One of the principle purposes of the PPS is to enable financial assistance to be secured against assets other than land. It also gives special rights to those who provide assistance to others acquiring assets or growing crops or livestock. This can include providers of vendor finance, labour, machinery or feed. These special rights require suitable documents to be created and registrations to be lodged.
Example 1: Mary owns a mixed farming and grazing property called “Pimzee Station”.
- Mary’s son Paul would like to buy “Pimzee Station” and associated livestock and equipment. Paul however cannot raise the necessary finance from banks.
- By suitable documents and arrangements under the PPS, Paul can obtain finance from a specialist herd and crop financier to pay Mary, provide working capital to develop the herd and produce crops on “Pimzee Station” and use the equipment owned by Mary. The specialist financier and Mary register their PPS rights over the crops, cattle and equipment, which offers them protection in the event of Paul becoming bankrupt or facing a property settlement with his spouse. At this stage, Paul does not buy “Pimzee Station” but leases it.
- Over the next few years, Paul sells and replaces cattle and their progeny, and crops, while not having to meet regular bank payments for any mortgage over the land. Paul now has enough progeny and cash equity to obtain a bank loan to buy “Pimzee Station” from Mary.
- This process would work equally well where Paul has started to build his own cattle herd with a view to building enough equity to purchase the property from Mary one day. By properly documenting and registering an agistment arrangement, Paul is protected in case Mary falls upon tough financial times – Paul’s interest in his cattle is protected from being captured by Mary’s financiers’ securities.
Example 2: Mike’s company runs a quarter horse bloodstock business called All Pap Stud on part of his cattle property.
- The land on which All Pap Stud operates is owned by Mike personally.
- Mike wishes to sell All Pap Stud and move solely into cattle. His children are too young to run All Pap Stud. They have sufficient space for a suitable buyer to continue to operate All Pap Stud where it is.
- A long term employee Catherine is the only suitable prospective buyer, however she cannot pay cash or obtain a bank loan due to an unfavourable property settlement she went through a few years ago.
- By suitable documents and arrangements under the PPS, MS can provide 7 year “vendor finance” to Catherine. This includes MS retaining ownership of MS’s horses (and having priority over progeny and the proceeds from service arrangements or the sale of horses) until paid in full. MS registers suitable security interests against Catherine, the livestock, progeny, equipment and semen to secure the purchase price.
- Knowing from experience that Catherine is a good operator helps to reduce the risk that the livestock and any progeny might deteriorate in value before MS is paid in full. Suitable arrangements and registrations ensure that cash flow of the business is able to be monitored by MS.
These are just some of the examples of how PPS can be used in succession planning. PPS’s flexibility means that no matter what type of business or situation, an effective solution can normally be found. Thynne + Macartney can assist you to use the PPS to help with your business succession planning.
Author: Peter Mills (former Special Counsel)