The Requirement to Discharge Liabilities when Selling Your Business

In our earlier article we discussed the assessment of the liabilities of business prior to sale. In this article, we look at your obligations as a seller with respect to these liabilities.

It is an essential condition of any business sale that the seller discharge all liabilities of the business and that the assets are transferred to the buyer free of encumbrance.

The most common liability of a business is a security interest registered on the PPSR – Personal Properties and Securities Register (commonly known as a PPSR interest). The PPSR is a register run by the Australia Government’s Australian Financial and Security Authority and is a register of security interests over personal property (not real estate). PPSR interests are created by an agreement between two parties, the “Grantor” who gives the security interest and the “Grantee” who is the party owed money by the Grantor and who registers the interest against the Grantor’s property.

A PPSR is generally only registered over the specific personal property subject to the agreement between the parties, for example, over a coffee machine subject to a hire agreement or over a vehicle subject to finance. However, it is possible for a PPSR to be registered over “all personal property”.

A PPSR gives the Grantee rights to take property if the debt related to the personal property is not repaid. For example, if you do not make repayments on your car finance, the finance company can come and “repossess” it to recover the money owed to them.

In this regard, a buyer is generally unwilling to take on the risk of an encumbered asset. A seller should conduct a PPSR search and arrange its finances and paperwork so as to promptly discharge the security interests and not delay completion of the sale.

Conclusion

It is vital that a seller identify all the liabilities of the business and transferring assets and ensure these are discharged at or prior to settlement. If cashflow is a concern, there are a number of creative solutions which can be implemented over the course of the deal to ensure this occurs whilst still managing the concerns of the buyer as to risk.

If you require assistance with selling your business, Adams & Partners Employment Law Team can help you. Contact us on (02) 4721 6200.

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