By now, I am sure many of you have started effectively implementing AI into your daily working lives.
Automating workflows, creating agents, setting up notebooks, and all that other good stuff you have heard at every single meeting you have attended in the last few years.
AI is great. Don’t get me wrong. I may or may not even be using it to help me write this article. But with its rampant use, we are starting to see dangerous long-term ramifications, particularly when someone relies on AI instead of seeking proper advice and assistance from a qualified professional.
The most recent case involved a sale of business on vendor finance terms. The vendor traded a small business on Victoria’s surf coast. He was struggling with his personal finances, and at the same time was facing a significant long-term relationship breakdown. In his circumstances, running the business was no longer an option. The idea of shutting shop was a difficult reality. The vendor had poured his heart and soul into the business for the better part of 20 years.
Luckily, the vendor had established a relationship with some repeat customers, who had happened to express an interest in the business while the vendor was weighing up his options. After some quick negotiations over a coffee, the vendor made the difficult decision to part-ways with the business by selling it to the customers on vendor finance terms.
So supremely confident in the business’ profitability was the vendor that he didn’t even require the purchasers to pay a deposit. Just ongoing monthly deposits for a period of 3 years. The purchasers were stoked. Unfortunately, they also had little to no relevant business experience, nor much knowledge of the niche industry that the business operated. A recipe for disaster. Within 6 months, the business had gone downhill, fast. Those ongoing monthly contributions? Ceased.
It pained the vendor to see the shape the business was in. But it also meant he was not seeing a return for the years of blood, sweat and tears he had put into building the business. So commenced the legal battle.
Within a matter of weeks, the purchasers realised the financial difficulties they were in – facing a significant liability to the vendor and a mounting tax debt – and were referred to Worrells. The company was quickly placed into liquidation.
Readers familiar with the Personal Property Securities Register will know the different types of registrations relating to different types of security arrangements. Typically, one may assume that a vendor may have registered an all-present and after-acquired property registration to secure obligations of the purchasers under the vendor finance arrangement. Technically, our vendor did. But he also had 5 other registrations purporting to secure obligations under the agreement, with every combination of collateral and security type you can imagine. All registrations were also made only a matter of weeks preceding the liquidation, being a year after the vendor finance agreement was made. Needless to say, we were suspicious.
We sought underlying documentation from the vendor regarding the registrations and were provided with a copy of the vendor finance agreement. While we obviously cannot show you the agreement, I imagine it would be much the same as if you were to go into your generative AI tool of choice and type the following prompt:
“Can you please draft me a sale of business agreement on vendor finance terms”
AI is great. But a lawyer it is not. As may be obvious, the agreement was completely insufficient. Not only did it fail to grant the vendor an enforceable security interest over the relevant asset, but it also failed to incorporate the bare minimum one would expect in a sale of business agreement. In the circumstances, each registration was defective. We quickly realised the PPSR registrations were also most likely done under the (un)helpful guidance of AI.
If the vendor had sought advice at the time of sale, properly structured the sale of business and vendor finance terms, and properly registered a security interest, he would have received a sizable distribution from the liquidation. But the reliance on AI ultimately led to an insufficient agreement and defective security registrations. This ranked the vendor as an ordinary unsecured creditor. Which means that any dividend received will pale in comparison to what could have been.
Not only did the vendor’s reliance on AI in drafting the sale of business and vendor finance agreement result in a significant loss that could have otherwise been reduced or avoided had they sought advice, but the vendor continued to rely on AI as its ‘lawyer’ throughout the liquidation. Sending countless emails that were clearly entirely written by AI, citing sections of legislation that did not exist, and entirely misinterpreting case law.
Sadly, we suspect that these situations may become more and more prevalent as the world continues to embrace AI. But the outcome is clear – AI cannot replace the advice of a professional.
