There are only weeks now until Christmas and the inevitable rush of business before the end of the year.
While a rush of business can definitely be a good thing, it can also be a bad thing if, like most businesses, you don’t operate on a cash-only basis.
The reality of year-end can be that increased trading means increased credit to customers means increased accounts receivable means increased potential for bad debts.
Now is a good time to check how you do business and take steps to help yourself in the event you need to chase bad debts into next year.
Our top tips are these:
Get the terms of trade in writing, correct, complete and signed
A written agreement is typically quicker and easier to enforce than an oral agreement. That said, it’s not much help to anyone if the written agreement doesn’t actually set out all the trading terms between you and your customer, or some of the terms are wrong.
For example, we’ve seen credit applications that include a personal guarantee with a blank space for the amount of the guarantee, nothing in the terms of the agreement to say whether the guarantee is limitless or capped, and then email correspondence between the parties saying it’s both. Unsurprisingly, when things go bad, there’s an argument about the amount of the guarantee.
We also see lots of written agreements that are undated, unsigned, marked “draft” or said to be read in conjunction with other documents that don’t exist or documents that contradict each other. None of these things make chasing a debt quick, easy, cheap or the outcome certain.
If you haven’t got written terms of trade with your customers, get some, and if the written terms (including the parties to the agreement) are outdated, update them!
Work out who your customer actually is
Sounds obvious but lots of written agreements we see, including credit applications, name an individual as the customer when in fact that individual is the director of a company that is a trustee of a trust who is the customer. Other written agreements have a business or trading name as the customer, which isn’t actually a legal entity you can sue.
You can certainly chase a trustee of a trust for a debt, but a lot of time and cost can be wasted by first going after the individual only to be told they’re the wrong debtor. Similarly, the wrong entity can’t chase a debt, so make sure you’re trading by your right entity too.
You can’t win any chase for a debt against the wrong debtor or by the wrong creditor!
Do your own research about your customer
We have ACNs and ABNs in Australia. Every trading entity has one and you should insist on at least one of these numbers being on any agreement between you and your customer. Then, go look up that number to make sure the one you’ve been given matches the name of the customer entity.
Your own lookup of the number will also reveal things like if the ABN is current and registered, if the entity is in external administration or was in the past, who any directors are, and what sort of entity you’re dealing with.
Help us to help you chase a debt by doing some preliminary and basic research about your own customer!
If the debt is growing, stop credit
If you’re supplying goods or services and the debt for those goods or services is growing with no sign of payment (or no believable explanation about the timing of payment), seriously consider stopping trade with that customer to limit your exposure.
Putting a customer on “stop credit” or ceasing to trade with them altogether won’t necessarily get the debt paid or save you from a preference claim at a later stage by a liquidator or trustee in bankruptcy of the customer, but your loss will be easier to swallow as single-digit thousands rather than tens or hundreds of thousands of dollars.
Get a credit control process in place or if you already have one, use it!
The talented team at Meyer Vandenberg can help you with any of the issues discussed above, just call…
For more information contact the Commercial Dispute Resolution Team: