Unfortunately this scenario does happen. Currently I am helping two ordinary hardworking fellows through exactly this sort of a situation.
The gents, who trade through a small company, received a substantial order to supply IT equipment to a large, well-known customer. The order was worth $100,000.
Before committing to the order my clients obtained a credit report from a major credit agency to provide them with the certainty that the customer could pay the amount expected. The credit agency confirmed that the customer “has a minimal risk of experiencing financial distress during the next 12 months”.
With that reassurance my clients supplied the equipment on 30-day payment terms. The customer was a bit late paying, but explained the delay plausibly – and my clients were familiar with the way big companies stretch their suppliers so weren’t overly concerned. The customer paid half the price within about 3 weeks of the due date, with an assurance that the remaining balance owing would follow over 2 weeks.
However, three days after the first payment was made, the customer went into administration, followed soon after by liquidation.
This meant that my clients were now an unsecured creditor for $50,000, with the hope of receiving a very few cents in the dollar (at the most) at some time in the distant future. The part payment of $50,000 already received was less than the amount they had to outlay to their own supplier for the equipment. The whole transaction had left them well and truly out of pocket.
And it gets worse.
Not only have my clients been left out of pocket, but also the liquidators have now asserted that my clients received the $50,000 part payment as an “unfair preference”, and are threatening to sue my clients to recover it
Even though my clients believe they have a sound defence, based on the fact that they have acted in good faith and reasonably, they are still faced with substantial legal costs in mounting that defence.
They have already suffered a substantial loss. Now they are being threatened with an even greater loss, simply because they permitted the other party to perform (in part only) its side of the bargain.
Meanwhile the liquidators’ action against my client, (and probably against other contractors and suppliers to the failed customer), is being funded by the Commonwealth Government Department of Jobs and Small Business!!
So the question is: what could my clients have done differently to avoid this disaster?
What did they do right?
- They entered into a commercial transaction in good faith.
- They made prudent inquiries beforehand to ensure a positive credit report and ability to pay.
- They performed their side of the bargain to the letter.
What else could they have done?
- They could have registered a retention of title security interest on the Personal Property Securities Register (PPSR).
Taking this action may have enabled them to recover some of the equipment from the failed customer (assuming it had not been on-sold by the customer).
I always reiterate the need for the PPSR to clients. And will do so to you too!
You must always remember: If you are supplying goods on account terms, always register on the Personal Property Securities Register (PPSR)!
Regardless of the outcome achieved for my clients, this whole situation is distasteful. To me, it is odious that the Commonwealth Government is funding the proceedings.
Presumably the customer folded with unfunded employee entitlements remaining, which the Commonwealth pays under the General Employee Entitlements & Redundancy Scheme (which is fair enough).
However is it really fair that the Government itself is trying to recoup these employee entitlements from everyday small business people who themselves have already suffered a severe financial loss from the failed customer?
The most ironic thing about this? That the Government agency that is beating down the everyday small business owner is the very one charged with advancing the interests of small business: there’s something Orwellian in that!
If you would like to know more or need any assistance, feel free to contact us at Antcliffe Scott, we’d be more than happy to help!