CORPORATE & COMMERCIAL NEWS, JULY 2009

Getting paid - maximising your chances

In the current economic climate, clients who supply goods or services often tell us that they are having trouble recovering outstanding debts. There are various ways that suppliers can increase their chances of getting paid, particularly if a corporate customer goes into liquidation. If you are in the business of supplying goods or services and want to maximise your chances of getting paid, rank ahead of other unsecured creditors and minimise your exposure to costly disputes and losses at a later date, then it is important that you take steps now to protect your position.

Terms of Trade

Firstly, you should utilise terms of trade to govern your supply arrangements with customers so as to impose safeguards and provide you with practical and legal remedies in the event of customer default. Examples of such safeguards and remedies include the right to retain title in the goods until payment for the goods has been made, the creation of a "security interest" in the goods (refer to discussion below) and in the proceeds of sale of the goods and the ability to
recover the goods from the customer's premises upon customer default.

To maximise enforceability, your terms of trade should be in writing and need to form part of the contract for supply of your goods and services. This means that your customers should have a copy of your terms before they place an order with you and ideally, you should make sure that your customers have returned a signed copy of the terms of trade to you.

Security Interests

If you supply or lease goods on credit to customers, then your terms of trade should provide for the creation of a “security interest" in the goods (and in the proceeds of sale of the goods) for the purposes of the Personal Property Securities Act 1999 (PPSA) until such time as payment in full has been made by the customer. In short, a "security interest" is an interest in personal property and in the context of a supply arrangement, secures your interest in the goods supplied (subject to the PPSA's rules regarding perfection and priority).

A "security interest" will only give you priority over other creditors if it is correctly registered on the Personal Property Securities Register. In order to obtain the requisite security ranking, "security interests" need to be registered within the PPSA's prescribed timeframes and accurately record the nature of the security interest and the description of the goods. Registration out of time may mean that you lose your priority to a prior ranked secured party.
Also, a lack of accuracy in your registration can invalidate the registration.

A security interest will only be enforceable against your customer if it is in writing and signed (or assented to in writing) by that customer (which underlines the importance of obtaining the written agreement of a customer to your terms of trade).

Revoke Rights to Sell

Your terms of trade should revoke the rights of an administrator of your customer to sell your goods where you have not been paid for them. To be effective, this right (a purchase money security interest or PMSI) must have been registered on the Personal Property Securities Register within 10 working days of the delivery of the goods to your customer. Once revoked, the administrator cannot sell your goods without your agreement or the approval of the Court. This gives you the benefit of being able to negotiate a payment (e.g. cost price) of each item sold.

Other contractual Arrangements

There may also be circumstances where the supply merits the use of a more specific and comprehensive supply agreement, particularly in the case of a supply to a large customer.

In addition to requiring the customer to consent to the creation of a "security interest" in the goods, you could also require a large customer to enter into a general security agreement (which could be incorporated into the terms of trade or a supply agreement) . This provides the benefit of additional security over all the assets of your customer (not just those that you have supplied). However, you should be prepared to rank behind a bank or finance company - if your
customer has any loan or overdraft facility, the lender will typically require that its general security agreement ranks first. An added benefit of taking a general security agreement from larger customers is that if the supplier ever goes into voluntary administration, the supplier has a 10 day window of opportunity to enforce its security over the assets of the customer.

Another option is obtaining a personal guarantee from the owner(s) and/or the director(s) of the customer. This will allow you to pursue those persons standing behind the customer personally for any amounts owing by the customer, even if the customer is insolvent. Guarantees must be in writing and must be signed by the guarantor. A guarantee could be recorded by way of a separate document although they are more likely to be incorporated into the terms of trade or a
supply agreement, in which case, the guarantor would need to be a party to that contract.

Practical Steps

In our current economic climate, there is an increasing need for suppliers to review and monitor their credit policies with vigilance. Getting payment, or a part payment, upfront is hard to achieve but is increasingly asked for. However, payments made by a company prior to its liquidation (and at a time when it could not pay its debts as they fell due) are at risk of being reversed if they result in you receiving more in payment of the debt that you would have in a
liquidation.

Conclusion

There are several highly effective steps that you can take to protect your position and strengthen your debt recovery procedures. There is no substitute for taking and acting on good legal advice. In particular, you should have your terms of trade reviewed from a legal perspective to ensure that they are current and working as intended.

If you would like any further information or explanation in relation to the issues discussed in this article please contact Geoff Hosking, Partner, Hesketh Henry Lawyers, New Zealand on +64 9 375 8693 or email geoff.hosking@heskethhenry.co.nz, or Kara Wilton, Solicitor, Hesketh Henry Lawyers, New Zealand on +64 9 375 8700 or email kara.wilton@heskethhenry.co.nz.