Ensuring fishing assets are ship-shape for funding and succession
Considerations for the fishing sector when engaging with lenders
Although few industries are immune to global economic challenges, Scotland’s fishing and aquaculture sector continues to be busy, with plenty of opportunities for operators throughout the supply chain. We don’t expect that situation to change soon.
In the last 12 months we have been involved in several vessel-related transactions, advising both lenders and borrowers. These transactions have included the acquisition of vessels, the funding of new fishing vessels and additional quotas as well as general refinancing activity.
Working closely with commercial lenders who are active in the fishing sector, we have several observations which are relevant for operators looking to borrow.
- Lenders are placing a greater emphasis on the value of the fishing licences and fishing quotas rather than the fishing vessels themselves. Therefore, care should be taken to ensure licences and quotes are up to date and all the particulars reflect what is on the FQA register, as this is what the lender will look for when attributing value to the quotas.
- A focus on change of control provisions (where there are restrictions preventing any change to who controls the borrower (i.e. change of directors and/or shareholders of the borrower)) especially where the second and/or third generation is now involved in the business of the borrower. In a few cases, the borrower has been with a lender from inception when there were only three or four shareholders, and the lender is now dealing with the same borrower but the business has four times as many shareholders.
In general, lenders will look to ensure there is no change of control without their consent. Where there are any discussions around this, the borrower will look to put in place conditionality around where a change to the member and/or shareholding of the members can take place without bank consent.
Given the value of vessels and quotas, and the fact that a large number of fishing businesses tend to be multigenerational, it is worth having a succession plan in place, especially one that ensures the company can continue to operate and trade even if some of the shareholders don’t see eye-to-eye. If that involves putting together a shareholder agreement and discussing options around succession planning and how that would look for the company it is worth exploring to ensure you have the right structure for your company. A final point, it is also worth keeping in mind having a discussion with the lender (if you have funding in place) so they are fully abreast and on board with how this operates. This will also ensure, if required, any change of controls provisions are updated to reflect what may happen in the future.
Ensuring your assets are ship-shape for the next generation
It is also important to be alert to the succession rules that apply when a person dies, given the significant value that can be attached to vessels and quotas. When it comes to succession planning for fishermen, careful consideration should be given to Wills and estate planning to ensure assets pass in line with your wishes, being mindful of Inheritance Tax, family circumstances and your future plans and intentions for the fishing business.
There are various corporate structures that can be used by fishermen, with a common one being the use of a limited company. The company would be made up of directors and shareholders and would typically own the vessel and any fishing quotas. Depending on the number of people involved, the company could then pay dividends to the shareholders and salaries to crew members who don’t have an interest in the company but are employees.
If a fisherman is a shareholder in a company of this nature, consideration should be given to their interest in the company and what should happen to it in the event of their death. Should their shares pass to family members or would it be more practical for the company to be given the option to buy back the shares? The latter option can often be useful to avoid the company shares becoming diluted as they pass down family lines (carrying the risk that individuals with no interest or connection to the fishing business become shareholders, with the rights that attach to those shares). It does, however, bring with it other potential issues, including, for example, whether the company would have available cash to purchase the shares from the deceased person’s estate.
The answer to these questions will depend on the role of the individual in the context of the company, and their family dynamics. Planning helps to ensure business continuity for the fishing business both in the immediate and longer term.
Having a valid and up-to-date Will is essential to ensure the shares pass to the correct people, but it is also crucial that advice is sought from a corporate solicitor. This is because the Will must coincide with appropriate business documentation, which should stipulate what is to happen to the interest/shares on the death of any key person in the business.
Another crucial factor to consider is Inheritance Tax. The general rule is that Inheritance Tax is due when a person dies leaving assets worth more than £325,000. The balance above that threshold, known as a person’s “Nil Rate Band”, is taxed at 40%.
Subject to certain conditions, it is possible for the value of a trading business to qualify for Business Property Relief (“BPR”), which allows its value to pass through generations either during lifetime or on death without any Inheritance Tax consequences. A company used for the operation of a fishing vessel would likely qualify for this valuable relief, but advice should be taken as early as possible to ensure all required HMRC conditions would be satisfied.
In terms of the fishing quotas, there are industry-specific timelines, guidelines and rules to follow to ensure they can be passed on. If held within a company structure, this is often quite streamlined. If, however, an individual holds the quota personally, it is crucial that their Will makes appropriate provision to stipulate what should happen to the quota on death in a way that complies with industry requirements.
Harper Macleod specialises in a range of legal services for the marine sector, including private client to banking law, employment, and corporate, and are on hand to provide bespoke advice.
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