.
It is the responsibility of the accountant completing the Independent Review Report or Audit to determine that the Covenantor is a related party as stated in the table.
Is there a standard Deed of Covenant and Assurance document?
Yes. This is the only document that will be accepted by BSA (see above).
As the Accountant, what process do I need to follow with respect to the Deed of Covenant and Assurance?
As the Accountant, you will need to review the entire financial position of each and every Covenantor in their own right whenever you complete a financial report for the licensee. You will be required to attach to the financial report a Statement of Financial Position for the Covenantor and sign and date the document.
Refer to the Practice Notes for Deed of Covenant and Assurance.
Why is there no amount stated in the Deed of Covenant and Assurance?
The amount being assured is stated in the Independent Review Report or Audit Report - not the Deed. This allows BSA to accept a Deed once only, and be able to continue to rely upon it until it is no longer needed by the licensee. This eliminates the need for yearly trips to solicitors to update the Deed.
As the amount being assured is stated in the Reports, BSA will not accept a new Deed of Covenant and Assurance without also receiving an appropriate Independent Review Report or an Audit Report.
Can a trustee company assure assets to a licensee using a Deed of Covenant and Assurance?
If the assets being assured to the licensee are held on trust, then the Trustee cannot assure those assets.
If, however, the assets being assured to the licensee are owned by the Trustee company in its own right (are not held of trust), then they may assure the net real unencumbered portion to the licensee in their own right, not as trustee of a trust. The trustee company will also need to be able to be fall into one of the approved assurers listed in the table above.
Can a Deed of Assurance be provided by the beneficiaries of a trustee company that is trading in partnership with the licensee?
No. The beneficiaries of the trustee company are outside the stated relationships (refer to the table above).
Can the solicitor alter the Deed of Covenant and Assurance?
No. The Deed will not be accepted where any term of the Deed or the Certificate has been altered from the gazetted original. Only the blank spaces may be completed and the document must be signed by both the licensee and the assurer.
Where there is not enough signing spaces for the licensee and all assurers to sign the Deed, then an extra signing clause is to be added.
If the solicitor refuses to sign the Statement by Covenantors Solicitor contained in the Deed of Covenant and Assurance does this make the Deed invalid?
Yes.
If the licensee refuses to have a solicitor sign the Deed of Assurance does this make the form invalid?
Yes.
Can a wife assure assets to a husband under an informal partnership?
No. The only persons that can provide a Deed of Covenant and Assurance to an individual is someone trading in partnership with that individual. To be a valid partnership, it must satisfy the requirements of the Partnership Act. BSA will require evidence of the existence of the partnership. This may be done by providing a copy of a Partnership Deed, or by providing a standard form Statutory Declaration for Partnership.
Can the amount assured under the Deed of Covenant and Assurance be used in the calculation of the licensee’s current ratio?
No. The Deed of Covenant and Assurance can only be used to support the Net Tangible Asset requirements of the Licensee.
Where there is a company licensee and the director is also licensed, can the assets used for the directors licence be assured to the company?
No. The assets may only be counted once, not twice or more. If they are being used to support the director’s personal licence, they must be deducted before determining if the amount available that can be assured to the licensee.
A beneficiary of a trust is going to provide a Deed of Covenant and Assurance in favour of the trustee. The beneficiary’s only asset is its interest in the trust. Is this acceptable?
The beneficiary will only be entitled to provide a deed of covenant to the extent that the beneficiary has a presently existing entitlement to a distribution from the trust (i.e. The beneficiary has a vested interest). The accountant will also need to determine that the distribution entitlement is able to be recovered or is collectible to be able to rely upon it.
Can a corporate shareholder of a company licensee who holds a significant, but non-controlling interest in the company (eg 40% shareholder) provide a Deed of Covenant and Assurance?
No. Only an associated company of the licensee can provide a Deed of Covenant.
What does the term associated company mean where that term is used in relation to the giving of a Deed of Covenant?
An associated company of the licensee is a company that:
Is related to the licensee within the meaning of section 50 of the Corporations Act 2001 (ie. the company is the holding company of the licensee, is a subsidiary of the licensee, or the company and the licensee are both subsidiaries of the same holding company) - or
Has the same shareholders and directors as the licensee.
Is stamp duty payable on the Deed of Covenant and Assurance?
Yes. Stamp Duty is payable by the Covenantor on execution. However, to reduce costs, BSA does not execute the Deed until such time as it is required to be called upon (i.e. has been placed into Liquidation or Bankruptcy).
If more than one person is giving a Deed of Covenant and Assurance in support of a licensee, are separate deeds required or can they all sign the one Deed of Covenant?
BSA will accept both alternatives. All of the covenantors can sign a single Deed, or they can each sign separate Deeds.
