Security Interests in Business Sales – start the release process early
We find that most clients who are selling their business are unaware of the sheer number of Security Interests that have been registered over their company, business or business assets on the Personal Property Securities Register (PPSR).
We have even had clients who have not wanted us to search the PPSR as they were convinced that there were no registered Security Interests, only for us to discover that there were – this can obviously jeopardise the settlement of a sale contract if appropriate arrangements have not been made to deal with the Security Interest and have it released.
Where do the Security Interests come from?
Often, the client will have signed a supplier’s credit application which contains a term enabling the supplier to register a PPSR Security Interest over the client’s assets.
As well as supplier Security Interests, there are often Security Interests registered over specific plant and equipment such as a phone system or a vehicle. While the finance for these items may have been long since paid off, often the old Security Interests have never been removed from the PPSR.
And, of course, a client’s bank may have security over all of the assets of the business through a general Security Interest – although usually known to the client, this can often be the hardest one to remove because dealing with a bank can take time and is not always easy.
Business Sale Contract
A contract for the sale of a business (assuming an unamended 3rd edition of the standard form REIQ Business Sale Contract is being adopted) will usually require a Seller to obtain from a Secured Party creditor a covenant to discharge the Security Interest upon the money owing to that Secured Party being paid out (usually out of the balance of the purchase price being paid at settlement), with such a covenant to be handed over to the Buyer at settlement.
That is, the Seller is not necessarily obliged to have that Security Interest released at settlement, but a written undertaking from the Secured Party is required – and that cannot be obtained if you are not aware the security interest is registered.
What can you do?
If you are thinking of selling your business or have recently entered into a contract for the sale of your business, early in the process you should turn your mind to undertaking a search of the PPSR and approaching your Secured Creditors (including old, long since paid out ones) to release their PPSR Security Interest registrations. This is something you can do before you even put your business on the market for sale and make the process much smoother in the lead up to settlement.
We can assist you with undertaking searches of the PPSR. Once we have your search results, you should try to identify those registrations which:
- are old or no longer relate to your business (such as old suppliers that you no longer have accounts with); or
- relate to debts which you have already paid off (such as old car loans),
and email those Secured Parties first (their email addresses should be in the search results).
For current creditors, you can contact each of them to ascertain the outstanding debt relating to their Security Interest. You can then either:
- pay out the debt straight away and have the Security Interest released prior to settlement; or
- if you need the proceeds of sale to be able to pay out the debt, prior to settlement you can request the Secured Party provide you with a ‘release and undertaking to amend registration’ which you will be able to handover to the Buyer at settlement and, upon receipt of payment of debt out of the settlement funds, the release will become effective.
By starting the process early, you will save yourself unnecessary legal costs, as well as unnecessary time and stress in the final days leading up to settlement. If you are a Seller, the last thing you want is for settlement to be delayed or not proceed because you cannot get one of your Security Interests released in time (or, at the very least, obtain an undertaking to release he registration).
If you need assistance with this process or would like to talk to us about selling your business, please do not hesitate to contact us.
Reliance on content the material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.