In this section we answer some of the questions that business owners who give guarantees typically ask. We want you to be fully informed about the Shareholder Protection framework, before you make a decision - so if there is something we have not covered, please contact us with your question and we will respond within 2 business days.
The questions are answered from the point of view of a shareholder/director who has given personal guarantees to support their business.
Please select from index of questions:
- Why is it so bad now?
- Why would I face a total loss without the protection framework?
- Show me how I can get a better result than a liquidator.
- Show me how I can save my business
- Is this a scam?
- What do I get for my money?
If you have any doubts about the shareholder protection framework, we encourage you to take legal or professional advice. We are always happy to speak with your professional adviser to clarify any aspects or answer any concerns. Your adviser may call Kim Powell on 09 415 2114 at any time.
Why is it so bad now?
When a business hits tough times the shareholder/directors are in a very difficult position:
- If you try to trade out of the company’s difficulties and are unsuccessful, you may face personal liability under the Companies Act 1993 for reckless trading and/or may be banned from acting as a director for a number of years.
- If (in the face of the above risk), you appoint a liquidator the value of the business assets reduces substantially and unsecured creditors often face a total loss.
- The guarantors will normally rank as unsecured creditors and have no realistic prospect of influencing the outcome.
There is provision under Part X1V of the Companies Act 1993 to promote a compromise with creditors and preserve the company, but in reality these schemes are very rare.
The shareholder protection framework offers better alternatives in that:
- The guarantor risk is mitigated
- The guarantors can take positive steps to improve the overall outcome
Why would I face a total loss?
The worst case scenario is that a liquidator is appointed to the company and all the guarantee creditors call on you to pay out on the guarantees you have given. Whilst there may be exceptional circumstances where you have security, in most cases you will rank as an "unsecured creditor" and be claiming in the liquidation for money you have paid out. As an unsecured creditor you are "bottom of the heap" and often get nothing.
The reasons you get nothing are easy to understand (although hard to swallow):
- The value of book debts goes down - it is much harder to collect debts when trade has ceased
- The value of work in progress goes down
- The value of stock goes down
- Goodwill normally reduces to zero
- Plant and equipment often gets sold at "fire sale" prices
- There may be other secured creditors who get paid first
- Liquidators fees are expensive
- Preferential creditors (mainly the IRD and employees) get paid before you.
The shareholder protection framework:
- Means that you are a secured creditor and rank higher up the pecking order, and
- You can take possession of the assets and get them out of the hands of a liquidator. You may be able to get a higher price and save on fees - to get a much better result.
Show me how I can get a better result than a liquidator.
If there is no business to be saved, it is often possible to get a better price for the business assets through an orderly wind down of business.
If you have put the framework in place then as a secured creditor you are able (under the provisions of the Personal Properties Securities Act 1999) to take possession of the business assets and sell them - using the proceeds to reduce what you have paid out as a guarantor.
This can be particularly beneficial to you as a guarantor:
- If you lease your premises, the rent can still be paid whilst you wind the business down. You may be able to use the time to find another tenant which may get rid of this liability altogether.
- If you have guaranteed hire purchase and lease companies, the installments can be paid during the wind down period which reduces your liability. In the interim, you may be able to find someone to take over the leases through your network of business contacts.
- You may be more effective at collecting book debts since you know the customers and have the expertise to deal with any disputes or customer queries.
- You may be able to get more money by completing work in progress and any outstanding contracts.
- You may be able to get more money for stock - since you have a network of business contacts.
A liquidator can do all of this, but the professional fees can be extremely expensive and the liquidator cannot be expected to have your level of industry knowledge or expertise.
Whilst this can produce the best possible result - there are provisions built in to the Personal Properties Securities Act 1999 to ensure that secured creditors act reasonably to obtain the best price and account back to the company for any surplus. it is critical that before embarking on this route that you obtain expert advice.
EDX stands behind its work and can provide this advice.
Show me how I can save my business
If you have put the framework in place then as a secured creditor you are able (under the provisions of the Personal Properties Securities Act 1999) to take possession of the business assets retain them for your own benefit.
This means that if there is a viable business to be preserved, you have a fighting chance of saving something from the ashes and starting over.
It is important to understand company may still go in to liquidation and a liquidator will want to satisfy himself that a fair price has been paid for the assets. In reality, the "payment" is setting off the value of the assets against what you have paid out as guarantor. If in exceptional circumstances, the value of the assets you take over is higher than what you have paid out as guarantor - then you would quite properly have to make a payment to the liquidator.
This can be hugely beneficial to you as a guarantor and as a business person since:
- Guarantees to landlords may never come home to roost since the "new" business can take over the lease and continue to pay rent
- Guarantees to hire purchase and lease companies may never come home to roost since the "new" business can take over the agreements and continue to pay the installments
- You will still have a livelihood
- You have the prospect of rebuilding a valuable business.
Is this a scam?
The short answer is "absolutely not" and if it all sounds too good to be true then let us reassure you that this is not an easy way out.
The framework provides you with many more choices than you currently have, but there are a number of very important points to consider:
- This framework does not provide any protection against personal liability as a director for any breaches of duty under the Companies Act 1993 - and in particular, no protection against reckless trading actions.
- If you seize and sell the assets then you have a duty of care under the Personal Properties Securities Act 1993 to "obtain the best price reasonably obtainable"
- If the proceeds from the sale of assets is greater than the amount you are owed - you must account back to the company for the surplus.
- If you seize and retain the assets for your own use, then under the Personal Properties Securities Act 1993 you are taking the assets in "irrevocable satisfaction of the (company's) obligation" to you as a secured creditor.
The framework does not provide an easy way out and if your business hits tough times it is critical to take expert advice. You will quite properly be held to account if you get it wrong!
What do I get for my money?
We have designed a standard framework that is designed to be used time and again by many companies. It is supported by a first class set of legal documents which would cost many thousands of dollars to prepare from scratch. Our service though, goes further than this.
- Search the Personal Properties Securities Register (PPSR) for your company to identify any existing secured creditors who need to be advised of the proposed action
- Hold a consultation with you to make sure you fully understand the framework and to gather all the necessary information for us to be able to prepare the necessary documentation. This can be done in person, or by telephone.
- Prepare all documents for your signature
- Register you as a secured creditor on PPSR and provide all details of registration back to you, together with a verification statement.
In the majority of cases there will be no additional charges, but in exceptional cases:
- If there are any negotiations required with existing secured creditors there would be a charge for our time.
- If at some stage in the future you refinance your business and your new bank wishes to take security, there may be a need to enter in to an arrangement which gives them prior rights. We (or your solicitor) can advise on this.
- If at some stage in the future a crisis happens and you need expert advice for the "work out" strategy, this would of course be subject to a separate agreement.
There are no other charges.