When it comes time to sell your business there are many things to consider and sometimes it is the small seemingly inconsequential details that if ignored can lead to some serious headaches down the line.
Clause 6 of the ADLS Agreement for Sale and Purchase of Business contains numerous vendor warranties and undertakings. These are things which, by signing the agreement, the Vendor promises to do by the settlement date. Our focus in this article is on Clause 6.3(1) which states:
“6.3 The vendor warrants and undertakes as at the giving and taking of possession that: (1) the assets and the stock in trade are the unencumbered property of the vendor.”
One issue lurks within the warranties you give as the Vendor. The warranty in question is that the business’s assets and stock in trade are “unencumbered” when the new owner takes possession (the settlement date). In this article we will explore what this warranty means, what it takes to fulfill it, and how Godfreys Law can assist you in making sure that this obligation is fulfilled by the settlement date so as to avoid any delays to settlement or claims for compensation by the Purchaser for late settlement.
What is an encumbrance?
An encumbrance is a claim which some other person or entity (known as the charge holder) has over your property. It secures a financial obligation to repay the claimant. Most people are familiar with a registered mortgage, which is a type of encumbrance giving the mortgagee (usually a bank) certain rights if you cannot repay your home loan.
A business, however, typically does not own the land it operates from. Instead, the business owns assets (e.g., vehicles, equipment, computers, etc.) and/or stock in trade which are goods sold by that business to its customers. Therefore, instead of a mortgage, a business and charge holder will usually sign what is known as a General Security Agreement (or “GSA”). The charge holder then registers a financing statement on the Personal Property Securities Register (or “PPSR”) securing all the present and after acquired property of that business as collateral (security) for the loan.
What is the PPSR?
Put simply, the PPSR is an online noticeboard where anyone can register a legal claim to personal property (so long as they have the contractual right to do so), and check if there is any debt or obligation attached to goods one may wish to buy. It helps businesses and individuals protect themselves financially, reduce investment risk, gain access to credit, and make better-informed financial and purchasing decisions.
How do I remove a financing statement from the PPSR?
If you are selling your business, you will need to do the following before the new owner takes possession:
- Search the PPSR for any financing statements registered against your business even if you think none exist; you will be surprised!;
- Repay (or agree on settlement to repay the debt from settlement proceeds) all debts relating to that financing statement; and,
- Contact the charge holder and ask them to remove the financing statement from the PPSR before settlement.
Going back to our example of a registered mortgage, this is similar to a seller’s obligation to both repay their home loan and discharge their bank’s registered mortgage on the land being sold before passing clear title to the new owner.
Failure to organise release of any PPSR charges secured over your business prior to settlement is a breach of Clause 6.3(1) and could result in settlement being delayed, the purchaser claiming penalty interest (damages) or the new owner taking legal action after settlement for a breach of the vendor warranties. This is the last sort of issue you want to be dealing with on settlement day which can be stressful enough!
How can Godfreys Law help?
Our experienced commercial law team can assist you in fulfilling your obligations under Clause 6.3(1). We do this by searching the PPSR for any financing statements registered on your business’s assets and liaising with any chargeholder(s) to ensure any financing statements are discharged from the PPSR and any debts are repaid from the sale proceeds. We consider this a standard part of the service we provide to any client selling their business, as it is in everyone’s best interests to ensure your obligations under the contract are fulfilled and the business sale goes smoothly.
This is one headache that you can avoid by utilising our expertise and experience. If you have any queries about this or any other commercial matters then contact our Commercial team on 03 366 7469 and they will be happy to have a chat with you.
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