North Sydney Commercial Lawyers

How to avoid insolvency and protect your assetsPrint This Post

The phrase “till debt us do part” does not just apply to domestic partners. It can also apply to businesses and their customers.

To keep your own business solvent, you have to pick your business customers carefully. As insolvency lawyers at North Sydney, we can help you protect your most valuable financial asset – your business – by following these guidelines.

Put your contract in writing

Jack’s company sold wholesale wine to Jill’s company which on-sold it to high quality restaurants and retail outlets including liquor shops. Jack trusted Jill with his life. And why not? Jack’s company had been selling wine to Jill’s company for over 20 years without a hitch.

Nevertheless, Jack had heard some horror stories at a friend’s barbeque last week-end and he decided to put the agreement between his company and Jill’s company into writing.

He was told that if he used a lawyer, then the three to six points that he thought were relevant might end up being 30. This was overkill, he thought, and so he set about drafting the contract himself, using material from the internet. How hard can it be?

Do it yourself asset protection

Jack recalled that only just recently, Jill had mentioned that increased overheads were making it hard for Jill’s company to make ends meet. Jack decided to deal with this in his contract by inserting a good ‘one line’ retention of title clause that he had located using google. He set about putting the contract together from various precedents found on the internet, and inserted the retention of title clause that he had found.

What’s more, Jill also agreed that Jack’s company could retain possession of all the wine that Jill’s company bought, until Jill’s company paid for it.

He also found some material which discussed the issue of personal property securities and he found a clause dealing with that as well. Inserting that clause seemed like a good idea and so he did so.

He also thought that he really did want his company to avoid insolvency at all costs and so rather than see Sydney insolvency lawyers (like Leigh Adams insolvency lawyers), he asked Jill for a personal guarantee and Jill agreed that she would give a personal guarantee if that was what Jack wanted.

Jill had recently complained that her marriage was on the rocks. As Jack thought about his company’s situation a little more, he began to feel that maybe Jill’s failing marriage had caused Jill to lose her edge. The business acumen that she had 20 years ago was leaving her.

Jack was concerned about protecting his company’s assets, so Jack decided to insert a provision that says that if Jill’s company falls into insolvency and ceases trading, then Jack’s company can automatically step in and sell the wine that Jill’s company has bought (but not yet paid for) to the same restaurants and retail outlets that Jill’s company was selling it to. That way, the money received from the sales could be applied to reduce what Jill’s company owes Jack’s company.

The agreement was completed and Jack’s company and Jill’s company signed it. Jack was very happy.

Jill’s company fails

Despite her best efforts, Jill’s company becomes insolvent and a liquidator is appointed. Jack receives a very terse letter from the liquidator demanding that his company deliver up all the wine that Jack’s company had possession of and said that if he did not, the liquidator will go to Court and seek appropriate orders for delivery up. Jack has 24 hours to decide what to do. 

No problems only solutions

Jack goes to see his lawyer urgently. Is his company protected? Unfortunately the circumstances mentioned above do not solve problems, they just create them.

First problem – retention of title fails

Proper retention of title clauses have to be around 300 words to work, otherwise the Courts will not recognise them. They have to mention ‘bailments’ and ‘separate accounts’ and a host of other things. So it is likely that Jack’s one-liner is doomed to failure.

Second problem – Jack’s company’s security fails

The success of the personal property security clause will depend on the success of the retention of title clause. If that fails, then the personal property security clause will also fail. What’s more, registration of the security interest on the personal property securities register is also needed to protect the wine. But Jack registered the security interest too late and the liquidator said that Jack’s company is therefore an unsecured creditor for the value of the wine that Jack’s company possesses, and which has been sold, but which Jill’s company has not paid for.

Third problem – go to Court?

But Jack recalls that you can apply to the court to extend time for registration of the security interest. Yes, his lawyer says, but because Jill’s company is already in liquidation,  Jack will likely need all the creditors of Jill’s company to support Jack’s application (see the ‘Enviro Pallets’ case). One of the creditors is the Australian Taxation Office and the lawyer says that it will be most unlikely that the ATO will consent to the late registration application.

Fourth problem – the guarantee

Jack then shows his lawyer the contract that he drafted. It says that Jill will agree to guarantee the debt (if any) owing by her company to Jack’s company.

But after the contract was signed, Jack got busy and forgot to actually have Jill sign any guarantee at all. As there was no guarantee, the agreement saying that Jill would sign one was of no help, his lawyer says.

Fifth problem – The contract says that Jack can retain possession

Jack knows the customers very well, as he had been in the industry most of his working life, and had dealt with them for many years.

But the liquidator wants the wine delivered up, and to sell the wine by auction. Jack begins to panic. If the wine is sold by auction, then it will only fetch a fraction of the price Jack could get for it by selling to Jill’s customer base.

Jack began arguing with the liquidator and said that his company had a right under the contract to retain possession of the wine until it was sold.

Many business owners are unaware that they have no right to withhold delivery of stock if it is unpaid for, unless the contract specifically says so. Whilst Jack had put this into the contract, the liquidator simply disclaimed the contract, which liquidators can do by law.

Sixth problem – does Jack’s company have a lien?

Jack continues his argument with the liquidator saying that his company has a lien over the wine because it had not been paid for. Jack loses this argument too.

Jack’s lawyer explains to him that Jack’s company cannot rely on a lien to retain possession of the wine.

Accountants and motor vehicle repairers and others can withhold possession of files and goods if invoices remain unpaid, providing that work has been done on the files and motor cars. Jill’s company had done no work on the wine. It had just bought it.

And although Jack’s company had done work on the wine by creating it, his company had always owned it.

Seventh problem – the wine is delivered and sold

The liquidator gets the wine. By this stage, Jack and the liquidator have completely fallen out, and the liquidator has to use other outlets to sell the wine. The liquidator complies with s 420A of the Corporations Act and gets the market price, but had Jack not panicked and become obstructive, it would have been possible for the liquidator to negotiate with Jack to supervise Jack’s company selling the wines to Jill’s customers. Jack’s company would have received more than $300,000 over what it eventually got if this had occurred.

The poor return cause Jack’s company to fail as well. Jack is now working in a hotel in Queensland.

What can you do?

Preparing contracts to maximise protection from customers is what we do. Call Leigh Adams Asset Protection Lawyers on 02 99640022 or email enquiries@lalawyers.com.au to get asset protection advice and insolvency advice. We get you there.