The Credit Conundrum and the Ppsr
Prior to accepting an appointment as company liquidator, we always conduct a company search. That search includes, amongst other things, a credit check report, which includes details of enquiries, defaults logged etc.
Invariably these reports disclose that the company that is about to enter liquidation has a remarkably good credit score. This leads us to ask the questions:
Are your clients relying on the credit score alone?
What are your clients considering when making their credit decisions?
A large amount of companies that are in liquidation have creditors that extend beyond the Australian Taxation Office and other regulatory bodies whose debts are created as a result of the law (i.e obligations to withhold PAYG & GST). However most other creditors have either made a credit decision or the relationship over time has resulted in credit being extended to their client.
When the company enters liquidation, these creditors often lament the loss and comment on the significant impact that it has on their business, its cash flow and the perilous position it puts them in. In short, they have extended credit to a point that is detrimental to their own business as a result of the liquidation.
Comments such as:
If I didn’t provide terms I would not have got the contract / sale.
You have to provide terms in this industry.
They were on COD for ages then they had this big job.
We also see credit applications that request 3 references. We rarely see any attached file note or details relating to these references being contacted. If they are, there is rarely any record of what was said.
These applications generally include terms and conditions of trade which require signing and, in most instances, include a personal guarantee with a charging clause (which provides for the lodgement of a caveat on the guarantor’s property to secure payment) that also requires signing. Often times we see either one or both of these documents unsigned, but credit has still been provided.
Companies should have strict credit policies. These policies should reflect your own business, your own risks and not those of the company credit is being provided to. All companies extending credit for supplies should have up to date terms and conditions of trade, consider having a personal guarantee or a charging clause to secure the advances. After all you are providing interest free loans. The terms should be enforced and a follow up procedure should be in place. Companies generally fail due to an absence of cash flow, extending credit without security or proper procedures for debt collection that impact your own cash flow.
Another way to secure your credit supplies is the PPSR. If you supply goods on credit your credit terms should include a PPSR registration clause which results in the company receiving credit granting you a charging clause over the supplies you make. This may allow you to recover your goods in the company’s possession even after it enters liquidation. Without a PPSR registration you have no rights to such goods and a liquidator can sell the goods for the benefit of all creditors.
Notably it has now been 7 years since the PPSR regime commenced. After 31 January 2019 registrations may now start lapsing. Companies should be checking their PPSR registrations for their expiry dates and know when they lapse. It is a great opportunity for companies to review their terms and conditions, their personal guarantees, charging clauses including PPSR registrations and ensure that the company receiving credit signs these updated documents. In addition, the ability to trace goods supplied on credit should be considered if the day ever arrives when a liquidator is appointed to the customer.
Depending on the goods you supply you may not be able to register on the PPSR or may choose not to register as you would prefer to enforce a debt rather than seek recovery of the goods. This is common for goods that are seasonal such as fashion. However in a liquidation scenario those goods would be lost to the liquidator.
In short Credit, is not the right afforded to the purchasing company it is an indulgence provided by the company selling the good or service. Accordingly do your homework, consider the effect of non payment and secure against it where possible.