BAILMENT AND FLOOR PLAN FACILITIES: THE RISKS

The world of bailment agreements, floor plan facilities, consignment sales, personal property securities legislation, the tort of conversion and transfer of title is a legal and financial maze that all of the participants, namely bailment/floor plan financier, Dealer, consumer and retail financier, all enter but struggle to exit when things go wrong.

Given the industry is currently experiencing many challenging operating conditions the risk of breaching financial agreements with financiers is higher than in recent years.

In this article we consider some general issues and risks to Dealers of certain actions which may put them at financial and/or legal risk. Dealers are encouraged to seek independent legal advice on their specific circumstances if there are concerns in relation to these matters.

Bailment/Floor Plan Finance Agreements

Most Dealers will have in place some form of bailment or floor plan facility agreement. The specific terms and conditions of each agreement should be examined and understood by Dealers.

A common theme in most of these agreements is that the Dealer’s financier has the right to conduct an audit to ensure that the Dealer is complying with the terms of the agreement. If the audit reveals risks, such as the Dealer not remitting funds to the financier within the contractual period, then the financier may consider its other legal rights including its right to immediate repossession of vehicles.

For instance, if at any given time a financier’s risk is several million dollars because there is a time lag between the goods having been sold and delivered to the customer but not yet remitted to the financier, then the financier may take the view that such a risk cannot be tolerated and seek to repossess all of its bailed goods and terminate or suspend its financing until the risk exposure is rectified. Such actions would be extremely damaging for a Dealer as in effect it would no longer have stock to trade and the commercial damage to reputation could be severe.

The immediate right to possession may also give the financier a further cause of action known as conversion. Conversion is when one deals with a chattel, in this case a vehicle, in a manner repugnant to the immediate right of possession of the true owner. Importantly, the tort of conversion may also affect a transaction between Dealers in relation to the sale of a vehicle.

The risk of curtailments also increases in periods of lower demand and causes cash flow pressures for Dealers which in turn lead to poor financial management decisions and risks.
Sales of motor vehicles on consignment

Most states impose legislation in relation to the licencing of a Dealer and part of the legislative requirements, certainly in NSW, is that in relation to sales of motor vehicles on consignment. Consignment sales often involve members of the public but can be used as a method of financing by a financier.

The requirements include the establishment of a trust account on behalf of the consignor and payment into the trust account of all amounts received by the Dealer in relation to the particular vehicle. Usually the Dealer has 1 business day to ensure the funds are in the trust account. Failure to comply incurs fines.

State legislation commonly also enables disciplinary action against a Dealer for failure to comply with the requirements of the Act. This could cause a loss of licence which in the case of consignment sales is a likely outcome.

Conclusion

Further to the above, Dealers need to manage their bailment/floor plan facility agreements with great care and ensure that they are complying with the terms of their agreements. If things are not going to plan, Dealers should identify it early and contact their financial advisors and floorplan providers to develop a correction strategy. Holding off in the hope that the market will improve is not a good plan, especially when inadvertent breaches and poor financial management could lead to severe consequences in tough industry conditions.

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