HG Alert: How do your terms of trade stack up? - 24 July 2009

With the global financial crisis continuing to bite hard on the availability of finance, now is a sensible time to re-assess your trading terms with your customers before an insolvency event occurs.

It is unfortunate, but often a commercial reality, that in times of a shortage of external funding, many customers look to their suppliers as a source of what is considered by them to be quick, cheap, external short-term funding. By turning what was traditionally 30 days credit into 60 days credit, or even 90 days credit, they are able to ease their cash flow constraints and avoid interest on overdrafts or refinancing.

While this tactic can create possible insolvent trading issues for the directors of the customer concerned, if the situation doesn’t improve and the tactic doesn’t pay off, suppliers who have extended credit and unwittingly funded the exercise will feel little comfort when told that there will be “no dividend” to unsecured creditors when an insolvency situation arises. This is particularly true in circumstances that could have been avoided or improved, had some pre-emptive steps been taken before the situation became dire and resulted in the involvement or intervention of an insolvency practitioner.

For example, the inclusion of a properly drafted retention of title clause (often referred to as a “Romalpa clause”) in an agreement with a customer can allow goods remaining at a customer’s premises to be recovered in the event of a default. This is an alternative to the title to those goods being passed to the customer and sold by an insolvency practitioner to fund a reconstruction or, worse still, the costs of the administration or liquidation. Well-drafted personal guarantees from people of substance can also be useful in circumstances where there is a default by the customer.

Charging clauses, charges and/or mortgages registered over assets of a customer or their associates (such as directors) can also offer additional security. For example, a charging clause, depending on its terms, can enable a caveat to be lodged over a director’s property to assist in securing payment. Armed with this protection, a supplier has some level of comfort when trading in what are uncertain and economically trying times.

What you can do to protect yourself

Now is an opportune time to consider whether the terms upon which you trade with your customers provide you with adequate security for payment. Unfortunately, it can often be those customers who have been traditionally “good payers”, or with whom you have developed a long history of trading and believe to be “good for it”, who strike cash flow difficulties. This means you could need to consult an insolvency specialist to help you recover payment.

Your terms should allow you to charge interest at an appropriate rate to ensure that you are compensated if your customers do take advantage of the goodwill that they have developed with you, and start to use you as a short-term credit provider.

We recommend that you include some well-drafted and properly considered protection in your agreements with your customers, whether by way of a specific agreement or by an inclusion in delivery or sales documentation. This will simplify the process of recovering money following a default or insolvency event, making the process more cost effective and possibly resulting in a better outcome for you. After all, if someone asked to borrow a sizeable sum from you, wouldn’t you want some level of comfort that it would be paid back?

For more information on terms of trade or other related issues, please contact HopgoodGanim’s Insolvency team.