Even the best of operators can face financial struggles and at such times a wounded business loses friends quickly.
When a business starts to look shaky, creditors will often tighten their trading terms for fear of suffering losses themselves. Assertive creditors may choose to seek liquidation of a company or bankruptcy of an individual. These options can lead to very poor outcomes. The result can be staggering liquidation costs, lost jobs for employees, lost owners’ equity, disruption for customers and losses to other creditors.
Sometimes it makes no sense for creditors to shut down a business. In these instances there are legal mechanisms available to companies and business owners to make compromises with creditors possible and, to an extent, put the fate of the company or the business owner/s in the hands of common sense.
The way we live our lives and operate our businesses is always changing. Amongst the biggest changes is the move to electronic communication and information. Despite its potential for quick, efficient communication and the reduction in the need for paper and storage, ironically, many people find themselves surrounded by more paper than ever!
Historically, good practice has been to record agreements in some sort of tangible document, a letter, fax or a written agreement and for information to be stored in physical files. Today, emails and other electronic communications are taking the place of letters and faxes. Electronic files such as PDFs, TIFs and Word files are taking the place of hard copies, and information is being stored electronically rather than on paper.
All too often shareholders overlook the need to properly secure the advances they make to their company, or the guarantees they grant in favour of their company, without being aware of the consequences that can result from this oversight. By registering security over the assets of their company, shareholders can effectively and efficiently secure their advances to that company and feel assured that steps have been taken to safeguard their investment.
If you’re a business owner, you should endeavour to structure your affairs in a manner that reduces risk. As part of mitigating your risk, it’s important you understand that when you advance funds to your company, or grant guarantees for the benefit of your company, you’re just as entitled as any other creditor to take security.