Article - Protect your business from bad debtors
Owners or managers of small to medium sized businesses will be increasingly aware of how the global credit squeeze is affecting New Zealand. As finance companies collapse, fuel costs escalate and interest rates rise (amongst other things) the pressure grows for everyone to cut costs and make savings. One common response from debtors to these pressures is to delay paying creditors – including you. Effectively they are using you as a low cost source of extended funding. Planning how best to protect your business from bad debtors involves both practical and legal issues, as set out in the following paragraphs. Take time at the outset to ensure the customer can and will pay.
Sometimes the promise of a new order for work overrides common sense enquiries at the time about the customer’s circumstances and their ability and willingness to pay the price you require. Ensure that you have full details of your customers before you commit to the work. This includes all of their contact details but also the legal name and type of entity. All too often creditors go to take enforcement action only to find they are missing details that compromise debt recovery. For example, you might assume your customer is John Brown trading as John’s Timber Supplies only to find out that he was representing John Brown Limited trading as John’s Timber Supplies. This can result in you having no action against John Brown personally, only his limited liability company, which might be insolvent.
If your customer is a small company, obtain a guarantee from the directors. It is often more effective to pursue a director personally, rather than a company.
Have written terms of trade that the customer signs before you supply the product or service. This makes it very difficult for the customer to dispute your terms at a later stage, which often happens if the terms are posted with an invoice, after supply, or not recorded in writing at all. Include terms that:
• state when payment is due
• set a default interest rate for late payment
• provide for recovery of full legal costs, should you have to take enforcement action.
If appropriate, include specific reference to creating a security interest pursuant to the Personal Properties Securities Act 1999. This will enable you to become a secured creditor. If you do this, you will also need to be aware of the process for registering a financing statement on the Personal Properties Securities Register at www.ppsr.govt.nz/cms, without which your security won’t be complete and is likely to be ineffective.
Take steps as soon as a customer is late. Speak with them if possible. If not, write to them. Too often debtors are not contacted early enough and a problem that could have been a minor one becomes a major one.
The overall key is to take care with your procedures and documentation at the outset of the transactions. It may require time and money to put everything in place but it will more than pay for itself over time.
Lawyers often deal with creditors who fail to recover some or all of their debt, despite having provided an excellent product or service, because they haven’t taken enough care or obtained adequate advice when setting up their paperwork and procedures.
If your customer is a small company, obtain a guarantee from the directors. It is often more effective to pursue a director personally, rather than a company.
Have written terms of trade that the customer signs before you supply the product or service. This makes it very difficult for the customer to dispute your terms at a later stage, which often happens if the terms are posted with an invoice, after supply, or not recorded in writing at all. Include terms that:
• state when payment is due
• set a default interest rate for late payment
• provide for recovery of full legal costs, should you have to take enforcement action.
If appropriate, include specific reference to creating a security interest pursuant to the Personal Properties Securities Act 1999. This will enable you to become a secured creditor. If you do this, you will also need to be aware of the process for registering a financing statement on the Personal Properties Securities Register at www.ppsr.govt.nz/cms, without which your security won’t be complete and is likely to be ineffective.
Take steps as soon as a customer is late. Speak with them if possible. If not, write to them. Too often debtors are not contacted early enough and a problem that could have been a minor one becomes a major one.
The overall key is to take care with your procedures and documentation at the outset of the transactions. It may require time and money to put everything in place but it will more than pay for itself over time.
Lawyers often deal with creditors who fail to recover some or all of their debt, despite having provided an excellent product or service, because they haven’t taken enough care or obtained adequate advice when setting up their paperwork and procedures.
Author: Legal News Letter 2008
Distributor: AnnanLaw - Lawyers Tauranga
For more information contact: AnnanLaw
Posted 21 November 2008
Distributor: AnnanLaw - Lawyers Tauranga
For more information contact: AnnanLaw
Posted 21 November 2008