Protecting Against Insolvency: Legal Perspectives Mike Gedye 1 4 - - PowerPoint PPT Presentation

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Nov 28, 2022 240 likes •329 views

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:

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THE NEW ZEALAND GOVERNANCE CENTRE SME d F il B i C f SMEs and Family Business Conference

Protecting Against Insolvency: Legal Perspectives

Mike Gedye 1 4 August 2 0 0 9 1 4 August 2 0 0 9

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Many Legal Perspectives but here are four: are four:

1. Protecting the SME from the insolvency of its 1. 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.

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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

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Getting Lucky: the Sleepyhead Case

Bank Sleepyhead

1st priority title clause in invoice

Liquidator Various other creditors (unknown

King Robb

beds

creditors (unknown to Court)

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The Flip Side: should you give your li it ? suppliers security?

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; h k h f h l ’ d – Check the scope of the supplier’s registration and demand that it be narrowed if it is too broad,

therwise 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.

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Protecting your investm ent in the SME g y

If it’s a bust, your equity capital is a goner.

B t t k it f h h ld ’ d t

But you can take security for shareholder’s advances to

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.

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I nsolvent SME: protecting the

w ner’s personal assets
w 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

b t th thi k may be greater than you think.

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