It's a new year.
How often do we hear business owners say, "Next year will be different"... “Things will be done right"... "We will put the right procedures in place"... but New Year resolutions are often never carried out as life takes over.
Last year, we saw too many cases where a director or family member lent considerable sums of money to a company but did not take a security relating to their loan. In the majority of these cases, the lender mortgaged their family home or investment property to raise the loan funds.
Quite often, these loans are made because the bank will not provide any more funding, and the business is out of financing options. The director or family member often ends up as the major lender, advancing more funds than the company's bank, but in many cases, they take no security on that loan, even though they are putting their personal asset on the line.
If we could say one thing to our referrers and clients, it would be to secure any such loans on the Personal Property Security Register (PPSR).
The Banks and other lenders usually insist on registering an interest on the PPSR for a good reason. As a secured creditor, the lender then has the legal right to be repaid before any unsecured creditors coupled with other benefits in an insolvency scenario. For obvious reasons, the right to be repaid before unsecured creditors also avoids preferential payment claims. This can make an enormous difference to outcomes achieved in an insolvency scenario.
For some reason, when it comes to lending their own money to a business, many directors or family members simply neglect to take security for their loans. They don't even think about it.
This is where an advisor can add value and security (pardon the pun) to clients.
What type of security do I need? When a lender provides a piece of equipment to a company on loan or by way of hire purchase, a PMSI is the appropriate security. However, when considering advancing funds to a company, we are talking about registering an AllPAAP.
As a secured creditor, an AllPAAP holder has priority over unsecured creditors, who are only paid after all security interests and employee entitlements have been paid in full.
A director or related party that has lent money to a company can improve their position massively by taking an appropriate security interest. Achieving a higher priority for repayment in a liquidation scenario can greatly improve the chances of recovering the amount owed.
We can assist in ensuring an AllPAAP is enforceable or 'perfected' by making sure that:
A written loan agreement is prepared, covering issues such as events of default, triggers for repayment, the interest rate to be applied and the method of calculating interest;
A General Security Agreement is prepared, which sets out the terms proposed security that relates to the loan;
Registration occurs within the applicable time period (20 business days); and
Evidence is maintained to show that the funds were received by the company and the source of those funds (such as bank statements from the lender and borrower).
One potential added bonus is that the existence of a registered security interest can sometimes deter creditors from aggressively pursuing legal action. If it can be demonstrated that there would be no return to the creditor by pursuing a recovery action due to the position of the secured creditor, they may not be inclined to incur the expense to take legal action.
The costs involved in registering a security interest are modest compared to the benefits it can provide.
As a professional advisor who sees a loan from a related party on a balance sheet, or are advising a company director or related party considering making a loan to the company, you will have a grateful client if you recommend they seek advice regarding the options available.
The team at de Jonge Read can provide comprehensive project management services to ensure that the security interest and all related documentation are accurate, offer the required protections, and that the whole process is managed effectively and efficiently.