Collecting the Shortfall from the Borrowers

Business Financing: Recovering the Balance from the Restaurant Operators

You financed the restaurant for a friend or relative, and now it’s run into financial difficulty. This could be due to a variety of reasons. At this point, the reason doesn’t really matter.

You have taken over the restaurant, sold it as a going concern or just the assets, but you’re still out money.

Let’s have another look at your security, and see what items here you may need should you decide to operate the restaurant as a going concern. The ones that you need for this purpose are noted in BOLD.

Here’s the security:

1)     Chattel mortgage, upon specific chattels for major purchases, big ticket items, tools of the trade,

2)     Assignment of Leases upon specific chattels for major purchases, big ticket items, tools of the trade,

3)     accounts receivable,

4)     assignment of book debts,

5)     General Security Agreement,

6)     Assignment of Leases upon business premises,

7)     Assignment of Options to Lease upon business premises,

8)     Assignment of Agreements to Purchase upon business premises,

9)     Assignment of Options to Purchase upon business premises,

10)   A pledge of the shares of the operating company,

11)   A pledge of the shares of the holding company,

12)   An assignment of the suppliers’ accounts,

13)   A pledge of any intellectual property,

14)   An agreement to be named as an additional insured on the insurance policy,

15)   An agreement by the insurer to waive its rights of subrogation,

16)   An agreement to the assignment of the telephone number,

17)   An agreement to the assignment of thewebsite,

18)   An Authorization to examine the books,

19)   An Authorization to examine the bank accounts,

20)   An Authorization to examine the HST returns,

21)   An Authorization to examine the Income Tax returns,

22)   An Authorization to examine the Workplace Safety assessments and payments,

23)   A personal guarantee of the owner, proprietor,

24)   A personal guarantee of the spouse of the owner proprietor,

25)   A copy of all suppliers’ contracts, including books of accounts, inventories and entitlements.

Many times, lenders will wonder: why do I need all that security? In this situation, numerous items were necessary just to dispose of the business and limit your losses.

At first, it was necessary to limit your losses. You must demonstrate to a Court that you did everything to limit your losses otherwise you may be prevented by the Courts in full recovery from the business owner. Mitigation of damages is a must. That does not mean granting endless extensions etc. That will just run up the costs and expenses. Be diligent, be quick and deal with each issue with dispatch. Procrastination and time-wasting will be your worst enemies. Be fair, but be ruthless at the same time. That does mean that you cannot be kind. You just have to be very, very firm about deadlines.

When you look through the list, you have used just about all of your security. Hold onto the insurance policies. They may continue to have some value. To the extent that you may have operated the business or even occupied the premises, you will still be covered. You want to have a file and the contact information yourself.

The next step is the enforcement of the personal guarantees. Your friend probably has no money. That’s why he went out of business. But, the spouse may have some of the assets that were tucked away when the “going was good”.

The unfortunate set of circumstances that most lenders face, particularly if they are friends rather than institutional lenders, is that they just never got all the security. In most cases, they settled for a chattel mortgage on the equipment. What they really need is a personal guarantee from the person operating the business AND THE SPOUSE. This is the only road to full recovery.

In such circumstances, be sure to consult with a trustee in bankruptcy, a lawyer or solicitor practising in the insolvency field or someone who possesses the right expertise.

Brian Madigan LL.B., Broker

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