Farm advice: Finding it hard to get paid
In this unpredictable business environment, it pays to ensure processes are streamlined and practical. Lawyer John Sheddan offers some financial advice.
We’re living in interesting and challenging times, and for many businesses, there will be tight financial patches.
No one wants to be told, or to have to say, that funds are tight and that payments cannot be made. Ignoring the situation and continuing to incur debt and costs is not a solution. Taking the first step to discuss the situation, however, allows your options to be considered and/or for some hard decisions to be made.
If you cannot reach an agreement, what happens if debts cannot or will not be paid? Debts or debtors can be divided into two categories: those who have security, over property and assets, and those who are unsecured.
Secured debt
Secured debtors, such as banks, finance companies, and often larger suppliers will take security over assets to secure the funds that they have lent or financed. This ‘first registered security’ provides that they have first claim over the asset if you’re unable to make payments. Those assets secure the debt and all interest and charges that are incurred. What’s more, the cost of chasing or seeking repayment are added to the debt so eventual payment is not an issue, just delay and further cost to the debtor.
In the case of land, a registered all-obligation mortgage given over land secures all loans, overdrafts, and any other sums owed such as credit cards or personal loans. This is a lender’s preferred security, as the land secures all the obligations and ensures the lender will be paid.
For lending that isn’t secured by land, a charge (or lien) over either the items financed or over all the personal property owned by the lender provides security. These charges, or ‘financing statements’, are registered in the Personal Property Security Register (PPSR) and can be readily searched and viewed at ppsr.govt.nz. You can, however, be unwittingly caught out by a charge already registered on goods on the PPSR, which secures lent money.
Let’s look at an example: you buy a car privately through, say Facebook, and the purchase is subject to prior secured finance. You don’t check the PPSR; if you had, you would have discovered that the finance company will repossess the car to repay an outstanding loan taken by the person selling you the car. The finance company’s financing statement ensures they have the first claim, over and above your subsequent purchase, leaving you as an unsecured creditor chasing the seller for repayment.
In the event of secured debt, a lender will normally attempt to reach an understanding as to what has happened and to discuss the next steps to get paid before they start to act.
If there’s no resolution or if the borrower refuses to engage, the lender will make a formal demand for payment – in effect calling up the loan. If not repaid, the lender will then formalise the debt as owing, plus interest and costs, and seize assets.
In the case of land, the lender will market and sell the land as a mortgagee sale. In such cases, all the costs of sale are added to the debt so refusing or failing to assist solely results in increasing the loss the lender is facing. Any shortfall between the sale price and the overall debt means that you would still owe money to the lender. This is not a good place to be.
Unsecured debt
In the event of other debts not secured directly by assets, a debtor must seek repayment directly from the person/supplier who has incurred the debt.
Caution must be taken to ensure that if you’re incurring debt, that it’s linked to the entity that’s liable to pay. Without this clarity, the obligation will attach to the person who incurred the debt. An example is that if you
as a farm manager have engaged a ditch digger for some drainage work, the debt incurred sits with you even if you were intending that your employer would pay the costs. If your employer does not pay, the obligation to pay actually remains with you, as you created the debt.
If the debt is undisputed, the creditor can call in a debt collector or apply to the court to formalise the debt. The next step is to either appoint a receiver, liquidate their business, or bankrupt the debtor. Often forcing a debtor into bankruptcy or liquidation will wind up the business with the secured creditors gaining first claim on the business assets.
Guarantees
Almost all lending, financing, and supply agreements require personal guarantees. These ensure that debtors cannot hide behind the limited resources of a limited liability company and that the lender can link all borrowing or credit back to an individual.
Any person who grants a guarantee for another person or entity effectively promises to step into the shoes of a debtor to repay any debts, costs, and interest owing by that debtor. Once given, a guarantee is ongoing, and a guarantor does not have to be kept informed of the situation; the first that they might know of issues is when a demand for payment is received.
Guarantees are serious obligations and should not be granted lightly, as they can lead to personal bankruptcy if such debts are not paid on demand.
In a nutshell
If you owe money or are owed money, communication is key. If you must delay payment, explain why and what will be done.
If you don't engage, the matter can fester and any goodwill may evaporate. The longer issues are drawn out, the worse the outcome and goodwill.
Debt recovery procedures by creditors can be expensive and long-winded. Talking to your creditors may result in a payment plan or another arrangement to pay off the debt.
If you’re owed money, then consider any suggestions that come your way by the person owing you money. It may be a solution for both parties.
If the payment delay is due to a pure cashflow problem, this needs to be addressed, otherwise, the tendency is to keep borrowing in the hope that things will come right. This sinking ship approach only leads to great carnage for all; identifying a tight patch versus a lost cause sometimes requires outside advice. Accepting the deal and moving on is often the best solution rather than digging a hole from which there’s no escape.
John Sheddan is a director of Gore law firm, Sheddan Pritchard Law Ltd. He specialises in rural and commercial issues involving rural and residential property sales, business sales, leases, and subdivisions.
Sheddan Pritchard Law Ltd is a member of NZ LAW Limited, an association of 54 independent law firms practising in more than 80 locations.
Information given in this column should not be a substitute for legal advice.
Find new and used farm machinery for sale in NZ
Keep up to date in the industry by signing up to Farm Trader's free newsletter or liking us on Facebook
.jpg)
.jpg)
.jpg)
