Simple Ways Trade Suppliers Can Improve Securities
When bad news is received by the credit department that one of its customers has gone into insolvency administration, the prospects for unsecured creditors against that company are often poor.
Statistics from ASIC reveal that in the 2018 financial year that 92% of administrations had no dividend to unsecured creditors at all and that only 3.2% of administrations had dividends over 10 cents in the dollar. Of course, that dividend in most cases does not get paid for many months, if not years after the debt became owing. This leaves the supplier who has supplied their goods on credit in good faith high and dry, usually waiting for its unpaid debt for a substantial period of time.
However, there are steps that can be taken by a supplier to improve its security position so that in the event of a customer’s insolvency the supplier is not solely relying on liquidator’s dividends. Well drafted terms and properly registered securities will increase the chances of a recovery of unpaid debt over a liquidator’s dividend for unsecured creditors.
Overleaf is a summary of the various types of securities including what is needed to obtain them and commonly associated problems.
In this article we summarise the various securities and rights that can be obtained by a creditor which include:
- - Taking a security over the debtor assets of the customer;
- - Putting provisions in the terms of trade which provide that ownership of unpaid goods remain with the vendor (‘retention of title’);
- - Taking a personal guarantee from the directors;
- - Taking security over the directors assets to support the guarantee;
- - Taking out an insurance policy to cover unpaid debt owing by a customer in the event of it going into insolvency administration.
Future articles will go into detail on each of the securities.
- Taking Security over Debtor Assets
A trade creditor is able to take a security interest over all the assets and undertakings of a customer to secure any debt owing. In fact a trade creditor can obtain all the rights a bank would have over the customer with well drafted clauses in the credit application.
In order to obtain security, it is as simple as ensuring that the terms of trade between the supplier and the customer contain relevant clauses that provide for the security.
A sample clause could be:
‘In consideration of the supplier supplying goods on credit terms to the customer, the customer agrees to provide the supplier with a charge over all of its assets both real and personal to secure payment of the debt’.
In order to make this clause enforceable in the event of external administration of the customer it is necessary that the interest was registered on the Personal Property Security Register.
The addition of this simple clause and the registration itself puts the supplier in a much better position than a supplier who did not have such a clause.
The supplier’s security interest over assets of the customer would be subject to any earlier security interests over the same asset and also possibly behind any unpaid supplier for particular assets.
Retention of Title security interest
A standard provision contained in suppliers of goods term of trade is a ‘retention of title’ clause. Creditors with this clause are generally in a significantly better position than creditors with only unsecured claims as they stand the chance of getting their unpaid stock back to reduce exposure.
In the event of the insolvency administration of their customer, creditors with the benefit of this clause in their terms of trade can:
1) seek repossession of unpaid goods from the insolvency administrator;
2) seek payment of the realisation proceeds of the goods if sold by the insolvency practitioner.
Unsecured creditors without the retention of title clause are unable to have their unpaid stock returned.
In order to enforce retention of title clauses against insolvency practitioners it is crucial that the security interest be registered on the Personal Property Securities Register as a ‘purchase money security interest’. If it is not properly registered then the unpaid goods will become part of the insolvent estate to be shared by all creditors.
A ‘retention of title’ security interest is available to all suppliers of goods and is easily implemented through a clause in the terms of trade. Having such a clause may even allow a supplier to defend liquidator’s unfair preference claims in the event the supplier receives payment of its debt in the period prior to the customer’s liquidation.
One of the best methods to ensure that a creditor is at the top of the queue for repayment is to obtain personal guarantees from the directors. A director having signed a personal guarantee is personally liable for payment of monies owing by the customer.
Often customers faced with financial difficulties take steps to repay debts owing to those creditors with personal guarantees in priority in order to preserve the guarantor’s personal estate.
It is best practice for the personal guarantee to be provided in writing and signed at the opening of the account stage but of course this can be obtained at any stage. There is no need to register the interest of a personal guarantee on any register.
Some well drafted guarantees also provide that the guarantor grants the supplier security over the guarantor’s personal estate. This clause puts the supplier in a significant advantage over creditors without the benefit of a guarantee or security. For example a creditor with security can lodge a caveat over any real property owned by the guarantor.
Trade credit insurance policy
What should also be considered by credit managers is a trade credit insurance policy to insure against the insolvency of the buyer. While purchasing this policy requires an initial outlay, it will lead to a quick recovery of the insured portion of the unpaid debt.
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