New Loophole Targeting Diamond & Jewellery Wholesalers

In the past few days, we’ve been alerted to a new financial loophole that gives protection for retailers, whilst leaving wholesalers penny-less in the event the retailer goes under.

How A Business Should Be Setup and Run

There are two basic business structures used in Australia: a sole trader or partnership, where the owner(s) are directly liable for the business, or more commonly, a limited liability company, where the owners are only liable to the value of their unpaid shares and the directors’ liability is limited.

Usually, when a company is established, the owner(s) put their own money into the company in the form of shares. In small to medium sized businesses, sometimes this is done formally (eg: registered with ASIC), other times it is done informally and the shareholdings are really debt the company has to the owner. In any case, the money that has been put into the company by the owner is the last of the money that is recovered should the company be wound up or go into liquidation.

How the Loophole Works

The loophole works through the owner using a friend or relative to give the company a secured debt. Unlike shares or unsecured debts, this secured debt is the first to be recovered in the event of a liquidation, leaving the owner with all or part of their money back, whilst leaving trade creditors (wholesalers etc) and employees with nothing. In addition to this, the secured creditor (friend or relative of the owner) can call in the liquidators at any time if they feel the business is going under and they need help to recover their money.

How Wholesalers Can Protect Themselves

There are many ways wholesalers can protect themselves such as using debtor insurance, getting diamonds certified and laser inscribed that are on consignment and running credit checks on their clients.

The Effect of Credit Problems Within The Diamond & Jewellery Industry

There are three main effects of the credit problems currently plaguing the industry:

  • Wholesalers, fed up with retailers not paying them on time (or at all), try their luck selling direct to the public. This causes great angst amongst retailers who then get caught up in a “race to the bottom” in terms of pricing.
  • Legitimate retailers have a hard time getting credit from their suppliers.
  • Prices go up to cover the cost of bad debts.

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