A spate of recent liquidations and insolvencies has reminded us how important it is to make sure that the debts that people owe us are secured.
Resellers are intermediaries in the retail supply chain, and so are disties. So you all buy goods and resell them, usually on credit. If you have sold goods to a customer who goes broke before you get paid, what are your chances of getting your money?
First, if you don’t have written terms of trade, they are pretty well nil unless the liquidator manages to scrape together enough money to pay secured creditors, IRD (PAYE and GST because there probably isn’t enough profit to pay tax on) staff wages for the last 4 months, the liquidator and court costs – and still have some left over. You’re going to be an unsecured creditor, so you will join the others who are last in line. Get your terms of trade drafted as soon as possible if you’re in this situation, by a lawyer who works in the commercial law area. This shouldn’t cost a lot at all but must be adjusted for your own business. Don’t just copy someone else’s terms and conditions off the internet – they may not be up to date. And you’ll be breaching the lawyer’s copyright.
Usually, the banks take all of the money as secured creditors. What a surprise! But if that was always the case, no-one would ever supply goods on credit and we would have a cash economy. That wouldn’t please the banks either. So the law allows sellers of goods on credit to protect themselves, but they have to actually do it by properly drafted contracts. Oral contracts do exist, and have terms implied into them by the Sale of Goods Act, but none of those terms address security for the debt. No written contract, no security.
Even if you do have written terms of trade, you might still be at the back of the line, even if you have that old standby, a retention of title clause in your terms of trade. That’s partly because your contract might have gaps in it (see above) and partly because you have to carry out a few procedures to protect yourself. If you don’t do that – why, you’ll just be donating money to the bank.
In New Zealand we have a statute called the Personal Property Securities Act 1999. What it does is allow creditors to take security over the assets of a debtor. There is a special provision for people who supply goods on credit for resale: they can have what is called a Purchase Money Security Interest (PMSI) over the goods they have supplied but have not been paid for – and also over the proceeds of sale of those goods. A PMSI has a “super-priority” – it beats a general security interest for the provision of funding, such as bank credit secured over all the assets of the debtor. So the liquidator will sigh, ask you to identify the goods supplied and not paid for, and hand them back to you. And if your contract is drafted correctly it will still keep a general security interest over goods you supplied in the past that have been paid for. The benefit of that one is that for general security interests the first in time to be registered wins. That aspect gives you a fighting chance of getting more money back – a chance which increases over time.
Did you see that word “registered”? Here’s the important part: not only must your contract be up to scratch and accepted in writing by the customer, but you also have to register your security interest on the Personal Property Securities Register. And that’s something a lot of people forget to do. You can have all the retention of title or security interest clauses in the world, but you’ll be an unsecured creditor if others have registered their security interests and you haven’t. The process is simple, but you have to do it – it’s so that future creditors can see who the customer might owe money to – and who is prepared to give credit. The good news is that you only have to do it once, if your contract works properly, and that will cover you for all future supplies to that customer. It can roll over every five years – don’t deregister it! So have a check: do you have terms of trade which protect your supplies on credit? And do you have registered security interests over the property you supply to your credit customers? If not, do it now. Remember that you need to take both of these steps to be …. shall we say “secure”?
Rae Nield is a solicitor specialising in marketing law. This article is intended for general information, and should not be relied on as specific legal advice. You should consult a lawyer for advice relating to your own specific legal problems. Rae Nield can be contacted at firstname.lastname@example.org.