Article: Property Investment

Getting Paid with Frank NewmanGetting Paid with Frank Newman

There have been a number of interesting media items in the last week or so that are worth a mention.

The first is the story about a company going into liquidation and owing good hard working folk some $70,000. There appears to be little prospect of recovery. The story itself would not have created headlines had it not involved a former Member of Parliament, Marama Fox. Companies going broke is a very common occurrence. Although the details of this particular liquidation have yet to be revealed, all too often directors fold a company only to incorporate a new one and continue trading, leaving creditors high and dry. The problem is a limited liability company is a legal entity in its own right, quite separate from the directors and shareholders.

What is unfortunate is that creditors can take some simple precautions to minimise the default risks when dealing with a limited liability entity, like a company.

If you are supplying goods or services it is essential that as a condition of supply you obtain a personal guarantee from one or more of the company directors. With that in your pocket you at least have the option of pursuing an individual if the company is unable to pay.

A second precaution is to have terms of trade that include the right to charge (reasonable) interest on overdue accounts and recover debt collection costs, including legal fees. It is not enough to have terms of trade. You must be able to demonstrate that the person you are trading with was aware of those terms of trade at the time the transaction was entered into.

With those terms in place, you can avoid being used as an interest free bank.  If an account is overdue, at least the interest clock is ticking and you can recover from them the costs to enforce payment of the debt should it be necessary.

While these measures are not always successful, my experience is that they significantly reduce the risk of not getting paid.

The second topic of interest is how much our local councillors get paid. The issue is topical because it comes on the back of the Prime Minister freezing MP salaries while a review (yet another one) takes place looking into the way MP salaries are determined.

As is the case with MPs, the pay levels for local body representatives are also set by the Remuneration Authority. With respect to the Whangarei District Council, they have recommended the mayor’s salary increases 3.3% to $144,500; the deputy mayor and committee chairs will get a 2.9% increase to $62,500, while councillors will see their pay rise 2.9% to $50,000.

At a recent Council meeting the WDC Mayor Mai put it to councillors that they should follow the PM’s lead and freeze their pay. The suggestion did not go down well. Councillor Bell is reported to have said he could not have stood for the council if he didn’t have a partner who was working, and Cr Deeming, a committee chair receiving a salary of $62k a year agreed, saying “You can’t actually be in council without having some other income”.

Those remarks are surprising. The reality for most families in our district is that both partners in a household need to work, and most households actually earn less than Cr Deeming’s council salary.

There is no doubt that being an elected representative can be demanding, especially those who have the courage to rock the boat or challenge their colleagues, which most councillors don’t.

The bigger issue is whether paying councillors more attracts higher calibre councillors and therefore results in better decision making.  It’s often said by those arguing for more,” If you pay peanuts you get monkeys”.

I had two terms on council with a six year reprieve between the terms. The first term the pay rate for a councillor was around $16k. Six years later it was more like $36k. In my view there was no correlation between the pay rates and the quality of the councillors.

In fact, if anything the councillors during my first term were more capable those I sat with second time around, and in most cases they placed the interests of the community above their own personal reward. During my second term I couldn’t help but be reminded on occasion, “If you pay bigger peanuts you get bigger monkeys”, and I have no doubt salary was the main reason some sought election.

The issue really is who should set councillor pay rates? Perhaps its time councillors trusted those they represent to make that decision. Councillors should ask the good people of Whangarei how much they should be paid. It would be a real test of how much people think their elected representatives are worth.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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