Suppliers: How To Avoid Bad Debts
Published November 2009
In the current economic climate, companies (in particular suppliers) face an increased risk of defaulting customers. Conversely at the same time, suppliers need their customers more than ever.
Insurance is available to safe guard against any potential risks, in the present economic climate such cover is being withheld, or if offered policies are inappropriate or premiums are wholly unproportionate.
Alternatives do exist:
1. Retention of Title
Retention of legal title to stock supplied at least ensures that in instances of non-payment and/or insolvency of customers then goods supplied can be reclaimed.
Specific clauses can be drafted and incorporated into the terms and conditions of a supplier of goods, which essentially retain title in goods supplied until payment. There are stringent practices involved in drafting such clauses to ensure the relevant clauses are incorporated into the contract between the parties and are enforceable.
To ensure clarity, in a complex area of law, suppliers should seek advice upon terminology of an effective retention of title clause/agreement. This will avoid potential issues in regards to whether or not the company’s terms and conditions are incorporated into the contract between the parties. It also allows for the supplier to clearly demonstrate the customer’s responsibilities and obligations in relation to payment and treatment of the supplied goods. It also allows for the supplier to set out their rights in relation to the same.
Best practice would dictate that suppliers ensure their customers sign the terms and conditions to reflect their consent to the same.
2. Invoicing Arrangements and Deposits
Each company operates under different practices and procedures. A particular practice and procedure relevant to this area is the invoicing arrangements undertaken by companies.
Some companies maintain that part (a deposit) if not all payment is made in advance of delivery. Others require part payment into a separate account which is sacrificed should the customer default later on in the contracts duration.
Others do not even insist on payment and merely rely on credit ratings and issue an invoice having completed their side of the contract and stipulate that payment be made within a specified period. Occasionally rewards may be issued for early payment such as a discount or improved terms on future contracts. Alternatively high interest rates may be included for late payment. It is advisable to ensure that such rates are reasonable and reflective so as to avoid them being scrutinised and found unenforceable at law.
3. Security
Certain securities can be taken over assets of a customer in order to secure payment i.e. should payment not be forthcoming the security can be enforced and suitable recoveries made.
However this process may be unworkable and, in any case, if not issued upon the contract/relationship coming into existence it may be too late.
It is worthwhile noting that such security is open to examination by administrators or liquidators if established within two years of the company being placed into insolvency. If the examination provides for grounds of challenge the security may be found to be unenforceable.
On the other hand, especially in small business dealing it may be more appropriate to require the directors of the contracting company to provide personal guarantees to ensure compliance of the customers/company’s liabilities. This is a relatively simple documentary exercise which can offer a good level of protection in regards potential bad debts.
4. Termination Provisions
The terms and conditions of sale of supplier companies will often dictate the contractual relationship. They will often therefore dictate the circumstances whereby the contract can be terminated. These will often include an event such as the customer becomes insolvent.
It is therefore worthwhile reviewing the provisions of the terms and conditions giving thought to extending them to allow the right of termination fall upon the supplier should it be considered that the customer is liable to become insolvent.
Summary
Practical steps that can be undertaken include:
1. Effective utilisation of credit reports;
2. Regular attendance and interaction with customers;
3. Pro active due diligence for delays in payment, excuses for non-payment; changes in the relationship and behaviour;
4. Retention of Title clauses; and
5. Directors personal guarantees.
Should you require further advice or assistance please contact Sam Pedley on 0121 550 0777 or email samuel.pedley@mfgsolicitors.com.
