Restructuring Financial Assets
Finance (lending) and securities mostly go hand-in-hand. We say mostly, because some small personal lending is unsecured, but generally most lending is secured. The most common forms of security that borrowers grant are mortgages, personal guarantees and chattels securities, commonly known as general security agreements. These differ from mortgages because mortgages are granted over land (real estate) where chattels securities are given over the personal property of the borrower (i.e. motor vehicles or invoices/receivables).
It is our job to advise not only the detail surrounding loan agreements but more importantly the security arrangements.
When a client visits us with a refinancing matter, it is our job to advise them not only the detail surrounding the loan agreements (under the Credit Contracts and Consumer Finance Act we have a duty of disclosure of the terms) but more importantly the security arrangements. We often find that there are cross-securities between various entities (companies, trusts etc) that are frequently not explained by banks to clients and lawyers are presented with surprises when the documents arrive on their desk.
Clients restructure their finances for a variety of reasons.
Banks are hungry when chasing debt and can offer incentives for people to move their debt to them. Another reason is banks have different lending requirements for businesses than they do for individuals and often this lending is with different banks. So we frequently find that when money is required for a business, it involves clients' personal assets to be given as security and so the same bank needs to be involved and switches occur then.
The work we do in this area can sometimes be complex and involve a myriad of issues, particularly if different entities are involved.
Business.
For example, if companies are asked to give guarantees and that company has minority shareholders unrelated to the client, we often have to consider whether all shareholders need to approve the transaction.
Trusts.
The same applies to trusts. Some professional trustees are kept in the dark when clients restructure their arrangements and are not comfortable with “rubber stamping” the documents. Because trustees have duties to the beneficiaries of the trust, if the trust is giving security in favour of an unrelated entity, this potentially places the trust in a position whereby its assets are at risk for no plausible benefit and so care is required.
Guarantors.
The giving of guarantees can also cause other problems. Often clients will ask why lawyers require the guarantors (the parties giving the guarantee) to seek independent legal advice on the giving of the guarantee. This is simply because of the conflict that is inherent. Lawyers act for the borrowers and protect their interests, and it is certainly in their interests for the guarantors to sign the guarantee. Yet by this action, the guarantors are being placed in a position that potentially affects them if the guarantee is enforced. So they have a different interest than the borrowers and sometimes need to be fully appraised of their potential liability. Guarantors are treated at law as being the original party that borrowed the money.
If you would like advice around your situation, get in touch with Nick, Jeremy or one of our team.
nick@davenportslaw.co.nz | 09 883 4420
