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Time to rethink terms of trade

By Helen Smith, Partner and Rebecca Jefferies, Associate

There are a number of ways to minimise bad debt - and in today’s current climate this is more important than ever.  

Informal supply arrangements of old may not be the best way to go in these tough times, what with increasing numbers of businesses defaulting on payments or disputing accounts.

Having the right systems and procedures in place can, of course, never guarantee payment but it will minimise the risk of costly disputes and losses at a later date. 

With the recession picked to continue for some time yet, businesses should ensure their terms of trade provide adequate protection. Most firms discover that their terms of trade are inadequate when a dispute arises and subsequently risk being left out of pocket.

Reviewing terms of trade now and ensuring they are adequate gives you the best chance of minimising disputes and bad debt.

In the past it was sufficient for suppliers to retain title to goods supplied until payment was received in full. Many terms of trade still have a retention of title clause but is it effective if the purchaser goes into liquidation and/or a third party claims an interest in the goods?

The simple answer is no. A purchaser can grant another creditor security over goods even though they don’t legally own them.  This means that, if the purchaser goes under, the supplier may find that another creditor can take possession of the goods and sell them.

The Personal Property Securities Act 1999 introduced a raft of new concepts and rules relating to security interests over personal property in New Zealand. Many people have struggled to come to grips with those rules but it is important that you do so. For those supplying goods on credit, the traditional retention of title clause is no longer sufficient on its own. If you don’t comply with the Act, you risk not being paid for goods which you have already supplied and then having to deal with a liquidator, receiver or a third party claiming a competing interest in the goods. 

So how can suppliers protect themselves?

Review your terms of trade to ensure adequate protection. The cost of doing so is likely to be far less than the cost later if the terms of trade are found to be inadequate. Terms of trade should deal with the requirements of the Personal Property Securities Act as well as other matters relating to the supply including terms that will apply if things go wrong.

Review your engagement processes. For a security interest to be enforceable, the purchaser must sign or agree to a security agreement which meets the requirements of the Act.  You may have terms and conditions which meet all the requirements but unless you can show that the purchaser has signed or agreed to them, they will offer no protection. 

Register your interest in the goods on the Personal Property Securities Register. If you supply goods on credit and register a financing statement on the Personal Property Securities Register you will have priority for your security interest in those goods. The Personal Property Securities Register is accessed online and registration is relatively straightforward.  Beware the strict time frames to register. If you register outside these times, you risk losing the goods to a prior ranking secured party.

Suppliers should also be thinking about undertaking credit checks on their customers, getting payment up-front, obtaining personal guarantees and reassessing their credit policies. This applies to those businesses supplying services as well as goods.