The Sydney property market has seen enormous growth. The median price has risen by some 412% in the past 25 years. Pegged to this has been the growth in certain industries such as trades and services or manufacturing.
It is common for us to meet clients with the following story:
- Client gets licensed and decides to go out on his own or takes over the family manufacturing business;
- Client does well and draws a good salary which allows them to purchase a house
- Client starts seeing the opportunity for the business to grow, so enters into larger contracts and hires more staff;
- The business is now in its ‘growth phase’ and has grown from a small cash reserve with minimal wages and minimal profit to a thriving business
- Client reaches a point where the next step is a serious margin level such as property development work or specified manufacturing;
- Client realises that to go for this work they will need to inject capital;
- Client’s property has risen and provides an opportunity to release some capital;
- Client decides to utilise this capital and injects this into the business; this may be documented by way of a simple Directors Loan;
- Client’s business suffers due to a major debtor going bust. Client has exhausted all their capital resources and now turns to high interest lending to ‘get by’
This common scenario leaves the Client and the business exposed. The Client’s loan is not secured, thereby pushing the client into a non-secured creditors list.
If the Client had secured their loan by way of a Loan Agreement and Security Agreement which grants the registration of a security interest on the PPSR, the Client would be a secured creditor and thus have a number of options to restructure the business. This may ensure the continued viability of the business and protection of the Client’s own personal assets.
In a market which is dominated by property and the personal wealth of company directors, it is crucial that proper documentation is put in place to protect the interests of all parties.
Section 441A of the Corporations Act 2001 (Cth) grants a secured creditor the right to enforce their interest even when the company goes into administration. This is an extremely power provision for secured creditors.
Now is the time to act to ensure that Directors, Shareholders and related party’s loans are secured and perfected in accordance with the requirements of the Personal Property Security Register.
The Takeaway
Not securing a loan is like asking a thief to hold your money rather than a bank.
If you have further questions, please contact James Frank at jfrank@franklaw.com.au.
This is not legal advice.
