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2 years ago · by · 0 comments

Implications on the Business’ Personal Guarantors

When a Business that Li Ka Shing had Stakes in Liquidates

Sometimes we are oblivious to the brutal consequences of our decisions until it is too late. Instead of experiencing the hard knocks of the business world first-hand, we should spare ourselves from potential heart aches by learning lessons from others.

A business that seemed headed for continued success

Whirl Pte Ltd (name has been changed) was a one-stop end-to-end IT solutions provider and hardware reseller. The company provided support to corporate clients to establish and manage network infrastructure connectivity with its employees and business partners.

It was established in the late 1990s when the IT industry first gained momentum. It started out with three partners, but grew very rapidly to become a regional company. For many years after its inception, the company recorded double-digit revenue growth year-on-year. In 2001, Hutchison Harbour Ring Limited, a subsidiary of Hutchison Whampoa Limited chaired by Hong Kong tycoon Li Ka Shing, even acquired stakes in the company.

At its peak, the company served more than 1,000 clients including MNCs and SMEs spanning the telecommunications, construction, insurance, automobile, oil, infrastructure, retail, banking and aviation industries, among others. It engaged more than 200 employees and reported company turnovers amounting to more than $100 million.

In 2005, the company solidified its overseas foothold when it inked a deal to partner a leading US IT developer to provide server-centric computing solutions in Singapore and Thailand. The partnership was a strategic move by the US developer to tap on the burgeoning Asian market.

Business tides turned – as they sometimes do

Whirl Pte Ltd displayed good business prospects. To many, it appeared to be destined for continued success. However, good times did not last forever.

To maintain its operations, Whirl Pte Ltd required a monthly bank cash line of $15 million. Owing to amount involved, banks required its shareholders to sign as personal guarantors. This did not prove to be an issue at first. But nearly two decades after its inception, the fate of the company turned for the worse. As you can imagine, that did not bode well for its three key partners.

Business debts become personal debts

When the business eventually went into liquidation, owing to reasons undisclosed, banks and creditors started going after the shareholders for debt repayment.

One of the shareholders happened to be my client. He first consulted me when he was already a personal guarantor to the business. Red flags were probably already raised by the business by then. When we spoke about his financial needs, his biggest concern was that his family would become liable for his business debts in the event of his premature death. To allay this concern, he took up more $30,000 annual term insurance for debt cancellation. The insurance served to pay the company for debt settlement should he die, so that his business debts do not get transferred to family members.

Things did indeed fall apart very quickly. About a year later, the business went downhill and one of the personal guarantors declared bankrupt. Owing to this sudden twist of events, my client was called to repay the outstanding business loan. Personal loans on his overseas properties were also recalled by banks. A business went wrong had devastating ripple effects on my client’s personal life. It was a very high price to pay for a business failure that most did not see coming.

If my client had known better that a once robust business would go south so quickly, he could have safeguard his personal assets from banks by placing them under an asset protection trust prior to signing as a personal guarantor. The trust must be irrevocable and established at least five years before credit protection comes into effect.
After just a year, his term insurance was terminated. On hindsight, he could have done more to ring fence his personal debts from the business loan. Unfortunately we do not have the benefit of hindsight in reality.

Put financial matters in order before it is too late

This is a typical example of a business debt gone wrong. A lesson we could all take from this is the need to address financial matters arising from becoming business personal guarantors sooner rather than later. Sometimes time is of the essence.
As if watching your business dissolve is not agonising enough, my client had to weather through extra pains of paying off a hefty business loan. To the majority of us, this is a heavy burden that we cannot even begin to imagine bearing.

Yet this problem is very real to business owners. If a high-performing company like Whizz-Work could go into the reds so quickly, how sure are you that your business is fail-proof? If not, would you be able to repay business loans? Are you prepared to repay business debts should your business partners declare bankrupt?

Nobody wants to answer these tough questions because no one wants to be in the position to have to tackle them. But these are questions that you have to ask yourself before you agree to become a business loan personal guarantor.
Separating your personal and business assets earlier in business is critical especially in bad times. It could save you from serious financial, emotional and mental headaches should creditors come looking for you. You would also be doing your loved ones a huge favour.

Don’t wait till it’s too late. Free Consultation Available

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