GETTING PAID PART 1 DEBT MANAGEMENT. Goods

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1 GETTING PAID PART 1 DEBT MANAGEMENT Most businesses involve some element of credit, at which point debt management becomes an essential element of your business. Many excellent businesses fail because they are not paid for the goods and services they produce. You want to make sure that your business is not one of them. Goods There are two ways to supply goods; with security and without. If you supply goods with no security, then your customer owns the goods and owes you money. Your rights are limited to recovering the money owed. If you sell goods with security, you retain ownership or an interest in the goods sold if your customer does not pay. You can therefore attempt to recover the asset. Retention of Title (Romalpa) Clause This is a clause in the contract that states, if the goods are not paid for, ownership rests with the seller, and not the buyer. Title only passes when the goods are paid in full. If your customer has taken your goods, and not paid for them, you have the right to walk on site and take them back. Consumer Leases Under a consumer lease, you retain ownership of the equipment you have supplied, and your customer is just leasing it from you. In the event that your customer fails to pay, again, you can walk in and take the equipment back. Other Forms of Security It is possible to obtain security over an asset. Examples include a car dealer arranging finance linked to the car, or a piano store financing a piano, where a security interest is lodged on the asset. Ownership has passed to the purchaser, but the supplier can recover the asset if the debt is not paid. Personal Property Securities Act This legislation came into effect in It states that any security interest must be lodged with the Personal Property Security Register. This has not made Romalpa clauses irrelevant, but it means that security interests registered on the PPSR take precedence over unregistered Romalpa clauses. It is possible to obtain a general security interest in all goods of the customer (controlled by the Personal Property Securities Act) or of an interest in land (controlled by the Land Transfer Act and the Property Law Act). If your credit application form or terms of business create security interests, then it is important to register those under the Personal Property Securities Act, to ensure they are fully effective. Under that Act, a purchase money security interest (money used to purchase a particular good) takes priority over any other type of security. But only if it is registered, and registration lasts for five years. Z:\Current Sites\EFG\Gaze Burt\Content\Publications\Getting Paid - Part 1.doc

2 2 Under that Act, there is a five-year default timeframe (after which any continuing security needs to be reregistered). There are also very strict procedures for withdrawing a security interest, once full repayment has been achieved. Due to the compliance requirements, many businesses obtain security interests then play Russian roulette" with the registration process. This is a balance between the risks of not registering, against the administrative and compliance costs of doing so. It is almost inevitable that some loss of priority can be expected, but at least an unregistered security has some priority over a completely unsecured creditor. Purchase Money Security Interest (PMSI) If a creditor supplies funding to allow a company to buy an asset, they create a PMSI security. This is typically for hire purchase arrangements. So, in the event that you fund the purchase of an asset, you will not find your title extinguished by the appointment of a Receiver operating under a GSA (more about that later.) There is a special rule that gives priority to a registered "purchase money security interest" over other types of registered security interests. You hold a "purchase money security interest" (PMSI) in property if you provide credit to the debtor so that the debtor can buy the property. So if you sell property to a buyer under a hire-purchase agreement, and you (not a finance company) are the lender, then your registered security interest will take priority over other kinds of registered security interests, regardless of when they were registered. Credit Contracts and the Consumer Finance Act This recent legislation provides prescriptive rules for the provision of lending money to individuals. It specifies the information and disclosures that must be provided to the consumer and provides options for the debtor to extend payment due to hardship of the debtor. This Act is administered by the Commerce Commission and in one case, the Commission compelled a finance company to pay nearly $600,000 back to customers where the company was found to be in breach of the Act. If you are in the business of lending money, as opposed to providing credit, you need to be in compliance with this Act. Property (Relationships) Act When dealing with a husband or wife, or civil union partners, common property is controlled by this Act. This Act allows for a person's debts to be enforceable on their partner if the debt incurred was for the benefit of both, to improve community assets, or incurred in the course of raising relationship children. Personal Guarantees Many businesses have personal guarantees but find that they are flawed when it comes time to enforce them. A personal guarantee requires two elements: It must be clear that the person signing is liable for the debts of a third party, and there must be consideration for the guarantee. If your client s account is at sixty days, getting a personal guarantee and leaving them at sixty days means there is no consideration for the personal guarantee. However, giving a new client credit based on a personal guarantee does imply consideration. Personal guarantees and indemnities are very powerful instruments if correctly worded and used appropriately. Different Types of Goods Supplying Fixed Items: (Vehicles, fixed equipment, computers, etc.) If the item is leased, you continue to own it, but you must register your interest in the PPSR to protect yourself 100%.

3 3 Even if the equipment is leased and you retain title, if your interest is not secured by registration on the PPSR, you can lose your asset. If you have a retention of title clause, and no PPSR registration, you can lose the asset if it is sold. If you have a PPSR registration, your security is valid even if the unit is sold. Identifiable Stock We are referring to such items like pianos, furniture, etc. If your customer goes into liquidation you will have title and will be able to retrieve your stock from the Liquidator (but not necessarily from a Voluntary Administrator). If the company sells the goods, the party buying them has clean title, and you will only have a claim against the liquidated company. Registering a PPSR security against stock can give you protection but, it is limited to the items remaining on site. Mixed Stock In theory: no difference. In reality: complex. A Romalpa clause becomes worthless if your goods become mixed in with someone else's. Nails, once banged into a house, become part of the house. However, under the PPSA, things are more interesting. So long as your paperwork is in place, you cannot lay claim to your nails, but if your nails constitute 1% of the house, you can claim one percent of the value of the house. Once the Goods are Sold Once the goods are sold, your title in the goods is extinguished unless you have a PPSR claim over a clearly identifiable item. If the goods have been sold, and you have lost title, you may be able to trace the proceeds of the sale. This is difficult in reality. Services Far fewer options arise where you are providing services, and your opportunities to protect yourself from debtors when providing those services on credit are somewhat more limited. You can require prepayment of your services. You can request a deposit. You can request a retainer. Generally services are supplied on credit. If your client does not pay their bill you will need to rely on a different enforcement regime. The next section of debt enforcement will be more relevant. Credit Processes Credit Application and Terms of Trade A signed credit application form setting out of the terms of business is a good start for any debt management regime. Customised, relevant terms of trade that are unsigned are worthless. Once you do get it signed, you need to hold it securely so that it can be easily found and referred to, particularly where it is intended to be the foundation document for repeat business. Where repeat business is not anticipated, signed terms of business or terms of engagement are again the ideal starting point. If you don't set out your terms of trade, but allow possession to pass to your customer or client, you are giving your goods or services away and merely hoping that they might pay you. Terms of Trade on the Back of Invoices This is an unsafe practice, only effective if: The terms on that invoice have been signed by the client and you hold a signed copy of it.

4 4 The same terms have been used with the same client or on a previous occasion, and the particular supply and dispute is on a second or subsequent supply to that client. If you can prove that, then you can probably prove that the client knew what your terms of trade were, and accepted supply on that basis. But you run the risk that the court will find against you. Credit Worthiness Depending on your type of business and the amount of credit to be extended to any particular customer, there is always the issue of verification of credit worthiness. You can require references. If you require them, you should then investigate them. You can require copies of bank statements or of photo identification. You can provide for charging of supplies to credit cards. Most people have them these days. But that takes you back to a credit application form, where you can record the credit card number and get the client or customer to sign, authorising you to debit that card for any goods or services supplied. There are also, of course, formal credit checks from Veda Advantage (formerly Baycorp) and other such entities. If you have a credit application form or terms of business, then it is good practice for your invoice to at least refer back to them, if not repeat them in full. Management Credit control is part of your business identity and reflects the market in which you operate. It is likely to respond to economic conditions, and may be part of your marketing approach, and a point of difference from your competitors. For instance, while the use of lay-by as a mechanism has fallen into misuse, a tightening credit market and the advent of the No Asset Procedure may see a resurgence of that form of credit. Once you have a system in place it is important to use it consistently (and keep it under review and change it if it is not working satisfactorily). This means making sure you get credit applications or terms of business, or invoices, actually signed and properly filed. This may involve considering how you pay your staff. If you have commission based sales staff, do you pay them on the basis of signed terms of business? Or just on the basis of goods supplied? Whatever your system is, it needs to reinforce itself at each level of your operation. Make sure you chase your debtors, and be known for doing so. Once the message is in the market, you will find you spend less time doing so. Those who want to take goods or services without paying for them will deal with your competitors instead. The new processes of No Asset Procedure and Voluntary Administration significantly increase the risk to creditors. It makes efficient debt management systems even more important. In relation to Voluntary Administration, it also makes access to prompt expert advice a lot more important. Five Steps to Prudent Debt Management (a) (b) (c) Signed terms of trade, including a retention of title clause, (and a personal guarantee if possible) signed by your customers, stating that title in the goods remains with you until they are paid for in full. A clear description of the goods being supplied. Be mindful here. If you normally supply videos to a store, and begin supplying DVDs, your title could lapse. Best to call it electronic equipment, including videos. Your right to allocate payment. If you supply ten cars and the debtor pays for five, allocate the payment across all cars, leaving them all partially unpaid. This way you can lay claim to all ten.

5 5 (d) (d) Have your customer sign the terms of trade. Do not just give them a copy. Ensure you keep a signed copy. Register your interest in the PPSR. The website is easy to use Getting Paid Part 2 We have prepared a separate document that addresses the ways in which you can maximise your likelihood of getting paid. If you do not have that document, please ask us for a copy, or visit our website If you would like our assistance with any matters raised in this article, please contact us.