Security over your own company

If your company owes you money, it should be secured. Your bank would not lend money to your company without security, so why should you? 

Many small companies are funded from money invested by the directors, or by directors leaving their salaries or other payments in the company. This creates a debt of the company, in favour of the directors. If so, an important part of asset protection is to register a charge over the company, to secure the company’s debts in favour of the directors. It is like the company giving the directors a mortgage over all of the company’s assets.

Why is it important?

One thing that covid has taught us is that any company, no matter how prosperous, can face sudden financial shocks. If that happens, and your company is placed in liquidation, the Corporations Act lays down the order of priority between creditors. At the top of the list, just after employee entitlements, are the entitlements of creditors with a registered charge. Accordingly, directors with a registered charge are in a strong position in the context of their company being wound up.

Probably more importantly, before a creditor spends the money to wind up a company, they will consider whether it is worthwhile to do so. If they see a registered charge in favour of the directors, it would be a large disincentive to spending money on winding up the company, knowing that any assets of the company may go to the directors before the ordinary creditors. That would provide an incentive to settle the claim, rather than pour money into winding up proceedings.

There are nasty provisions of the Corporations Act which mean that a liquidator can sue you for any money you took out of your company in the previous 4 years, unless you can prove that the company was solvent at the time. That is often hard to prove, and paying that money to the liquidator is a painful experience.

However, this does not apply to money taken from the company for a secured debt. Accordingly, if you have a charge over the company, any payment by the company of money owed to you cannot be clawed back by the liquidator.

How do you do it?

It is a relatively simple process. We prepare a formal document giving security over all of the assets of your company, then lodge it with the Personal Property Security Register.

When should you do it?

If the charge is registered less than 6 months before the beginning of winding up proceedings, then it is invalid against the liquidator. Accordingly, it is a good idea to do so now, even though may be no suggestion of your company having any financial difficulty.

What happens if the directors lend further money to the company?

The charge we prepare is an “all moneys” charge. This means that it applies to whatever the company may owe you from time to time, without referring to a specific amount.

Similarly, the assets of your company probably change from day to day as you acquire and dispose of stock and debtors. The charge is a circulating security, meaning that it applies to whatever assets the company has at any time.

Conclusion

With a registered charge, if anything goes wrong with the company, each director will be entitled to get their money back out of the company, as a priority creditor. Once the charge is in place, it can stay with the company forever, and will provide security for whatever the company may owe the directors now, or at any time in the future.  

Having a registered charge over your company is like clicking on your seatbelt. You hope you never need it, but it can be vital if things go wrong.

For more information, please contact Andrew Somerville: asomerville@somervillelegal.com.au 9923 2321.

 

 

 

 

 

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