Why Register?
In times of financial difficulty, shareholders of SME’s will often advance additional capital to a company to keep it afloat. Shareholder advances may be in the form of a term loan to the company, or via a shareholder’s current account and should be appropriately documented at the time of the advance.
It is important for a shareholder to protect their advances just like any other creditor. Taking security over the assets of the Company can be an effective way for shareholders (or related parties) to protect their advances from a future insolvency event.
By registering a security on the Personal Property Securities Register (PPSR), shareholders potentially go from being last in the queue of creditors as an unsecured creditor to being a secured creditor having priority. Secured creditors are repaid ahead of all unsecured creditors and any secured creditors who registered later in time over the same asset. Unsecured creditors are generally paid last and pro-rata with other unsecured creditors.
Shareholders should also register their security before advancing funds. The timing of registration is often crucial to priority of that security as between other secured creditors. Note however, if a company already has a loan with another party, usually a bank, that company may under the terms of the loan need to obtain that party’s consent to grant another registrable security.
Avoid Voidable Charges
Under section 293 of the Companies Act 1993, a liquidator can void a security where for example, a company grants a security to a related party (in this case a shareholder), if a company becomes unable to pay its due debts immediately after granting the security, and the security is granted during the ‘related party period’. Generally speaking, the ‘related party period’ is the period which is 2 years prior to commencement of liquidation of a Company.
Further, a liquidator can void a security where the security is granted within the ‘restricted period’ which is generally 6 months prior to commencement of liquidation of the company. Therefore it is important to register security well before you need to rely on it.
If voided, the secured creditor will become an unsecured creditor, losing any benefits they may have had in terms of priority and enforcement options. However, a security may not be able to be voided where a security secures actual money advanced to the company, or where valuable consideration is given in good faith to the company upon or after granting the security.
Subpart 6 of the Property Law Act 2007 (PLA)
Companies should be cautious when making dispositions of property at a time when the company may be at risk of insolvency. Under the PLA, courts have the power to set aside such dispositions if it appears to be a gift, an unequal exchange, or was intended to prejudice a creditor. Generally, shareholders can avoid a disposition to them being set aside by ensuring that the terms of their loan advances to a company are given for fair value and upon arm’s length terms.
Advances to the business should be secured before an event of insolvency is apparent. Plan now to minimise your risk in the future. If you have any unsecured shareholder advances or are intending to advance further monies, it may be time to seek legal advice on how to secure those advances on the PPSR before it is too late.