Leased Assets in Liquidation
If a guarantor can’t service a lease, the finance company can repossess & sell the financed equipment and recover any shortfall from the guarantor.
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Understanding Leased Assets in Liquidation
A lease, hire purchase or other finance agreement typically contains a personal guarantee. Therefore, Directors need to understand what will happen with leased assets in a liquidation setting.
A liquidator is only interested in selling assets of a company if it generates a positive return to the liquidation and the creditors.
If a liquidator finds a company has assets subject to finance, he will conduct an assessment to compare:
- The value of the asset -v- its payout value.
- If the value of the asset exceeds the payout value of the finance – the item has positive equity. The Liquidator will look to sell it.
- If the payout exceeds the value of the asset – it is a net liability. The Liquidator will have no interest in it.
Where there is positive equity and the director wants to retain possession of the asset, the liquidator may sell the net equity in the contract to the director who is then required to continue servicing the finance agreement.
If the payout exceeds the value of the asset, the liquidator will disclaim any interest in the asset. A disclaimer formally advises the financier that the company has no further interest in the item or the contract.
Once the financier receives this notice, it will act in a number of ways.
Firstly, if they have been unhappy with, or are uncomfortable with the director because they may have experienced difficulties with payments etc., the Finance Company may repossess and sell the item. If this occurs, the guarantor may be liable for collection fees, penalties and interest as well as being charged for any shortfall on the facility after the item has been sold at auction.
Depending on the size of any shortfall, bankruptcy or the loss or sale of the guarantors’ home or other assets may follow.
Alternatively, if the guarantor is able satisfy the finance company that the finance agreement will be honoured, the guarantor, provided they continue making payments, may retain possession of the financed equipment.
If a guarantor is unable to continue servicing the finance agreement, they may consider selling the financed equipment but as the encumbrance will be noted on the title, clear title will not be able to be provided to any purchaser without the finance company agreeing to a sale.
A finance company will usually give permission for the sale of a leased asset only where the guarantor provides a top up cheque to ensure payout of the finance agreement, in full. It is only when at this time the finance company will agree to removal of any listings against the assets’ title.