How secure are the funds you’ve injected into your business?
From the Commercial Law Team
We often see business owners who haven’t thought to protect the funds they have injected into their business, or who are not even aware that they can protect them.
When you advance funds to your business (known as shareholder advances), or grant personal guarantees to benefit it, you’re just as entitled to protection as any other creditor, by taking security over your business assets. This will rank you ahead of all other unsecured creditors of the company in the event of liquidation, in some instances, even ahead of other preferential claims such as amounts owing to the IRD or for wages, holiday pay or redundancy pay.
There’s nothing improper or immoral in doing this. The New Zealand system of creditor priority is based on the concept of notice. Lenders and suppliers to your business have the ability to search for any security you have taken over your business assets on the Personal Property Securities Register (PPSR) and at the Land Registry (if those assets include land). This gives them the opportunity to assess whether they will require security, and if so, it’s level of priority against other registered securities before they sell goods or lend money to the company.
What are securities?
The type of security taken depends on the assets your business owns. In most situations, the security takes the form of a general security over all of the company’s present and after acquired assets (e.g. stock in trade, motor vehicles, machinery) and is recorded in a general security agreement (GSA) that is signed by the company and then registered on the PPSR. If the business also owns premises or other buildings, then you can also take out a mortgage and register that at the Land Registry.
The preparation and registration of a GSA and/or a mortgage is relatively straightforward, resulting in a time and cost that is insignificant when compared with the protection they provide.
A well drafted security agreement can also provide protection if you have guaranteed the obligations of the company. This is very typical if your company has lending with a bank. Where you have given such a guarantee, it’s not uncommon for a creditor to call upon you without first taking action against the company, if the company cannot immediately pay. In this situation, it is important that if you’re the affected shareholder, you can legally and efficiently seek recourse against the company assets as compensation for your loss.
When should I do it?
Timing is really important. Securities can be registered at any time but ideally, you should register a security before advancing any funds to your business, no matter how healthy your business is. This is because the order of registration generally determines the order of priority between competing security interests on the PPSR. Furthermore, if you leave registration until the company has financial issues and the company is subsequently put into liquidation, a liquidator may be entitled to render the security void, meaning you will end up being just another unsecured creditor.
Are there other benefits?
An additional benefit of securing shareholder advances is that by being a ‘secured’ creditor, you will have a greater degree of influence over any liquidation at a time where shareholders and directors often have very little or no influence over their company’s affairs.
In summary, no matter how healthy your company is at the time, for a minimal cost, you can make a shareholder advance or provide a guarantee and secure that advance and/or guarantee by taking security over the assets of your company. By becoming a secured creditor, you can give yourself the best chance of protecting your investment and maintaining as much control as possible in the unfortunate event of liquidation.
Better late than never…
If you don’t have any securities in place yet, we strongly recommend sorting that out as soon as possible. Get in touch with us today on 04 970 3600 or email email@example.com and we’ll help you through the process from start to finish. If you’re reading this before taking the first steps to finance your business, well done, we look forward to the opportunity to help!