Joint ventures typically seek to combine the efforts of two parties, such as the skills of one partner with the funding capacity of another to generate a profit for the benefit of both. Joint ventures are commonly used in property transactions to construct and sell and/or manage development.
The project is governed by an Agreement (hopefully documented) which stipulates what each party will contribute, their respective roles and obligations, as well as how disputes will be resolved.
Partners often only find out the value of this agreement when the venture does not go as planned. In our experience problems often arise
- problems with funding (often due to poor valuations),
- poor project management or delays in the advancement of the project due to seasonal or other factors,
- parties failing to complete some or all of their responsibilities,
- poor record keeping making it impossible to properly undertake an accounting of transactions, and
- disputes arising over the inclusion of proper expenses.
EXAMPLES OF ACTUAL MATTERS
The Who Paid for What Scenario
The parties entered into a joint venture to develop a series of residential properties. The bookkeeping for the venture changed hands during the project. While the parties had a project manager, some invoices were sent to the project manager for approval and others were approved directly by the parties.
The venture failed and the parties were required to make additional contributions in order to pay out the creditors. The parties disagreed about whether the debts incurred related to the project and which party contributed the funds.
The Messy Equity Scenario
The parties entered into a joint venture to construct and sell residential units. An entity associated with both of the parties was to be the project manager. One party contributed the land, the other their skills as a builder and both were to contribute funds equally to the construction costs.
One party contributed more of the funding and did so via a number of sources adding to the complexity of the project (including loans, overdraft and credit card facilities, cash, various bank accounts and solicitors trust accounts). Although all the units were sold, the parties disputed about the proper accounting position for the joint venture.
WHAT CAN YOU DO TO PROTECT YOURSELF?
1. Choose your partner wisely. Regularly communicate progress and any problems
While this may sound like common sense, it is vital for the success of the project or alternatively the ease of your exit. Consider how the party deals with bad news and how comfortable you feel approaching them if you are unsatisfied with an aspect of the project.
Ensure that you are in regular contact with the other party (you may want to arrange weekly, fortnightly or monthly meetings) and communicate problems early.
2. Get an Expert Legal Advisor to draft your Joint Venture Agreement
A properly drafted joint venture agreement can save you many problems in the long term. Many law firms have specialists in this field and can provide you with Expert advice to help avoid any pitfalls.
Hopefully it will not be needed, but it’s money well spent in the event of a dispute.
3. Engage a reliable bookkeeper and accountant
You may consider that this is an area where you can save in unnecessary costs. However, you are likely to incur much higher costs if a dispute arises or if proceedings commence.
Not only is it imperative for taxation purposes, implementing an effective accounting system with checks, balances and authorisations is vital. Maintain adequate records by retaining invoices for all expenses. Note the invoices are correctly addressed, refer to the project and accurately describe the work undertaken.
4. Have an agreed process for authorising payments
Appoint an independent project manager who is responsible for paying all expenses or establish an agreed process for invoice approval (ie if one party controls the project, appoint an administrator chosen by the second party to approve the payments).
Develop the invoice process noted in the above point. This is of particular importance when the claim against the joint venture is being made by a party or an entity related to one of the joint venturers.
5. Take a disciplined approach to spending monies
This means establishing a joint venture account and avoiding the pooling of joint venture funds with any other project. If you need to use alternate funding sources, keep your accountant or bookkeeper updated and ensure that they properly record the transactions.
HOW CAN WE HELP?
If you are concerned about a venture, a partner or require assistance in accounting for a joint venture that has gone awry, our Expert Forensic Team is able to assist you by:
- Undertaking a preliminary review of areas of dispute;
- Advising on documents to request for disclosure purposes;
- Assisting with the preparation of or reconstruction of the accounts; or
- Preparing an Expert’s report including a proper accounting of the joint venture.
For more information contact Bradley Hellen or Brian McDonald from our Forensic Accounting Division on (07) 3023 1300.