Businesses throughout the world are currently experiencing increases in the size of their debtors’ ledger. Late payment or failure to pay by customers puts obvious pressure on the cash flow of business. It is very important that businesses ensure they have the correct tools to deal with recalcitrant debtors. It is up to the management of the business to determine the level of action that will be taken against each customer debtor, but the more options available to the management team the more quickly and decisively they can act. The ‘tools’ needed have to be created and inserted into the binding terms and conditions business has with its customer, preferably at the beginning of the relationship.
Ensure the terms of trade are signed
One of the many defences thrown up by debtors is they have not agreed to the terms of trade. This is simple problem to remedy by including terms of trade as part of credit application which is signed and returned by the debtor. This prevents argument about whether or not the terms of trade have been agreed to. If security agreement term is included in the terms of trade, it is important this is assented to so the same is enforceable against third parties.
Include security interest
The Personal Property Securities Act has given suppliers of goods great deal of power and simple way of implementing it. The old retention of title clause will now be construed as ‘super security’ and will give the supplier security that will rank ahead of bank security interest created by general security agreement (what is akin to the old debenture) in the same goods or proceeds. This is referred to in the industry as ‘PMSI’. What security interest you obtain is matter of construction of the terms of the agreement. For instance, it is possible to claim PMSI in the goods you supply, and also to claim general security interest in some or all of debtor’s other assets if the customer is prepared to sign term sheet that contains such clause. My advice is to include both PMSI security interest over goods supplied and general security interest in all the debtor’s other assets.
It is important to ‘perfect your security interest’. Prior to the supply of any inventory you need to register what is known as financing statement on the Personal Property and Securities Register. This is an electronic register and, once mastered, the registration process is simple and takes no more than five minutes.
You can also include in your terms of trade the right to protect your security interest by the appointment of Receiver. The Receiver would be appointed to seize and sell the assets secured. The threat of appointing Receiver over substantially all of the assets and the undertaking of the business does have the effect of prompting action by recalcitrant debtor.
Include personal guarantee
It is worth including term that the director signing the terms is also personally guaranteeing the debt. The debtor and director may object, but again if you do not ask you will not receive.
Include clause that makes the debtor liable for all costs of recovery, including your solicitor’s actual cost. If you do not include such clause it is highly unlikely you will able to recover your solicitor’s actual costs in chasing down such debt and recovering the same. This makes instructing lawyer to pursue even modest debts economic and shifts the cost of doing so from you to the debtor.
Default interest
You should also include in your terms of trade default interest provision. This should state if your account goes unpaid for nominated period (say, one month), it would attract default interest component for that date. The default interest can be made any amount which is high but not excessive. Previously default rates have been as high as 30 percent although in the current climate the suggestion would be that reasonable default rate would be closer to 23 percent per annum. If the unthinkable happens and proceedings have to be issued, it enables you to claim that rate instead of the current Judicature Act rate prescribed by statute, which is 8.4 percent.
Conclusion
If you incorporate these terms into your terms of trade, you will have powerful weapons which you can use to recover money which is owed. What you will receive is greater ability to control your debtors’ ledger and that could be the difference between surviving recession profitably or being one of many businesses that will fail in this period. M
Bret Gustafson is partner at Kensington Swan, specialising in restructuring and insolvency matters.
