It Depends – What are the main traps associated with vendor finance?

In this edition of It depends, lawyer Alfred Jackson talks about vendor finance – what are some of the key traps you should watch out for?

Hey, my name’s Alfred, and I’m a solicitor in the private client and commercial team here at Cooper Grace Ward. And on this version of It Depends, I’ll be talking about some of the key traps with vendor finance.

What are the key traps associated with vendor finance?

So, what are the key traps with vendor finance? It depends, but the most common one is that your counterparty doesn’t pay you. At the end of the day, you’re effectively acting as a bank and you need to make sure you get repaid.

Is the security adequate?

One of the first things you’ve got to think about is whether or not your security is adequate. For example, I have a lot of clients tell me ‘It’s fine. I’ve got a security interest over their 25% interest in an unlisted private company’. While that’s better than nothing, ultimately, it can be pretty hard to try and sell those shares and recover your funds. So, you need to think about whether your security adequately covers, the money outstanding.

Is the security enforceable?

The next thing you need to think about is whether or not it’s enforceable. Unfortunately, it’s not always as simple as putting it in writing and signing off on it. One of the key reasons your security arrangement might not be enforceable is if it’s held to be a penalty. For example, the New South Wales Court of Appeal has recently held that an arrangement which voided the warranties and restraint of trade where the vendor finance wasn’t paid on time, it held that, you know, that arrangement was unenforceable. Without getting into the nitty gritty of that case, it’s a warning to advises that you need to pause and consider, whether or not the arrangement is enforceable or if there’s a risk of it being a penalty.

Is the security perfected?

The next thing you need to think about is whether or not your security needs to be perfected. For example, if it’s a security interest, you might need to register it on the PPSR. There are a number of timing requirements which come with that. So, you need to make sure that you’re across those things depending on what type of interest you’re registering. Additionally, if it’s over shares, you may need to consider whether or not it should be perfected by control, which is a bit of an unusual one compared to most registrations. But talking about the PPSR and the Personal Property Security Act is probably a topic for another version of It Depends.

If you have any questions on vendor finance or commercial transactions generally, please feel free to reach out to me or any of the team here at Cooper Grace Ward. Thank you.