Business Law - Security Interests in Business Sales – start the release process early
We find that most clients who areselling their business are unaware of the sheer number of Security Interests thathave been registered over their company, business or business assets on thePersonal Property Securities Register (PPSR).
We have even had clients who have not wanted us to search the PPSR as they were convinced that there were no registered Security Interests, only for us to discover that there were - this can obviously jeopardise the settlement of a sale contract if appropriate arrangements have not been made to deal with the Security Interest and have it released.
Wheredo the Security Interests come from?
Often, the client will have signed a supplier’s credit application which contains a term enabling the supplier to register a PPSR Security Interest over the client's assets.
As well as supplier SecurityInterests, there are often Security Interests registered over specific plantand equipment such as a phone system or a vehicle. While the finance for these items may havebeen long since paid off, often the old Security Interests have never been removedfrom the PPSR.
And, of course, a client’s bank may have security over all of the assets of the business through a general Security Interest - although usually known to the client, this can often be the hardest one to remove because dealing with a bank can take time and is not always easy.
BusinessSale Contract
A contract for the sale of abusiness (assuming an unamended 3rd edition of the standard formREIQ Business Sale Contract is being adopted) will usually require a Seller toobtain from a Secured Party creditor a covenant to discharge the SecurityInterest upon the money owing to that Secured Party being paid out (usually outof the balance of the purchase price being paid at settlement), with such acovenant to be handed over to the Buyer at settlement.
That is, the Seller is not necessarily obliged to have that Security Interest released at settlement, but a written undertaking from the Secured Party is required – and that cannot be obtained if you are not aware the security interest is registered.
Whatcan you do?
If you are thinking of selling your business or have recently entered into a contract for the sale of your business, early in the process you should turn your mind to undertaking a search of the PPSR and approaching your Secured Creditors (including old, long since paid out ones) to release their PPSR Security Interest registrations. This is something you can do before you even put your business on the market for sale and make the process much smoother in the lead up to settlement.
We can assist you withundertaking searches of the PPSR. Once we have your search results, you should tryto identify those registrations which:
- are old or no longer relate to your business (such as old suppliers that you no longer have accounts with); or
- relate to debts which you have already paid off (such as old car loans),
and email those Secured Parties first (their email addresses should be in the search results).
For current creditors, you cancontact each of them to ascertain the outstanding debt relating to their SecurityInterest. You can then either:
- payout the debt straight away and have the Security Interest released prior tosettlement; or
- if youneed the proceeds of sale to be able to pay out the debt, prior to settlement youcan request the Secured Party provide you with a ‘release and undertaking toamend registration’ which you will be able to handover to the Buyer atsettlement and, upon receipt of payment of debt out of the settlement funds,the release will become effective.
By starting the process early,you will save yourself unnecessary legal costs, as well as unnecessary time andstress in the final days leading up to settlement. If you are a Seller, the last thing you wantis for settlement to be delayed or not proceed because you cannot get one ofyour Security Interests released in time (or, at the very least, obtain anundertaking to release he registration).
If you need assistance with this process or would like to talk to us about selling your business, please do not hesitate to contact us.
Disclaimer:
Reliance on content the material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.
