Most banks do NOT provide loans WITHOUT SECURITY - why should you?
When directors advance monies to their company, they don’t usually think about what will happen to those funds in the event of the company being wound up. The loan funds will usually ‘sit’ on the company’s balance sheet as a liability and in some cases, the amount is never fully paid back to the director.
In situations where the company is solvent and operating from year to year without any major problems with insolvency, there is no problem with this.
However, if the company comes into hard times and is unable to pay its debts as and when they fall due and is eventually wound up as a result of being insolvent, the loans from the director will be treated as an unsecured debt along with all other trade creditors who have not been granted security by the company, (assuming that the director loan was not secured).
In wind up situations where the company has acquired assets and has obtained equity in these assets to the extent that they are either partially or fully unencumbered, any recovery from the sale of the assets is distributed according to the statutory requirements as set out in the Corporations Act 2001. After the costs of winding up are allocated to a liquidator and / or the petitioning creditors, employees are the first of the company’s creditors to be paid and unsecured creditors are the last class of creditor to be paid.
There is however, one class of creditors who remain at the head of the list and are guaranteed to be paid fully before unsecured creditors receive anything. That of course is the Secured Creditors.
Banks are always assumed to have security as they will not usually advance significant funds to a company without that security.
So why wouldn’t directors secure their own advances to the company just like the banks do?
I have come across many situations where the director or related parties have advanced monies to their companies and in most cases these loans are not secured. In the stressful times that come with a company’s financial difficulties, securing the monies advanced to the company is never in the forefront of the minds of those trying keep their company afloat.
The cost of securing a loan by a director to the company will pale into insignificance if and when the company is ever wound up due to its insolvency, as that security may enable the director to receive 100 cents in the dollar return or a better return than ordinary unsecured creditors.
Circumstances will of course dictate the actual position of each class of creditor, but the Australian law allows secured creditors to have superior ranking and priority to normal unsecured creditors.
Accordingly, directors who lend their own hard earned dollars should seriously think about obtaining security so that they receive a lawful priority over the general class of unsecured creditors.
Security can be obtained against land owned by the company through a mortgage against the registered title for the property.
Security can also be obtained over assets of the company apart from land via a registration on the Personal Property Securities Register (PPSR).
If directors have loaned monies in the past and have not obtained security from the company, it is still possible to have a security interest registered on the PPSR. However, there are a number of provisions of the Corporations Law which come into play with the late registration of a security interest on the PPSR.
Some interests covered by the Personal Property and Securities Act 2009 that are not registered on the PPSR within a certain time will vest in the company that is being wound up or in external administration. So it is important to seek your own legal advice to ensure a late registration will still provide protection to the lender.
If directors are seeking to secure their loans or advances to their company in any circumstances, they should seek the appropriate legal advice.
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Registered Liquidators are experienced accountants, licenced and regulated by the Australian Securities and Investments Commission (ASIC). They are appointed to take over the running of insolvent or failed companies and oversee the final period before all affairs are finalised and the trading body is dissolved. Registered Liquidators must be appointed in the event of a Creditors Voluntary Liquidation to resolve any debts accrued by the company in the most efficient way possible. A Creditors Voluntary Liquidation (CVL) is the most common liquidation appointment type. In the event of a company entering insolvent external administration through CVL, it is the task of a Registered Liquidator to manage the finances and affairs of the body in a fiduciary capacity. After an Extraordinary General Meeting between the shareholders of a company, a Special Resolution will be passed which symbolises the instigation of the process by which the company will be wound up: liquidation. The directors, creditors and shareholders then step away from the organisation which has entered liquidation and their responsibilities are passed to a Registered Liquidator. This professional winds up all ongoing affairs which can include the collection of any outstanding debts and the disposal of company-owned assets. A Registered Liquidator must provide a document titled Consent to Act as Liquidator before they are appointed. Throughout all liquidations, the Registered Liquidator must file relevant documents with ASIC as well as providing ASIC with their yearly return. This enables the Commission to ensure only the highest quality of Registered Liquidators are operating and providing services throughout Australia. ASIC keeps a Register of Liquidators under the Corporations Act 2001 upon which every person is provided with a Registered Liquidator Number. In order to be registered, the person must demonstrate their relevant qualifications, experience, abilities and knowledge. Each registration is valid for 3 years, after which the Liquidator must reapply to maintain a valid license. All Registered Liquidators hold an accountancy degree as well as valid membership to the Institute of Chartered Accountants and/or CPA Australia. In the event of an organisation becoming insolvent, the appointment of a qualified, experienced and professional Registered Liquidator will ensure the subsequent process of winding up the company is completed correctly and responsibly. A Registered Liquidator is capable of completing this complex task efficiently and with minimal unnecessary stress to the directors and shareholders. For more information, contact Menzies Advisory Liquidators & Receivers where our Principal is a Registered Liquidator, Official Liquidator and has been a Certified Practicing Accountant for over 35 years.
Sometimes shareholders and company directors decide to cease trading despite the continued viability of the company. When this decision has been made, it is best to bring in external administrators to complete the Members’ Voluntary Liquidation process. By hiring qualified and experienced professionals, the process of finalising all company affairs, deregistering your company and the distribution of remaining funds amongst shareholders will be completed in a timely, commercially beneficial and legally correct fashion. While the terms ‘administration’ and ‘liquidation’ are most often associated with insolvent companies, it is also possible for the affairs of solvent companies to be wound up in this matter. There are various reasons why a business may choose to wind up rather than be sold as a going concern or continue trading. These include: Redistributing capital tax free Restructuring a company Business is no longer trading/required Bringing a company to its legal end – once deregistered it cannot be reinstated When a reason is decided upon, the majority of directors are obliged to sign a Declaration of Solvency form, stating the company is in a position to pay all existing debts within the upcoming year. Dormant companies may also be deregistered through this external administration process. Winding up a solvent company through external administration is easier and simpler than an insolvent company because, by definition, the company is in a position to repay any and all outstanding debts. 75% of company members are required to vote in favour of bringing in an external administrator at a meeting in regards to the Special Resolution. Once a company has entered the Members’ Voluntary Liquidation, the company can begin to be wound up by an external administrator. The appointed administrator will meet with any creditors and take care of any legal paperwork with the court, government and ATO. Once a company has been wound up, the remaining value of the assets can be distributed among shareholders. At this point the company will be legally deregistered. The external administrator is, by definition, independent and impartial. Their sole task is to preserve the company’s assets, comply with all legal obligations and return all funds to creditors and/or shareholders. Therefore, the external administrator cannot be someone with a conflict of interest or some form of duty within the company itself. Impartiality ensures the correct protocols are followed and the liquidation is completed in compliance with all laws. If you are considering placing your solvent company into voluntary external administration, contact Menzies Advisors today and find out more about how our expert liquidators and administrators can help wind up your company as quickly and commercially successfully as possible.
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
Menzies Advisory in Gold Coast Brisbane Melbourne and Sydney are specialist Liquidators
