THE NEW ZEALAND GOVERNANCE CENTRE SME SMEs and Family Business Conference d F il B i C f Protecting Against Insolvency: Legal Perspectives Mike Gedye 1 4 August 2 0 0 9 1 4 August 2 0 0 9
Many Legal Perspectives but here are four: are four: 1. 1. Protecting the SME from the insolvency of its Protecting the SME from the insolvency of its customers: take security. 2. The flip side: what if your suppliers ask for security from you? from you? 3. The SME is insolvent: protecting the owner’s investment in the SME. 4. Your SME is insolvent, now they’re coming after your assets: what you could/ should have done/ not done. The above perspectives raise many legal issues that The above perspectives raise many legal issues that cannot be addressed here – my purpose is just to raise awareness.
Taking security to protect against non-paym ent by custom ers non paym ent by custom ers • The old adage/ principles no longer adequate (though you can get lucky): you now need standard terms of trade signed by get lucky): you now need standard terms of trade signed by customer plus registration. • May require initial legal advice to set up the structure but thereafter relatively simple to operate To do or not to do thereafter relatively simple to operate. To do or not to do calls for a commercial judgement of cost vs risk of not doing it. • • Where you are supplying services customers will be more Where you are supplying services, customers will be more reluctant to allow you to do this and anyway you will lose to the customer’s bank. • • Basic concepts simple but things can get tricky eg: Basic concepts simple but things can get tricky, eg: – Cross collateralisation; – Marshalling: another creditor gets your goods, can you get theirs? – Tracing proceeds of your goods
Getting Lucky: the Sleepyhead Case Bank Sleepyhead 1 st priority title clause in invoice King beds Liquidator Various other Robb creditors (unknown creditors (unknown to Court)
The Flip Side: should you give your suppliers security? li it ? • Perfectly reasonable to accept terms of trade where Perfectly reasonable to accept terms of trade where seller takes security over goods supplied but: – Check what assets the security is over; – Check the scope of the supplier’s registration and h k h f h l ’ d demand that it be narrowed if it is too broad, otherwise your ability to raise credit could be compromised; – Check the terms do not breach your banking covenants covenants. • Be more cautious where a supplier of services is asking for security.
Protecting your investm ent in the SME g y • If it’s a bust, your equity capital is a goner. • B t But you can take security for shareholder’s advances to t k it f h h ld ’ d t ensure they are repayable before unsecured creditors. • And if you finance specific assets, you can even get y p , y g priority over the bank. • This is legal (subject to insolvent/ reckless trading/ voidable transaction laws and insolvency test trading/ voidable transaction laws and insolvency test issues) but is it moral? • Also, the bank may not be very pleased.
I nsolvent SME: protecting the ow ner’s personal assets ow ner s personal assets • This issue assumes the SME is a separate legal entity to the owner the owner. • Directors Liability Insurance protects against some risks. • Family trusts, relationship property agreements and dispositions to spouse can insulate personal assets to some extent but open to challenge if done in some extent but open to challenge if done in contemplation of insolvency. Legal advice essential. • Assuming personal liability via guarantees – exposure may be greater than you think. b t th thi k
Personal Guarantees – know the risks i k » ` Guarantee NZ Bloodstock P Parents Defective Defective Lease of $1m stallion (no registration) 1 st ranking 1 st ranking Debtor entitled to secured stallion party party
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