Dealing with Receivers as a Supplier

We all know that if a customer goes into receivership unless you are a secured creditor you have basically done your dough.

However this is not always the case because sometimes the receiver actually tries to trade out of the receivership.  If you were supplying the company that went into receivership what should you do if the receiver asks you to continue the relationship?

What to do

Remember that ABC Ltd (in receivership) is not the same entity as ABC Ltd. This means that any contracts you had with ABC Ltd do not just 'roll over' but need to be renegotiated.

Remember also that a receiver is acting in the interest of the secured creditor who appointed the receiver. This is where a receiver differs from a liquidator, as a liquidator also has to take account of all creditors.

• Check that you can cancel delivery of goods or services to ABC Ltd - this should be part of your terms and conditions. You may be legally obliged to complete a contract even if you know you won't get paid for it (although this doesn't usually happen). 
• Consider changing your payment terms to cash on delivery (or payment in advance if you provide services) rather than say a 30 day account.
• If delivering goods take advantage of the Personal Properties Securities Act

Feel free to contact us if you wish to discuss this further, or to find out more read the following article from Angela O'Meara of Johnston Lawrence pubilshed in the Sunday Star Times 18/12/2011

An Interesting Disputes Tribunal Tale - Continued

Further to our blog An Interesting Disputes Tribunal Tale the District Court judge has come back with his decision on granting of an appeal.

I agree with the original applicant. Matters must be brought to finality. As I have pointed out, there are only limited appeal grounds to the District Court. It can never be the position that a party should be allowed an appeal, or for that matter a rehearing, only to correct errors or omissions in their conduct of the original hearing, which might have led to an adverse result. I accept that the conduct of these hearings is over to the parties themselves, before a Referee (in this case a qualified Barrister and Solicitor) .......... they are not entitled to representation by lawyers. 

However, the offset for that is that they are on an equal footing, that the hearing takes place less formally than in a Court, rather sooner, and of course at much less expense for the parties. The "substantial merits and justice" provisions of S.18 (6) of the Act apply. Consistent with these factors, decisions are expected, as was the case here, almost immediately, or as soon as can be. 

The appellant appears to me to have misunderstood the very limited nature of the appeal rights to the District Court, treating them as some kind of further re-hearing application. This is not right. It is not an appropriate case then for me to grant leave to bring the appeal out of time.

So what does this mean?

Quite simply, once you have been through the Disputes Tribunal process and the Referee has given his/her decision then that decision is binding unless one party has been treated unfairly.

Debts Hit Small Firms Survey

We are often told we must be busy right now. Fair comment. But if we are busy then how is this affecting our clients?

A recent survey by Veda Advantage was reported in the Dominion Post on 10 Oct 2011. The report reads:

"The country's small and medium size businesses in the construction, property/business and manufacturing industries have been the hardest hit by bad debtors this year"

"Most bad debts were under $10,000 but 17 per cent of firms surveyed advised they were carrying bad debts worth more than $10,000."

We would agree with these results although our sample size is a little smaller. The report also goes on to say:

"It was disturbing 48 per cent of firms said they did not run a trade credit process, meaning they were not assessing risk when they advanced credit and they were not keeping a close eye on a client's ongoing ability to pay."

Again, we would agree that these numbers are disturbing although we have found a number of our client's are now much careful with who they deal with and are obtaining credit reports and taking notice of industry scuttlebug. We also have a number of client's who contact us for any market infomation we may have. We have no problem with this and welcome this opportunity.


The other issue of concern for businesses in the construction industries is how many do not seem to be taking advantage of the Construction Contracts Act. For more infomation about the act see my blog How to save yourself from the next Signature Homes debacle

Why Terms On The Back of Invoices Don't Work

Even though it appears to be common practice to put terms and conditions on the reverse of invoices in the hope that this makes them enforceable, this may not be the case.

When it comes to a creditors ability to pass on collection costs to a debtor disclosure is the key.

I say this because funny things can happen at the Disputes Tribunal. In a recent case the tribunal found that "While it is possible that a term may be considered to have been incorporated into a contract by a course of dealings between the contracting parties, the law requires that reasonable notice of the term is provided."  

In further explanation regarding this case the tribunal stated that "While there is a reference to terms of trade on the bottom of the applicant’s invoice, I do not find that to be sufficient to allow the applicant to assert that the respondent had notice of these particular terms. The clauses about collection and other costs and disbursements (including solicitor-client costs) are buried in the small print on the back. There is no evidence of any warning (other than the small print on the back of the invoice) that these unpaid invoices would incur collection and other costs."

Unfortunately this lead the tribunal to find that "As a result of this, I do not find that the applicant has established that it is entitled to collection and other costs."

So what does this mean to you?

Firstly if you have continuing business with a debtor get a credit application signed. This is the most enforceable contract.

If a credit application is not feasible put the most important terms on the face of your invoices. We consider the most important to be the ability to charge collection costs, interest, and fees in the event of non-payment. 

Romalpha type clauses need to be worded in a certain way to comply with the Personal Property Securities Act,  and given the space restrictions on the face of invoices this cannot be done.

Finally - make sure you use a warning letter of some sort setting out the financial consequences of default. We have a suggested 7 day warning letter you are welcome to use.

 

An Interesting Disputes Tribunal Tale

I suppose it had to happen but a debtor we have been dealing with has lodged an appeal of a Disputes Tribunal finding with the district court.

Basicially our client did some electrical work to the value of $4164 on the debtors property in October 2009. We were asked to become involved in January 2010. After making several attempts to come to some resolution with the debtor we eventually lodged a claim with the Disputes Tribunal in August 2010. 

At the first hearing the referee could not reach a conclusion as the dispute was technical in nature and beyound his expertise. He decided to appoint an independant investigator to give a report on our client's work. This took some time to prepare and eventually a second hearing was held in June 2011.

The referees decision following this second hearing was in favour of our client but only for $2630. This is not unusal for the Disputes Tribunal as they go out of thier way in an attempt to be fair. Given that the diffrence was far less than the cost of taking action in the District Court our client was accepting of the decsion. Payment was to be amde on 27 June 2011.

Statutory Demand was served on the debtor on 15 July 2011 as no payment had been received.

The debtor then requested a rehearing which was held on 25 July 2011. This request was regected by the referee and his comments were damning I have read;

“the respondent is really wishing to re-litigate and, in colloquial terms, have a ‘second’ bite at the cherry with respect to issues (workmanship and hours) that have been very fully gone into. Whatever force there may be to the opinions of Mr F, the respondent’s ‘right’ to re-open this matter and present the opinions of the expert it has now found must give way to the larger interest in the finality of litigation.”

"The respondent has ascerted that the investigator was not 'neutral' or 'honest'. An attack on an appointed investigator in the forgoing terms is very serious. It is made by Mr R for the first time today. There is absolutely no evidence whatever to support any such aspersions on the investigator. The respondant was wa supplied with a copy of the investigator's report well in advance of the hearing of 13 June. It had ample opportunity to challenge the report, including, if so elected, the investigator's impartiality. I am not prepared to sustain assertions that the investigator was not 'honest'or 'neutral'made part way through the hearing of an application for rehearing"

On 28 July 2011 we received a request from the debtors solicitor to hold off the Statutory Demand as the debtor was going to lodge a application for an appeal with the District Court. We agreed as long as funds to pay the outstanding debt were held under a solicitors undertaking to pay out if the application proved unsuccessful.

The application  for appeal was eventually lodged some 18 days after the cut off point for lodging an appeal.

The District Court judge has now asked our client to comment on this out of time issue which we have responded to opposing the debtor request. We await an outcome.

All in all this case demonstrates how the legal system seems to work in it's own time bubble, but that you can normally rely on a fair hearing so long as you are properly prepared and are able to keep you temper during any hearings.

How to save yourself from the next Signature Homes debacle

As most tradesmen in the Hawkes Bay are aware Signature Homes Hawkes Bay Ltd went into liquidation recently owing a significant amount of money to unsecured creditors. This case is typical of a number I have come across with subbies being worst hit.

The worst thing is that the subbies could have reduced or even stopped their losses if they had had greater confidence that the rules are in their favour.

So what can be done?

Even though someone like Signature Homes gave the impression that they were solid, it was well known for some time that they were as solid as something flushed (thanks to my plumbing friend for that analogy!). Problem is that a lot of contracts still seemed to be done on a handshake.

This appears to be because people are scared of not securing the job, or future jobs.  Therefore they are willing to do business without presenting their own terms, reading the debtor’s terms, or taking advantage of the Construction Contracts Act 2002 (CCA).

The CCA is interesting in that a majority of subbies I talk to think the CCA is too complicated or has no teeth. There is plenty of case law now which gives good indications of how useful the CCA is. It was written to facilitate speedy payment after all. Sometimes even politicians get things right.

So if the CCA has teeth then just how complicated is it to use? As easy as falling off a log really.  All you need to do is ensure your invoices meet the requirements of the CCA. If you do nothing else put the words “This is a payment claim under the Construction Contracts Act 2002” on all your invoices. There are other issues to consider but I find most subbies do this as part of their normal invoicing.

If you aren’t paid on time do not hesitate to issue a 5 day notice to stop work. You don’t actually have to stop work but it sure makes the head contractor sit up and take your requests for payment on time seriously. If you do stop work no other trade can finish your job unless you approve.

The head contractor is required to either pay you in full on due date, or advise why they haven’t paid your invoice. If they don’t do this then the CCA requires that they pay your invoice in full and then claim back any variations from you.

The CCA takes away the head contractors infamous excuse of “I can’t pay you because I haven’t been paid”. Paid when paid clauses cannot be enforced.

Subbies have been given the Construction Contracts Act to use and just like keeping your tools in top condition (do builders still sharpen saws?) get used to knowing when and how to use it.

An issue of Priority

Toll Logistics (NZ) Ltd and ASB had an interesting court battle last year (MCKAY AND ORS V TOLL LOGISTICS (NZ) LIMITED HC AK CIV-2009-404-7389 22 June 2010) over the strength of the priority of a Personal Property Securities Act (PPSA) listing over a contractual lein.

Toll provided warehousing services for DVDs imported by Scene 1 Entertainment Limited. When receivers of Scene 1 were appointed by ASB Bank Limited, Scene 1 owed Toll $287,000. Toll claimed it had priority over the secured debt of ASB by virtue of a contractual or common law lien over the DVDs in its possession at the date of receivership.

From what I gather (and the discussion went on for 17 pages of legal gobbly gook using case law from the 1840's) the parties agreed in the end that Toll did in fact have a contractual lein over the DVDs in question but that as ASB had a perfected security interest under the PPSA. This meant that the judge made the following conclusion: 

"I make a direction that the respondent [Toll] does not have a security interest or other right in respect of the property of Scene 1 Entertainment Limited (In Receivership) which ranks in priority to the security interest held by ASB Bank Limited over the property of Scene 1."

Why is this important?

Looking at this issue from Toll's point of view leins are an old way of maintaining an interest in items (normally goods of some sort) you are looking after for someone else. For example a vehicle left with a mechanic. This is all well and good, but if there is a prior interest in the items registered on the PPSA the goods you are looking after belong to whoever made the registration and you loose your priority rights you used to have with your lein.

So if you were a mechanic with a workers lein over a motor vehicle which had money owing to a finance company and you sold the vehicle under your lein then you would have to pay out the finance company first.

Looking at this issue from ASB's point of view they did the right thing by registering thier interest in the DVDs and saved themselves $287,000 because they could get thier hands on the money first.

I cannot say it often enough but the PPSA is such an underused piece of legislation which is of such great benefit to creditors. Use it our loose your rights.  Contact us to find out more.

How do I ask for my money?

When we discuss what a client is doing to chase overdue debtors themselves, it is obvious that there are some simple changes that could be made to improve collection rates. Here are a few simple tips you can use on a daily basis to help you.

Tell them when and how you want to get paid

How often do you actually know when your supplier wants payment? We recently had work done at home and 3 out of 4 tradesmen didn’t say when they expected to get paid when we agreed to the job going ahead.

When we eventually got invoiced 2 of them didn’t even have account numbers on their invoices! Don’t be embarrassed to tell your customer how and when you expect to get paid, they will appreciate the certainty.

Be one of the early callers

The old saying ‘the early bird gets the worm’ really does apply. Often if an account is due by the 20^th the creditor waits until the beginning of the following month to follow up payment. Why wait?

If you debtor is a business customer then they need to be educated that you expect payment as arranged. Whilst we all understand that there is no money until they have been paid, why wait? Call them on the 21^st. Perhaps it will prompt your customer to get onto their debtors quicker.

If your debtor is a consumer customer you should only offer 20^th month terms if you invoice them monthly. In any event there is no good reason why they would be late with payment so call them the day after any invoice is due. I bet they get paid on time every week, why shouldn’t you?

So what question do you ask?

When you phone your overdue debtor your mission is to get paid. You do this by simply phoning (yes you actually have to pick up the phone and dial!) I good initial question, after you have made your greetings and such, is to ask “I see your account hasn’t been paid yet, is there any reason for that?”

You can ask this any way you like, using a soft voice or a hard voice or any other voice you can think of, but before you hang up you want to know why your debtor hasn’t paid, as well as a commitment from you debtor as to when you will be paid. Just remember that they might actually be telling the truth when they say the cheque’s in the mail, so you don’t have to make any threats at this stage.

If your debtor makes a promise to do something in the future make sure you put it in your diary to check it actually happens. Don’t make the mistake of waiting until next month to follow up.

Follow Up

Another old saying is ‘the squeakiest wheel gets the most oil’. If a debtor makes a commitment make sure you follow up immediately if it’s not kept. And don’t forget this is when a debtor turns into a plonker so you can also harden your language slightly. The key here is to be persistent rather than a nuisance.

For the next step you should refer to my February column “When To Use A Debt Collector”

Debtors are slower in paying

A couple of recent articles in the Herald have discussed the issue of debtors becoming slower payers than usual of late. (Late payers 'growing drain on cashflow' and Slow-payers put strain on SMEs). This is an issue that has been raised by credit reporting bureau Dun and Bradstreet.

I would have to agree. Many clients and debtors I have talked to in the new year are saying the same things. I can't pay my bills because my debtors are dragging the chain.

Whilst lots is said about big business being slow paying the worst offenders I'm told are government departments.

Whilst an SME doesn't have to worry about government departments running out of money (well not just yet at any rate) this comfort still doesn't reduce the overdraft.

So next time you're talking to your local Nat MP ask him/her about what's been done by the government to fix the problem of government department debt being overdue. And don't be fobbed off by the previous Labour government being blamed.

This one one issue the so called business friendly Nats promised to fix 2 years ago and, according to my very loose anecdoctal evidence at any rate, haven't. Perhaps by business friendly they meant big business and not SMEs!

Why directors can't get away with it

A recent article in the Herald on Sunday (Directors held account for a reason) discusses a couple of cases where directors were found liable for the debts of their companies even though directors guarantees had not been signed. These cases make for interesting reading.

The author, Damien Grant, makes a couple of really valid points which I 100% agree with:

"Many directors take the view that if the business makes a profit they are entitled to the reward and if the business fails then it is the creditors who must shoulder the burden. This is wrong. Creditors do not get to share in the profit of a business so they do not deserve to be unduly exposed to its losses".

It's about time this was pointed out. The number of times I come across companys which are clearly trading whilst insolvent is remarkable. Some directors seem to think it is ok to use their creditors as their bankers, when clearly it is not.

"More often than not, when we investigate a liquidation there is a way to hold a director personally liable. The main reason action is not pursued is the lack of creditor support or the fact that the director has no assets to pursue".

In our experience this lack of creditor support is quite true and is, I believe, due to exorbitant cost of taking legal action. This cost may make the risk of legal action worthwhile if the debt is for say $50,000 but for $1,000, probably not.Yet for a lot of businesses $1,000 is a lot of money. When creditors act collectively then the risk of taking action against debtors is spread amongst the collective and the risk is worthwhile.


WHAT SHOULD YOU DO?


If you get notice that one of your debtors has gone into receivership or liquidation don't walk away for your money. Take the time to ask yourself if you think the directors have realisable assets and if you could form a consortium with other creditors to pursue legal action against the directors. It could be well worth while.

Changes to Credit Reports

The Privacy Commissioner has approved a move to positive, rather than negative credit reporting. Overall we believe this is a good move.

It means that positive information such as You had this loan for $x which was repaid on time will now be held on file, as well as negative information.

Previously the only information held was negative e.g. You had a loan for $x and you had defaulted.

Veda Advantage will also be allowed to keep a record of drivers licence numbers.

What does this mean for you?

1. We believe that as a creditor credit reports will now be far more useful. It's all very well knowing if someone has been default listed in the past (the old leopard doesn't change it's spots type thing), but it is far more useful to know if someone has made commitments in the past and kept them. Over time this will make it more relevant for you to invest in credit reports for your new clients.
2. It would be beneficial to start recording drivers licence details when you get them as identification.
3. You need to make sure you have the correct authorities in place to collect information off your clients. Normally this is part of your terms of trade (see our website for more details) but there are other ways to get your clients authority.

Why did this change come about?

As far as we can tell this change came about because people were complaining that information held on Vedas file didn't relate to them. We can understand this. For example how do you tell one John Smith from another?

The only way to do this is by giving everyone an ID number. As New Zealand does not have a national ID card then the drivers licence is our national ID card by default.

We do feel sorry for those without a drivers licence but no system is perfect.