Business Loans, UPE’s and the PPSR
It is a reasonably common occurrence for a business owner to advance funds to the business entity whether it be a company, trust or partnership particularly during the initial start up phase.
In addition, for businesses operating through a trust it is very common to have loans owing to the beneficiaries (owners) referred to as unpaid present entitlements. These loans have traditionally always been unsecured so that in the event of administration, receivership or insolvency of the business the owner is paid last along with any other unsecured creditors.
Through a simple process of entering into properly worded loan and security agreements combined with a correctly completed registration on the Personal Property Securities Register (PPSR) the business owner can become a secured lender to the business.
With these protections in place in the unfortunate event of insolvency or other form of administration then the business owner is a secured creditor and will be paid before unsecured creditors and even the liquidator.
The securing of loans has traditionally been done by way of what was called a “floating charge”. The terminology has changed with the introduction of the PPSR to now be called a “circulating asset charge”. This concept has been around for years however very few business owners and their advisors are aware of it or are not being proactive in putting this simple yet highly effective strategy in place. Think of it as a mortgage against the business assets much like a bank takes a mortgage on real estate. Business assets encompass all assets of the business including such items as cash in the bank, trading stock, plant and equipment and intangibles such as goodwill should the business be sold. The security “floats” or “circulates” to encompass whatever assets are available on the day so are nonspecific unlike a typical bank mortgage. The security circulates over the secured property until the happening of certain events which trigger the crystallisation of the charge and converts it into a fixed charge when it is considered to “attach” to specific assets. Property subject to a floating charge can be dealt with by the company without having to seek the consent of the financier (the business owner in this case). For those businesses that already have the old floating charge in place it will continue to be perfectly valid to continue using the language and clauses that created the floating charge in security agreements, though there is a risk that continued use of this language and concepts may cause confusion.
A security interest may not be effective until at least six months after the entering into the relevant agreements.
It is highly recommended that all business owners considering securing their loan accounts act before any evidence of insolvency has arisen. Insolvency evidence could be as simple as not paying your creditors on time.
In practice it is common for business owners to have little if any warning of impending insolvency due to circumstances unforeseen and out of their control. Our fee for attending to the relevant documentation and registration is relatively low (usually well under $1,000). It is a once off cost for lifetime cover, and allows for movements in the loan balance throughout the years.
We recommend all new businesses enter into the agreements at the time of commencing business – a set and forget approach. For existing businesses, they need to act now even where no insolvency is apparent as the security will fail if left too late. Given the relatively low cost to put this form of security in place it really is similar to very cheap once off insurance to make sure you the business owner gets paid first in the unlikely event of business failure, even if it is twenty or thirty years later.