Business Buddy recommends avoid being an unsecured creditor

Business Buddy recommends avoid being an unsecured creditor

The holiday season media has brought New Zealanders the unpleasant news of the demise of Dick Smith electronics, the well-known techie retail business.

In recent years it has become a common occurrence as businesses head into the New Year and no one likes to see a business fail; especially if we are owed money by them.

Business Buddy director, Kirsten Hawke says when a business is in trouble, it can be confusing for those who are left out of pocket and some of the terminology is puzzling.

What does it mean when a company, such as Dick Smith, goes into voluntary administration?

The concept was introduced into New Zealand company law in 2007 and is a practice that freezes a company’s financial position until the appointed administrator investigates options to save the business.

This is a situation that requires serious legal and financial advice and Business Buddy can point people in the right direction if they are involved in voluntary administration.

This is a step before liquidation and can sometimes avoid liquidation altogether.

Should the company’s financial situation be deemed irretrievable, an administrator aims to wind up the business in a manner that delivers the best return to the creditors.

Factors that affect the action plan include the secured creditors’ charge over the company’s property and whether continued trading is more beneficial to the secured creditors.

So, who gets what?

Secured creditors

These are the big boys who are owed money and have the legal power to claim on the assets of a company with an appointed administrator.

Secured creditors’ financial interests are the first priority for the administrator.

They will have registered debt owed to them with the Companies Office Personal Property Securities Register (PPSR).

For example, a building supply company may register significant debt owed by a builder, or a bank or finance institute will register debt owed for vehicles, buildings, etc.

When a company voluntarily appoints an administrator the secured creditors will be included in the planning for the future operation of the company.

Preferential creditors

The second tier of priority for payment of debt goes to preferential creditors, which includes Inland Revenue, employees’ wages and holiday pay, Customs and lay-by customers.

They may receive payment if there is anything left after the secured creditors have sorted out what they need to reclaim from a company in liquidation.

Unsecured creditors

Unfortunately, unsecured creditors at the bottom of the heap are least likely to see any money and most likely to be interviewed by the media and vent their rage in social media.

“Unsecured creditors are often trades people who can find their own company severely affected by a large unpaid debt,” says Ms Hawke.

The domino effect can see the financial impact pass from the principal contractor, to sub-contractors, to staff and their families. Nobody likes this.

A personal guarantee from the liquidated company’s director makes no difference to an unsecured creditor’s claim against assets.

The person or company owed money by a liquidated company cannot take any legal proceedings against the company or its property, or enforce rights against any property of the company. Bugger!

Will terms of trade protect an unsecured creditor?

Terms of trade do not mean a supplier is a secured creditor, which can only be achieved by registering debt owed with the Companies Office Personal Property Securities Register (PPSR).

However, terms of trade issued by a landlord gives them the power to terminate a lease agreement and a supplier can close a wholesale agreement/account.

If an unsecured creditor is planning to repossess goods they need to be aware that the 1908 Sale of Goods Act says once the purchaser takes possession of a good, it’s theirs.

If they haven’t paid for the goods, then they owe a debt to the supplier, but they own the goods.

But wait there’s more. In 1976, the Romalpa Clause or Retention of Title Clause was passed into law, which gives suppliers the power to include the clause in their terms of trade.

Essentially it means the supplier owns their stuff until their customer has paid for it.

“An unsecured creditor with the Retention of Title Clause in their terms of trade agreement can repossess their goods before a company goes into voluntary administration or liquidation,” says Ms Hawke.

Note the word before. Once the administrator, liquidator or receiver moves in – the goods go into lockdown and only secured creditors have any claim against the goods.

The administrator can even reclaim inappropriately repossessed goods from an unsecured creditor and use them to reduce debt to secured creditors.

This includes goods leased to a company, such as cars, computers and fixed equipment.

A lease agreement needs to state you own the item and you need to secure your interest by registering it with the PPSR.

If you are having trouble getting payment from a client, it pays not to leave the debt outstanding for long and to keep in close communication to determine if they are in financial dire straits.

Using Xero integrated programs such as Chaser will help small to medium businesses stay on top of outstanding invoices.

“The best advice – talk to a chartered accountant or lawyer to learn how to prevent the pain of another business’s financial woes impacting on your company,” says Ms Hawke.

ENDS

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