NEWS LETTER WINTER 2007
02 09 2007
This publication is produced by Foremans Business Advisors specifically focusing on insolvency issues relevant to accountancy practices and their clients. In this edition we look at whether your clients are doing all they can to protect two main asset groups - stock and debtors.
HAVE YOU ASKED YOUR CLIENT THE QUESTION?
When was the last time you asked your client whether they had “Retention of Title” on the supply of their goods? It could make the difference between your client being an unsecured creditor in an insolvency situation with little prospect of receiving a dividend as compared to your client being entitled to recover its goods in full from the insolvent debtor.
As Liquidators, we are amazed at the very limited number of suppliers who have taken the step of inserting a Retention of Title (“ROT”) clause into their terms and conditions of supply. A ROT clause generally provides that title or property in the goods does not pass to the buyer until either:
- the buyer has paid the supplier in full for the goods the subject of the invoice (a simple clause); or
- the buyer has paid the supplier all monies owing for all goods supplied to the buyer (an all monies clause).
The advantage of having an all monies clause as compared to a simple clause is that under a simple clause the supplier has to be able to identify the goods to a specific unpaid invoice. Under an all monies clause the supplier has to be able to identify it as stock supplied by it.
Many suppliers rely on their ROT clause being on their invoices or statements as acceptance by the buyer of that clause. The mere presence of an ROT clause on an invoice delivered to a customer at the time of or following delivery does not prove that the buyer agreed to the goods being subject to ROT.
To improve your clients’ recovery chances, you should be recommending that your client also inserts the ROT clause into its credit application form and have an official (e.g. director) of the buyer sign off on the credit application form before commencing trade.
Remember that if your client changes its name or wishes to vary its terms of trade it should provide the buyer with the amendments (including the ROT clause) and have the buyer sign off on such changes as agreed.
Identification is not the only hurdle for suppliers who have a ROT. There is also the question of whether the buyer has agreed to the clause being part of the terms of trade, whether the clause is clear and not ambiguous and whether the goods are still in a collectable condition (e.g. not on-sold, mixed or affixed).
Having a ROT clause, such as an all monies clause, may not provide your client with a guarantee of recovery of the goods it has supplied, as against a Liquidator, but your clients’ prospects are significantly increased as compared to where a suitable ROT clause does not exist.
PERSONAL GUARANTEES
On many occasions your clients will be supplying goods and services to its customers on credit and where the customer is a corporate entity. To improve your clients’ prospects of recovering its debtors, your clients should have a policy of ensuring that all customers have signed a credit application and that the terms of trade within that credit application include a provision for the execution of personal guarantees where the prospective customer is a company. This should be done before your client commences trade with any new customer.
We often hear from a practical perspective that the supplier didn’t have a credit application and personal guarantee executed for the sole reason that they were “too concerned about upsetting the customer” to insist on a credit application and personal guarantee being completed. This is an extremely conservative and outdated view in our opinion and often driven by the sales people in an organisation who sometimes don’t appreciate that not all sales are good sales (i.e. if you ultimately don’t get paid).
The above concern is normally misplaced as business people in the 21st century accept that credit applications and personal guarantees are simply part of doing “everyday business”. In reality, your clients should give serious thought to not dealing with anyone that is not prepared to agree to its trading terms.
Our philosophy is “if you don’t ask you don’t get!”
Before commencing trade with a new customer have your client send to the prospective customer its credit application with the personal guarantee. If the customer refuses to sign the personal guarantee have your client ask the customer why it is not prepared to sign the guarantee? Do the directors of the corporate customer not believe in the financial viability of their company? By refusing to sign are the directors of the customer simply saying that they prefer that it is your client who should carry the risk of their company failing and not themselves personally?
If they refuse to sign then it is up to your client to make an assessment of the risk in dealing with this particular new customer. At least ask the question!
Do your clients maintain a Personal Guarantee register outlining which corporate customers have signed a personal guarantee? In reverse, do your clients maintain a register of what personal guarantees they have signed?
We recommend that your clients seek independent legal advice before inserting a personal guarantee into its terms of trade or before signing a personal guarantee themselves.
If you have any questions concerning the above topics or about insolvency matters generlly, please contact:-
Carins - Call Todd Kelly or Peter Morris to arrange a free consultation on 07 4052 1655
Melbourne - Call Dean McVeigh or Vincent Savage to arrange a free consultation on 03 9521 6662