If a Broker goes bust and takes the Client account monies with them - who loses out

[Tranona]

Where it is true that Peters were acting as a Broker when they sold the boats and the money should have been paid into a clients account which it wasnt.

At the time when Peters went bust they were actually using the clients money to fund a brand new boat so were technically acting as a dealer when they went bust.

That is just not so. When they took deposits for new boats they were acting as a dealer. Full stop. There was the one instance where they were acting as both with the same client, but it was with two separate transactions involving two different boats. There is no reason why a dealer cannot hold deposits in a client account as they promised to do (and may well have done correctly with other clients), but clearly they would prefer to have the deposit paid into their trading account.

As I described earlier they often financed stock through a third party finance house, partly to reduce the level of deposit they requested. The difficulty of course is that when business slows they end up with stock and no cash, but liabilities to the finance house.

 

[Tranona]

BA Peters plc (in administration); Moriarty and another v Atkinson and others isn't really about the failure of a client account. The Court of Appeal's ruling was that money which should have been paid into the client account was actually paid into a current account and the court did not feel able to allow the relevant creditors to use the breach of trust (in failing to pay the money into the right account) to put their claims ahead of other unsecured creditors.

Yes, that is very clear and has never been disputed (at least not by me). The importance for brokers is that the case clarified the tests of whether a trust had been created. The impact on Brokers is that their client accounts need to be clearly set up so that funds cannot be moved in and out of the account except under the terms of the trust, and that they should not be used as security by the broker against other liabilities (that is offsetting). YDSA changed the wording of their recommended accounts to reflect this. One assumes that other client account operators adopted similar changes.

 

[ari]

You can never guard against a determined fraudster. However it is a requirement that the registration number is permanently attached to the boat - traditionally into the main beam on a wooden ship, but most commonly now on a plaque attached to the main bulkhead. However, for the last 10 years or so it has been optional to renew registration, and it has always been possible to remove the boat from the register, so the number is only a clue. Even if there is no sign of a number it is still worth the search as it is the entry in the register that is important. In theory it can't be on more than one register at a time but it could be possible to be on the SSR as well - even under a different name.

Guess you have to treat each case individually if you have any concerns about what yyou are being told.

Removing a number is hardly the work of a "determined fraudster" (is there a check, by the way, to make sure these plaques are actually "permanently attached" in the first place)?

If someone wants to sell you a boat with a mortgage on it then if not telling you and peeling off a plaque that may or may not have been affixed is all it takes, then it's not master criminal stuff.

Guess you just have to hope that they're honest (and if that's the case, why bother even checking?)

 

[jfm]

Hi Observer. A few quick comments from me though I've sort of lost the will to live on this thread and will probably leave it to rest soon!

In current climate I would be cautious as buyer or seller about large sums in broker's or dealer's client account. If a seller and seeking large deposit I would insist on money being paid to me and offer a bank guarantee to secure the buyer.

Two sides to that though - as I buyer I'd be nervous of paying a seller not a stakeholder. Issue isn't his creditworthiness hence the g'tee wouldn't make me happy. Issue is he will not return the deposit becuase he could argue that under the contract it isn't due. There is much subjectivism in the contract Eg my surveyor says the rudders are loose and he says that isn't a material defect. Etc. Then the g'tee i no use to me. In truth, simplest fix to the deposit problem is make the deposit small

The completion payment also to be paid direct and I would use your escrow mechanism for keys and documents including BoS. It's easy to set up and gives good tension to the broker as escrow agent because smooth completion is in his interest as fastest way to getting paid.

Yup, this is best route. Both buyer and seller should be happy for broker to hold boat, keys, docs in escrow. Payment is then direct. Amazing the broker associations can't see this...

As buyer of new boat from a dealer I would look for confirmation the dealer has clear title if a stock boat. If large deposit needed I would look for bank guarantee as above or negotiate smaller non-refundable deposit. Completion money by transfer once all papers are seen and inspected. .

In fact most/many stock boats are financed so you need as customer to pay the bank and only the balance to dealer. Easy to do. Been there, done it, twice.

If buying new boat not yet built, I'd insist on deposit and stage payments directly to builder and direct agreement to assure title to incomplete boat and unincorporated materials vest in me as buyer. All this is standard stuff in real property construction I believe and easily transferable to marine construction (I don't have experience in ship finance but bet its applied there).

Tricky though, cost many builders wont. I prefer to use a dealer with a decent balance sheet and take the risk on them. Ie an essex dealer. Remember all of sunfairprinsealine have undergone LBOs and you are at the back of the queue as a creditor, so it's a case of do what you say (own the 1/2 built boat) or find a well financed dealer. Owning the 1/2 boat sounds better than it is - who would finish the boat if builder went belly up? I reckon an empty hull on s78 is a liability not an asset, and anyway its value lags way behind the 50% stge payments you've made by that point. You're only in good shape credit wise in the last month of build where there is30- 50% owed on the boat and it's 90% finished. So I choose the "well financed dealer" route. It's personal choice ultimately of course

 

[Observer]

Yes, that is very clear and has never been disputed (at least not by me). The importance for brokers is that the case clarified the tests of whether a trust had been created. The impact on Brokers is that their client accounts need to be clearly set up so that funds cannot be moved in and out of the account except under the terms of the trust, and that they should not be used as security by the broker against other liabilities (that is offsetting). YDSA changed the wording of their recommended accounts to reflect this. One assumes that other client account operators adopted similar changes.

I don't see how that can be done. Surely the bank won't and (practicably) can't monitor/verify that instructions given by the account holder conforms to a legal relationship to which the bank is not party.

Also the bank can't prevent a charge being created (e.g. to a third party) in breach of trust. Can't imagine anyone would be dumb enough to accept a charge over a client account as security for a loan but it's technically possible as fas I can see. The bank can of course accept (and the terms posted above by Jonic in post #82 show how this is achieved) that it cannot set off, combine, consolidate etc against/with a client account.

 

[Observer]

Hi Observer. A few quick comments from me though I've sort of lost the will to live on this thread and will probably leave it to rest soon!

Yes well you've already done a lot. I'm a late arriver.

Two sides to that though - as I buyer I'd be nervous of paying a seller not a stakeholder. Issue isn't his creditworthiness hence the g'tee wouldn't make me happy. Issue is he will not return the deposit becuase he could argue that under the contract it isn't due. There is much subjectivism in the contract Eg my surveyor says the rudders are loose and he says that isn't a material defect. Etc. Then the g'tee i no use to me. In truth, simplest fix to the deposit problem is make the deposit small

I was thinking a guarantee that can be called on demand. Seller is a bit at risk of buyer withdrawing capiciously but may prefer to have larger deposit with that risk than smaller deposit with broker that can't be easily recovered if seller withdraws without reason. Pays yer money.... etc. Personally, as seller, I'd favour a deposit large enough to cover costs and give the buyer a bit of pain if he backs out but not large enough to worry about where it's being held and by whom (i.e. I agree with you). Depends on circs though. Risk of adverse survey and so on.

Tricky though, cost many builders wont. I prefer to use a dealer with a decent balance sheet and take the risk on them. Ie an essex dealer. Remember all of sunfairprinsealine have undergone LBOs and you are at the back of the queue as a creditor, so it's a case of do what you say (own the 1/2 built boat) or find a well financed dealer. Owning the 1/2 boat sounds better than it is - who would finish the boat if builder went belly up? I reckon an empty hull on s78 is a liability not an asset, and anyway its value lags way behind the 50% stge payments you've made by that point. You're only in good shape credit wise in the last month of build where there is30- 50% owed on the boat and it's 90% finished. So I choose the "well financed dealer" route. It's personal choice ultimately of course

Many builders won't what? Agree to build on a basis that givees purchaser direct recourse? One of my yacht finance deals was done like that. Dealer in Holland but direct contract between purchaser and builder. I can't comment whether it's widespread because that's the only one I have direct knowledge of. I agree commissioning a new build is tricky and lots of downside to half-built boat etc. So balance sheet strength is crucial to risk assessment. Could require a performance bond but that has possible/likely circularity where not available if needed (cos the builder's balance is weak) and not needed if available (cos builder's balance sheet is strong).

Safer as you say to buy a completed boat from dealer, then it's only or mostly mechanical issues to sort out.

 

[jfm]

I mean the "production" builders (fairprinseeksea) generally (a) don't want contracts with customer, only with dealer and (b) will resist buyer taking ownership of half built boat

I believe sunseeker will do (b) on a bigger boat. BTW it is perfectly possible to have a builder's cert and registered ownership once keel is laid (or once out of mould, I believe, with a grp boat). Totally different ballpark if you are buying 33m cbi navi )) where direct contracts with builders are the norm. Princess and seeker might now do direct contracts for their (say) 30m+ boats; the prices mean that any buyer will be nervous about contracting only with a dealer, but i dunno first hand

 

[gjgm]

"Yup, this is best route. Both buyer and seller should be happy for broker to hold boat, keys, docs in escrow. Payment is then direct. Amazing the broker associations can't see this..."

Maybe they can see it, but if the buyer pays them they can deduct their fees?
You have mentioned escrow a few times before (over the years!).I may have missed the vital posting, but quite what does that entail? IE something via a solicitor, or a standard doc of the internet... how do you set up something "in escrow" ?( mean literally, how do you do it!)

 

[jfm]

"Yup, this is best route. Both buyer and seller should be happy for broker to hold boat, keys, docs in escrow. Payment is then direct. Amazing the broker associations can't see this..."

Maybe they can see it, but if the buyer pays them they can deduct their fees?
You have mentioned escrow a few times before (over the years!).I may have missed the vital posting, but quite what does that entail? IE something via a solicitor, or a standard doc of the internet... how do you set up something "in escrow" ?( mean literally, how do you do it!)

Broker will invariably hold the deposit, and that covers his fee. In fact, when i sold my boat via this route i made the deposit exactly mathc the commission!

As to how exactly you do it, you need an escrow agreement. One page. I'll try to find mine, anonymise it, and post it on here.

 

[gjgm]

Broker will invariably hold the deposit, and that covers his fee. In fact, when i sold my boat via this route i made the deposit exactly mathc the commission!

As to how exactly you do it, you need an escrow agreement. One page. I'll try to find mine, anonymise it, and post it on here.

Great, thanks.

 

[DAKA]

That is just not so. When they took deposits for new boats they were acting as a dealer. Full stop. There was the one instance where they were acting as both with the same client, but it was with two separate transactions involving two different boats.

Thats what I said, this is one part where we do agree !

Technically two transactions and two boats.

The Brokers took the money form the sale of the boat and instead of paying it into a client account as agreed they paid it into their own account.

Then they used the money to order a new boat (now technically dealers) and just before they went bust they paid the money into the clients account.

The judge correctly pointed out that you can not take a £1 out of trust and then pay it back in so he wouldnt let the clients have their money out the client account.

If you dont agree the above statement please read the case notes, in the past I have posted enough links and quotations from the case notes to be able to sit back now without the need to comment further as the rest of the forum have also now seen the same quotes/links in order to make their own minds up.

I think we do agree now, its just our differing degrees of risk acceptability that causes a divide.

You wouldnt believe how hard it has been for me to accumulate £100 000 in order to buy a boat, basically all my working life, I cant afford to loose it in a couple of weeks as a Yacht Broker p1 55es up the wall in Dubai.

 

[SailorBill]

Come to think of it the car service industry is a shambles!! Something should be done!! Anyone could set up tomorrow and keep all the cars that come in for a service. WAKE up garages, we know you could fleece us blind of our cars What if he goes bust and runs of with my £30,000 car!!.

That's it, its too dangerous. I'm doing all my servicing myself until the government puts in place a compensation scheme.


Note:

I don't subscribe to any of the above and do not have a 30K car.

Just a thought

Oh very droll. I hardly think your scenario compares to yacht brokerage.

You're a broker aren't you, so not biased at all then! Unsurprisingly, you stick up for your industry. Carry on sticking your head in the sand, by all means. In the meantime I and others will try to avoid using a broker until the industry gives adequate protection to its customers' funds i.e. puts a proper compensation scheme in place as per solicitors client accounts.

 

[Tranona]

You're a broker aren't you, so not biased at all then! Unsurprisingly, you stick up for your industry. Carry on sticking your head in the sand, by all means. In the meantime I and others will try to avoid using a broker until the industry gives adequate protection to its customers' funds i.e. puts a proper compensation scheme in place as per solicitors client accounts.

I am not a broker, but I would be interested in seeing your evidence that a "compensation scheme" is need. A list of the proven cases where a broker has taken clients funds would be a useful start.

 

[jonic]

Oh very droll. I hardly think your scenario compares to yacht brokerage.

You're a broker aren't you, so not biased at all then! Unsurprisingly, you stick up for your industry. Carry on sticking your head in the sand, by all means. In the meantime I and others will try to avoid using a broker until the industry gives adequate protection to its customers' funds i.e. puts a proper compensation scheme in place as per solicitors client accounts.

I am not biased, just better informed.

You have far more risk by not using a decent registered broker with a safe client account, than trusting a total stranger in a private sale.

You seem to think there aren't any decent brokers or they are the minority.

I am not burying my head on the sand or sticking up for my industry.

I'm sticking up for all the good brokers who know what they are doing and do it well.

No-one condones a **** broker, in fact I would despise them more than you but these threads totally distort the ratio of good to bad, and I and any other decent, hard working, professional broker finds them insulting and damaging.

Tranona knows what he's talking about but your view is so entrenched you don't listen to him either.

I'd like a compensation scheme for every dishonest buyer and lying seller that I have to weed out, but I doubt I'll get it so I concentrate on the honest people I enjoy working with.

I am totally fed up with these threads. I am never offering insight or advice again on here.

I have better things to do, and decent clients to look after.

I sincerely wish I had never bothered.

 

[PaulGooch]

<snip>.

I'd like a compensation scheme for every dishonest buyer and lying seller that I have to weed out, but I doubt I'll get it so I concentrate on the honest people I enjoy working with.

<snip>

Those scumbags aren't limited to boats mate, we get them in the motor trade too. Ask someone if the car they want to trade in has any faults and most (yes, i do mean most) will say no. Turn the ignition on and look at all the pretty management lights. A test drive is invariably a real eye opener.

 

[gjgm]

Oh very droll. I hardly think your scenario compares to yacht brokerage.

You're a broker aren't you, so not biased at all then! Unsurprisingly, you stick up for your industry. Carry on sticking your head in the sand, by all means. In the meantime I and others will try to avoid using a broker until the industry gives adequate protection to its customers' funds i.e. puts a proper compensation scheme in place as per solicitors client accounts.

Just of out interest, do you have JFM on "ignore" ?

 

[Jim@sea]

There is always an element of risk in parting with money to a Limited Company who is using customers deposits or clients money to fund their business whilst insolvent. I particularly remember three occasions of note.
When a certain Car Manufacturer went into Boat Building in the 1970's People had been paying stage payments for their boat to be built and was it, keel laid, superstructure, fitted out, aparrently like most Ltd Co's who know they are going bankrupt, they chose to go after the last and biggest payments had been made, consequently the finished boats belonged to the Liquidator. I remember reading that one disgruntled creditor who had paid in full for his boat and was waiting for them to deliver it, broke into the premises and with a trailer removed his boat during the night. I wont say the name of the Car Manufacturer but they were sports cars and to get into them you had to have a Low Tus. (Sorry about that)
The second occasion was when a Large Car Auction went Bankrupt, they waited until they had a "Big Sale" including selling a load of Police Cars, they went Bump "After the Auction" so all the money from the sale of cars belonged to the Liquidator.
The Third occasion was " International Marine" a Yacht Brokerage Firm who also sold "Fisher Yachts" I remember going in their yard when they were expecting the Liquidator and someone was going round sticking labels on boats as to ownership, what a mess. (and did not Fisher Yachts go bump?)
As I am about to buy my 9th Boat in 40 years I realise that with virtually all the Boat Dealers or Brokers who I have bought my boats from have gone Bankrupt or ceased trading.
1. A boatyard based at Lymm Marina. Bought a Marina GT and a Shetland Suntrip. Went Bankrupt and left.
2. Ladyline LTD. I bought a Burland 26, Part EX for a Nauticus 27, Part EX Conway 26. They went bust.
3. What happened to "Marine Secol LTD" I bought a Moody 30, PX it for a New Princess 33, and had to get a full refund due to a Trading Standards Offence.
4. "Castlemain Yacht Brokers" in Guernsey. I bought a 33ft Nauticat. Was I really that naive that in 1981 that I sent them a cheque for more than my house was worth to purchase a boat without taking possession of it immediatly. I dont know what happened to Castlemain, Father and Son, nice people (its the nice ones you remember)
So as shortly I am due to buy another boat. I am more "Street Wise" now and if I have to buy a boat on Brokerage off a Limited Company who is operating from Rented Premises, I will pay for it with a Bankers Draft, step on board and pith off with it on the same day.
Am I wrong.

 

[Observer]

The bigger risk of unregistered mortgages on boats is probably from loans made by friends or family or business acquaintances. But then the borrower/boat owner is more likely to carry and respect a moral obligation to the lender so less likely to sell without clearing the debt.

Well, this thread is an eye opener !
You think friends and family draw up mortgages with the boat as collateral?
I can imagine them simply lending money, but drawing it all up so that they have a claim on the boat does surprise me.
If they just lend the money, the boat itself is irrelevent to this discussion?

The "charging clause" in a mortgage or fixed security, the bit that creates the charge on the asset, is very simple, a few lines. It's not hard to create something that is enough to taint the owner's ability to subsequently transfer clean title.

I would think that a commercial lender is less likely to use an unregistered mortgage but that's guesswork. I don't have direct knowledge of marine lenders' policies - that's why I asked Jonic.

A friends and family type private lender may have enough knowledge to creata a security document that will bite but not to create a mortgage that can be registered or how to register or that Part I registration of the boat is needed in order to register it. He may feel it is not necessary to impose the burden of Part I registration or he may feel it is unnecessary to advertise his security to the world He may be comfortable with an imperfect security as better than no security at all. The motivations of a private lender are much harder to predict than those of a commercial lender.

 

[Tranona]

The motivations of a private lender are much harder to predict than those of a commercial lender.

There is probably a lot that is hidden about finance of boats. Formal mortgages with finance houses are attractive to those that have high disposable income and low asset bases. In other words they have the prospective future income to service the debt and eventually pay off the capital. Not too different from many people taking out their first mortgage on a house in the expectation that in 10 or 15 years time the payments will be a small proprtion of their disposable income. This becomes a no-brainer if the house rising in value as recent history shows.

However, most boats don't behave like that. At best they hold their monetary value, but more commonly lose value. Also unlike houses they are discretionary, so people who buy them tend to finance them out of discretionary income or secured against other more stable assets. The most obvious is to raise additional cash against equity in houses which also fits well with the profile of many boat buyers. Borrowing from family and friends is also more likely, as many people have substantial cash balances which earn very poor returns in conventional investments.

Few of these alternative arrangements are likely to show up as formal charges against the boat, so one is reliant on the vendor's declaration that it is free, but that is no different from many other high value assets. The ability to register a formal charge against a boat is a bonus in a way as it does open up sources of finance that might not be otherwise available and give buyers some security.