It is an unfortunate reality that your business can be severely affected when one of your customers becomes insolvent. With the current COVID-19 pandemic, it is a sobering reality that many businesses in the supply chain are likely to fail and cause a domino reaction with their contacts.

In part three of Madgwicks Lawyers' Coronavirus and the Law series, Special Counsel Catherine Ballantyne provides some practical tips for getting prepared in light of the possible consequences of a customer becoming insolvent due to the pandemic.

In the beginning

It is important at the start of a new business relationship that you implement some strategies which can minimise your exposure if your customer is insolvent:

  1. Perform a credit check prior to agreeing to supply your goods or service. If they have a bad credit history, request funds upfront or cash on delivery.
  2. Ask for a personal guarantee from the director (if you are dealing with a corporate entity) and perform a property search to see if the director owns any property in their personal name. This allows you to seek payment from the director personally if an administrator or liquidator is appointed to the corporate entity.
  3. Have your paperwork in order – whether it is a contract or your standard terms of trade, ensure that it is current and able to be relied upon if enforcement is required to procure payment.
  4. Be aware of the Personal Properties Securities Act – seek legal advice as to whether you are able to register your interest on the Personal Properties Securities Register ("PPSR") and ensure it is done correctly and as soon as possible.
  5. Ensure that your PPSR interest is registered over the correct entity – in many cases if you are dealing with a trading trust, you need to be careful that you are securing the trust's property and not just the assets of the corporate trustee. This is because a corporate trustee often does not have any assets of its own. It is a common mistake to register a security interest over only the corporate trustee and not on the ABN of the trust.

Once you are trading

You should constantly be vigilant throughout your business relationship to ensure that you keep your exposure to a customer's insolvency in check:

  1. Invoice often so that if your customer is under financial stress you are aware of it sooner rather than later.
  2. Be firm about your terms of trade – do not allow outstanding amounts to get out of control and be prepared to stop supply if payment is not forthcoming.
  3. Keep your paperwork up to date – ensure that any personal guarantees cover all amounts owing and that PPSR registrations are current and do not need to be updated for new equipment or new security interests.
  4. Be prepared to take legal proceedings – although it may not be palatable, sometimes the only way in which to be paid is to have your lawyers commence legal proceedings.

In summary

Although a customer's insolvency cannot be avoided, if you follow these tips you place yourself in the best possible position for recovery.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.