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Commercial and Corporate update: Retention of Title — Bad debts getting you down?

Nov 9, 2011

Bad debts getting you down?

Getting paid by customers can be a battle and it is essential that you employ effective tools and tactics to assist in securing payment from debtors.

Properly drawn credit applications and trading terms are cost effective weapons to make sure you get paid. A hard fought for sale is worthless, and even damaging, if you do not get paid or if payment is long delayed.

Allowing debtors to be in control of when (or even if) to pay can clearly be very damaging for any business.

What can well drafted trading terms do?

Well drafted trading terms can be used to attack a debtor for payment and as a shield to protect you from claims. Effectively drawn trading terms can:

  • require debtors to pay your accounts on time or risk payment of interest and administration charges;
  • assist you to become a secured creditor and rank in priority to other creditors;
  • require the debtor to pay your legal costs of recovery;
  • require a company’s directors to pay you if the company does not;
  • allow caveats to be lodged over land owned by a debtor and its directors;
  • facilitate the appointment of an administrator to the debtor company, i.e. when a debtor does not pay, someone else is in charge of the company;
  • permit the recovery of goods that have not been paid for via retention of title provisions;
  • require a debtor to raise its claim for defective goods and services within a short period of time after delivery (e.g. seven days after delivery and not six months later when it is being chased for the debt);
  • minimise your exposure to claims for damages and compensation from a debtor;
  • protect your intellectual property, e.g. labels, designs, copyright etc.;
  • stop debtors from using spurious claims as a means to delay, avoid or reduce payment.

Don’t delay

Don’t leave it until it is too late.

In these uncertain economic times it is important that you stack the deck in favour of you getting paid or recovering your goods. If you believe one customer “going bad” will hurt your business, imagine 2, 3 or more.

To illustrate how well drafted trading terms can assist you to get paid, ponder this question – who would you pay in the following example?

  • Bill: who has sent a letter of demand begging for payment; or
  • Bob: who has exercised powers under his trading terms by:
    ?   registering a debenture charge over your company;
    ?   lodging a caveat over your family home and investment property;
    ?   placing your company into the hands of an administrator;
    ?   taking steps to sell your properties?

Well drafted trading terms can assist to put you in Bob’s shoes!

Want your goods back?

What can you do if you have sold goods to a customer (and you know they are still holding them) but the customer has not paid you?

  • For example, you have been dealing with a customer for several years and have built up a solid working relationship. Over the past few months you have noticed that the customer’s payments on your 30 day credit account are now slipping into 60 and 90 day territory.
  • Due to the long standing relationship, you are prepared to accept this minor hiccup. Then the week after having shipped $10,000 worth of goods to the customer you get the dreaded letter that an administrator has been appointed to the customer.
  • That shipment — combined with the last 90 days of accounts overdue — leaves you with a total exposure in excess of $40,000.
  • Can you get your goods back even if they are still in the customer’s warehouse or store shelves?
  • The bad news is that, unless you have a well drafted retention of title clause that has been sufficiently incorporated into your trading terms with that customer, the goods are already the property of the customer (even in administration or receivership) regardless of whether or not they have been paid for.

What to do?

It is often (incorrectly) assumed that provided that words to the effect of ‘title in goods does not pass until payment is made’ is set out at the bottom of an invoice, it is possible for the unpaid goods to be “reclaimed” from the customer.

This is incorrect.

In most instances a clause to that effect will not be sufficient and is of little help in assisting you to retrieve your goods. Consider the following possible scenarios:

  • What happens when you turn up at the customer’s premises to retrieve your goods and they simply say ‘no’?
  • What happens if the goods have been partially incorporated into other goods?
  • How do you identify the goods?
  • What happens if the customer has marked some goods as sold?

In a recent landmark decision, the High Court set down the guiding principles of what is required for a retention of title clause to be effective. It is important that your trading terms and invoicing comply with the principles set out in that decision.

It is also important that you not only have an effective retention of title clause, but that you also take steps to make sure it is ‘incorporated’ into your dealings with the customer. Merely putting a clause on an invoice is often futile – it’s like closing the door after the horse has bolted.

Knowing how to have those clauses effectively form part of your dealings with your customers is another vital part of the equation.

In most instances, a properly drafted and correctly incorporated retention of title clause will allow you to recover your goods (and in some instances recover payment for goods already sold by the customer) if payment has not been made even if a receiver or administrator has been appointed.

More information

For a review of your current trading terms or to see how a credit application and trading terms can assist you to get paid, contact Darren Brown, Principal Lawyer, on (03) 8600 8867 or dtbrown@kcllaw.com.au.

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