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Continuous Line of Credit Loan Agreements

Protection from Preferential Payment Clawback (2022)

Overview

Due to recent changes in legislation Continuous Line of Credit, or Revolving Line of Credit Loan Agreements have become the centrepiece for protecting business owners and directors against huge potential liability when using their personal credit cards for business expenses.

These changes in legislation centre around the introduction of the PPSA OR Personal Property Securities Act and its register PPSR or Personal Property Securities Register.

So, today we are going to discuss.

  • How the changes in legislation could spell disaster for you and your business,
  • How a simple $6 Government Registration can protect you as a business owner,
  • And finally, how you, as a business owner, can make yourself your largest secured creditor putting you first in line if your business experiences any future financial issues.

PPSA Legislation

Now, most businesses are not aware that a couple of years ago the government introduced new legislation which was by far the biggest change in legislation in the last 30 years. Essentially, the legislation (without going into too much detail) redefine or reclass what is classed as a secured creditor and what is classed as an unsecured creditor.

Now I know that doesn’t sound like much, but what it means is that you, as a business owner are now automatically classed as an Unsecured Creditor. That means that if your business was to get into any future financial trouble, and administrators or liquidators were appointed, you would probably be their first phone call. And the first thing they would demand is the return of any payments you had received from your business in the previous 6 months. And unfortunately, you don’t get any choice. As a matter of fact, with the way the legislation has been worded, we have seen liquidators demand the return of payments from unsecured creditors up to 18 months or longer.

What Is A Continuous Line Of Credit Loan Agreement?

A Continuous Line of Credit or Revolving Line of Credit Loan Agreements solves that problem. These Loan Agreements have come about due to an article that was produced by one of the major credit card companies in Australia in which they stated that the average SME or Small to Medium Enterprise spends around 60 to $80,000 worth of company expenses per year on their personal credit cards. These payments, of course, and then reimbursed by the company onto the owner or directors Credit Card. Unfortunately, in the process, the business owner or director of the business has left themselves open to huge potential financial losses.

So, if all businesses in Australia are spending $80,000 on average a year of business expenses on their personal credit cards the potential liability changes dramatically when it’s looked at realistically. Let’s assume that not every business in Australia falls into that category, let’s assume that only 50% of businesses in Australia are using the personal credit card for company expenses, even though they do get reimbursed, it means the remaining businesses potential liability could be more like $160 000 to $180 000 plus per year. When you revert that back to the 6-month Preferential Payment Clawback Period or Relation Back Period, a business owner can still be looking at a potential liability of $80,000 to $90 000 of potential liability.

And it’s not just payments received as reimbursements for your Personal Credit Card expenses; the legislation could cover various other payments from your business to yourself.

What Is Preferential Payment Clawback?

It’s called Preferential Payment Clawback and it’s all part of the PPSA or Personal Property Securities Act Legislation. I won’t go into too much detail here as we have a detailed Blog on the PPSA Legislation which is linked in the Related Articles section, which when you fully understand the ramifications, will make your toes curl.

Essentially there are 3 types of creditors when a company gets into trouble.

They are                              

  1. Secured Creditors (businesses that have spent the $6 and registered on the PPSR as secured Creditors)
  2. Preferred Creditors (which are essentially employees)
  3. And Unsecured Creditors

Now as a business owner, depending on how you have set up your business you could be both a Preferred Creditor and an unsecured creditor. If your business has paid you a wage those payments will more than likely make you one of the Preferred Creditors, but just for those payments.

All other payments you have received will more than likely be classed as payments to an unsecured creditor and be subject to Preferential Payment Clawback.

Examples Of Preferential Payment Clawback

So, let’s have a look at what a Preferential Payment Clawback Letter of Demand looks like,

Example 1

 

Now as you saw in Example 1 (above) we have redacted the companies details that these letters were sent to but you can see the name of the builder,

The next thing you will see is that the liquidator is asking for the return of 171 000,

it outlined the legislation being 588FA and part of the Corporations Act 2001,

it then also outlines the 6-month Clawback Period, in this case, they call it the Relation Back Period,

It also includes the invoices, the dates and the amounts,

And then to top it all off it gives the business 7 days to pay the 171 000.

Example 2

 

And this one, Example 2 is the same as the first but for a different business which outlines,

  • the amount being clawed back being $48 000,
  • the same 6-month clawback period,
  • and again, the same 7 days to pay.

 Example 3



And also here is Example 3 which is an extract from a 2016 / 2017 Creditors Report concerning preferential payments made to the ATO Totalling $52,636. You'll notice the ATO settled for 50,000 in the early stages of the liquidation.

Why?

Because the ATO knows that the legislation applies to them exactly the same as any other business.

Now I understand that a lot of you be going, What the? But the legislation is the legislation, and it will more than likely affect most businesses one way or the other at some point in time.

In Conclusion

You will, as the owner of your business either be classed as a secured creditor and are one of your companies largest and most prominent secured creditors, or you will be classed as an unsecured creditor with all the risk that goes with that.

AND, If you wait until there is an issue, it will be way too late. Don’t let all your effort and hard work amount to nothing. I don’t know of any business owner who doesn’t want to be their businesses biggest secured creditor.

So here is where our Continuous Line of Credit or Revolving Line of Credit Loan Agreements comes back into the Story.

In order to solve all the issues, we have just discussed, we need to consider a few key points,

  1. Any Loan agreement between you as a business owner and your company that makes you a secured creditor over your own business needs to have the flexibility allowing you to increase, or pay down, any amount of that loan at your own discretion, meaning that there can’t be a fixed $$ figure associated with the loan.
  2. Any Loan Agreement needs to be a one-off that will last for a least 7 years. As no one wants to keep having to restart their loan agreement all the time.
  3. And finally, any Loan Agreement must include the appropriate legislation incorporated ensuring that your PPSA Registration is legally valid and can be registered legitimately on the PPSR.

And that’s exactly what Continuous Line of Credit Loan Agreements do.

Given that you and your business are separate legal entities, our Continuous Line of Credit Agreements is simply an ongoing Loan Agreement between you as your business owner, and your business itself.

  • There is no defined loan amount
  • The loan is for 7 years or part of the 7 years
  • All the paperwork can be done for you. All that’s needed are the details of the two parties
  • Emailed drafts of the loan agreements for approval
  • Once approved and signed we will register your loan agreement on the PPSR
  • We will then forward you the Verification Statement which is your proof of your PPSA Registration
  • And we will maintain your PPSA Registration for the life of the loan
  • And when instructed we will also deregister your Loans PPSA Registration

Well, I think that covers everything regarding our Continuous Line of Credit Loan Agreements.  And feel free to check out the PPSA Registration Blog detailed below.

If you would like to know more about "How You Can Become Your Businesses Largest Secured Creditor" please feel free to request our FREE Facts Sheet here.

That’s It From Me, Until Next Time

Have a Great Day

 

Company

With over 35 years’ experience Collection Consultancy Australia prides itself in offering Products and Services designed to Protect Business Assets and Cashflow. Quite often the process can start from simply making business owners aware that there is option available, through to business specific solutions and education. We are here to let business owners know that there can be a better way to secure their financial future.

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PO Box 7160,
East Brisbane QLD 4169.

Phone: 1300 565 988

Email: info@collectionconsultancy.com.au

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