One of the key challenges for many businesses is to ensure that their cash flow and credit management procedures are working effectively. From developing Terms of Trade and the protection of assets on the PPSA register, through to credit management and debt recovery, this presentation provides an overview of the key issues and how your business can address them.

1. A Complete Guide to Credit
Management
Rebecca Hegarty, Senior Associate
Coleman Greig Lawyers

2. AGENDA
• How am I most vulnerable? – Identifying risk
• Minimising risk – Processes, Document protection and Legislative help
• Using the court process
• Fending off claims

3. Am I venerable?

4. Credit Vulnerabilities
1. Not all details on documents are
complete / accurate
2. Customer entity change
3. Documents not signed or retained
4. Which terms govern the trading
relationship?
5. Customer insolvency
6. No process / resources to follow up
debtors

5. Credit Risk
Credit Risk
Who am I dealing with? Have I verified this?
What documents govern
the Relationship?

6. Better the Debtor you Know
Individual
Partnership
Other
Trust
Company
Debtor ID

7. Who am I dealing with?
The sole trader:
may or may not have registered a business
name
personal unlimited liability
The partnership:
not a separate legal entity
General partnership – partners have
unlimited liability jointly and severally for all
debts and obligations of the partnership.
Company (Pty Ltd or Ltd)
Generally no personal liability for directors
except in certain cases e.g. personal
guarantee
?

8. Who am I dealing with?
The Trust
Not a separate legal entity
The trustee enters into contracts on
behalf of the trust
Right of indemnity for trustee out of
trust assets
Note: ABN and ACN will be different
for a corporate trustee

9. Verifying the Information
• Free ASIC search
• Free ABN search
• Trade reference checks
• Request copy of Trust Deed & Trust ABN
• Property searches
• PPSR searches
• Bankruptcy searches

10. Credit Documentation
The Credit Application:
(i) What are your credit terms?
(ii) Are your trading terms incorporated?
(iii) Have you requested and received all identifying information e.g.
ACN, ABN, full name, trading name, any trust name, bank account
details
(iv) Is this a master supply agreement for the purpose
of PPSA?
(v) Communication of acceptance

11. Credit Terms
1. Risk:
Whose terms prevail?
Minimise risk:
Clause to specify your trading terms prevail.
2. Risk:
Clauses crossed out.
Minimise Risk:
Note which clause is crossed out and assess its importance
(e.g. is it your retention of title clause or an exclusion clause?)

12. Credit Documents
Terms of trade
• Are all major areas covered? (e.g.
payment, default, security, delivery)
• Does anything in your terms give rise
to a security interest over personal
property?
• Do you have (need) a charging clause
over real property?
• PPSA clause included?

13. Guarantees
• Guarantee: Personal obligation by guarantor if primary
debtor doesn’t pay
• Indemnity: Personal obligation to pay if you suffer loss and
indemnifier can be treated as principal debtor.
• Must be in writing and ‘signed’
• Must have consideration to support it
• Is this in the form of an agreement or deed?
Risk:
Not signed, witnessed (if a deed), no indication of acceptance
Minimise Risk:
Check has been signed, note any disability of guarantor, check if witnessed as
required, give time to get advice

14. Processes
What resources have you allocated to:
(i) contract / credit account establishment?
(ii) account management?
(iii) PPSA registrations?

15. Processes:
Debt Management:
• Who is responsible internally for recovery of debts?
• Are they aware of the ASIC/ ACCC Debt Collection Guideline?
https://www.accc.gov.au/publications/debt-collection-guideline-for-collectors-creditors
Some tips re: contact with a debtor:
(i) should be for a reasonable purpose only and you must establish
you are speaking with the debtor;
(ii) contact at reasonable times of the day;
(iii) contact at reasonable intervals
(iv) privacy obligations

16. Debt Management
What is your process?
• First Contact: call to debtor to establish why not paid and when
will be paid
• 1st letter: can be by you
• At what point do you outsource?
• Do all staff know the procedure?
• Are credit and sales staff on the same page?

17. Helpful Legislation

18. Minimising Risk
The Personal Property Securities Act 2009 (Cth)
• Covers security interests taken in or over personal property
• Encompasses commercial and consumer property; tangible and intangible
property
• Personal property widely defined ) doesn’t cover land, buildings or fixtures
Is the way I trade with customers within the ambit of PPSA?
Most common trading scenarios that may create a security interest
• ROT
• Lease
• Consignment arrangement

19. Personal Property Securities Act 2009 (Cth)
• Commenced 30 January 2012
• Established the PPS Register (PPSR)
• If you don’t ‘perfect’ your security
interest (e.g. registering on the PPSR),
you may lose your claim to your
property to a 3rd party or lose your
priority in claiming it

20. What’s Changed?
Before PPSA- If we could prove it was ours, we just took it back

21. And now?
After PPSA- you may be competing with others as to who can claim the property

22. What do I need to do?
1. Have a written security agreement in place with the customer
(“grantor”)
2. Establish if the terms of the agreement give rise to a security interest
A Security Interest:
(i) secures payment or performance of an obligation e.g. mortgage, lease of
goods (including under a PPS lease), conditional sale (sale under ROT
clause), charge
(ii) regardless of whether it secures payment or performance of an
obligation
• A commercial consignment sale (e.g. motor vehicle dealer who sells cars
on the owner’s behalf.)
• Lessor or bailor of goods under a PPS lease

23. What do I need to do?
3. Perfect the security interest
PERFECTION
Steps taken to ensure your security
interest has priority over other security
interests or claims over same collateral
• Registration on the PPS Register
• Control
• Possession
• Temporary perfection

24. Important Time Limits
Company Grantor
Register your security interest within
20 business days of creation of the
interest or within 6 months before the
commencement of the Insolvency
Event [Section 588FL Corporations Act
2001 (Cth)]
Individual Grantor
If Grantor a person, security interests
not registered at time of bankruptcy
are void

25. Getting an edge
The Purchase Money Security Interest
• A security interest granted to secure all or
part of purchase price (e.g. goods not paid
for)
• The interest of a lessor or bailor under a
PPS lease
• The interest of a consignor who delivers
goods to a consignee under a commercial
consignment
Doesn’t include security interest granted in
collateral that the Grantor intends to use
for personal, domestic, household
purposes unless may or must be described
by serial number (eg motor vehicles,
aircraft, watercraft)

26. Case Study 1
Customer A enters into a credit application and terms
with Supplier B to acquire widgets on a continuing basis
now and in the future and on these terms. The widgets
are intended to be on sold by Customer A (so has been
sold as inventory).
One term is a retention of title clause.
1. What Should Supplier B do?
2. Before Customer A is delivered any widgets, do a registration on the
PPS register
3. In the registration claim a “PMSI” and “Proceeds”
4. The class of collateral into which the widgets will fall is “other goods”
5. Supplier B should also claim an security interest in the proceeds

27. The PPS Register
• Does not record ownership or
guarantee title
• Is a register of security interests and
not a document register
• Online notification of security interest
• Exact match system

28. Beware of Mistakes
Certain defects can invalidate your registration:
(i) a seriously misleading defect in any data relating to the registration; or
(ii) One of the following:
− if a serial number is required and is missing (e.g. incorrect number
entered or none at all)
− if the serial number is not required and a search using only the
Grantor’s name does not show the registration;
− if the Financing Statement incorrectly claims the security PMSI

29. PPSA – Risks and Benefits
Risks:
• Losing your security interest to the claim of a liquidator or company
administrator
• Losing your priority in a contest with a 3rd party over the same goods
Benefits:
• Maintaining your security interest in some form even if your goods are on
sold, attached or co-mingled
• Maintaining your interest as a secured creditor in the event your customer
becomes insolvent
• Minimising extent of a claim of receipt of preferential payments by
liquidators

30. Building & Construction Industry Security of Payment Act (SOPA)
Building & Construction Industry Security
of Payment Act 1999 (NSW) (“SOPA”)
• Different states have own Act
• Can be of use to you if you supply labour
or related goods or services to anyone in
the building industry
• Defeats effect of ‘pay when paid’
• Statutory right to a progress payment
• Access to adjudication procedure

31. SOPA
“Construction Contract”:
A contract or other arrangement under
which one party undertakes to carry out
construction work or provide related
goods or services for another party
work or supply in relation to
construction work outside NSW
• NSW act doesn’t apply to:

32. SOPA – Risk & Benefits
1. Risk:
No written contract
Benefit:
Can still make a claim under SOPA
2. Risk:
You are too slow in making a claim
Benefit:
If time limits and requirements followed,
can be powerful tool

33. Court process
Statement of Claim - serve
and wait 28 days
Defence No Defence
Default JudgmentHearing

34. The Power of a Court Judgment
Judgment:
• Will remain in place for 12 years
• Stays on a credit record for 5 years
• What we you know about the debtor?
• employer details
• financial institution account details?
• does a third party owe the debtor money?
• Is the debtor a company or individual?
• How much is the judgment for?

35. Enforcement of Judgment
• Have 12 years to enforce
(6 years if you wish to issue a
Bankruptcy Notice)
• Enforcement Options:
(a) Writ of Execution
(b) Garnishee Order
(c) Examination Order
(d) Bankruptcy
(e) Wind Up

36. Writ of Execution
• To proceed against personal property owned by the debtor
• In place for 12 months
• Fees for sheriff for every visit
• Writs are executed in order of time of receipt by sheriff
• Two visits: (i) to tag goods (ii) to remove goods
• Sale by public auction
• If unsuccessful but debt is over $10,000 and debtor owns real estate, can
register writ on title of real estate

37. Garnishee Order
• To Garnishee money in hands of third party of debtor that is
owed or held on behalf
• Examples:
(i) Garnishee on wages and salary
(ii) Garnishee on bank account
(iii) Garnishee on rent monies held by agent
• Most economic to issue
• Need details of accounts, employer etc.

38. Examination Order
• Examination Notice served on debtor or
director of debtor
• Notice seeks details of assets, liabilities and
income as well as supporting documents
• 28 days from date of service to comply
• Non compliance: apply for Examination
Order
• Serve personally on debtor or director to
appear at court on designated date with
supporting documents
• Adjourn if no documents produced
• Examine before the court

39. Bankruptcy Proceedings
• Judgment not older than 6 years
against an individual
• Minimum debt of $5,000
Stages:
i. Issue and serve Bankruptcy Notice
ii. No response in 21 days - issue and serve
Creditors Petition and verifying affidavits
iii. Court grants sequestration order and
costs, trustee appointed
• More expensive procedure
• Limited to unsecured part of debt

40. Restrictions of Bankruptcy on Debtor
• Generally in bankruptcy for 3 years but can
be extended for offences
• Remains on credit record for 7 years
• Written permission from trustee to travel
required
• May be required to make income
contributions:
• Base income threshold (currently
$55,446.30 with no dependents to
$75,406.97 with over 4 dependents)
• Must disclose the bankruptcy when apply
for or buying goods and services on credit
or by cheque above threshold value
(currently $5,602.00).

41. Wind up a Company
• Applies to a company debtor
• Debt must be over $2,000 minimum
threshold limit
• Issue Creditor’s Statutory Demand for
Payment (can be done without a judgment)
• No response in 21 days? – file wind up
application at court
• Winding up order made, Liquidator
appointed
• More expensive procedure
• May not recover debt

42. Dealing with Potential Insolvency

43. Insolvency – Key Indicators
Insolvency: unable to pay debts as and
when they fall due
Key indicators of Insolvency
• poor cash flow, or no cash flow forecasts
• disorganised internal accounting procedures
• incomplete financial records
• continued loss-making activity
• accumulating debt and excess liabilities over
assets
• default on loan or interest payments
• increased monitoring and/or involvement of
financier

44. Insolvency – Key Indicators
• default on payment plan
• outstanding creditors of more than 90 days
• instalment arrangements entered into to
repay trade creditors
• judgement debts
• significant unpaid tax and superannuation
liabilities
• difficulties in obtaining finance
• difficulties in realising current assets
(e.g. stock, debtors)
• loss of key management personnel

45. The Unfair Preference Claim
Section 588FA Corporations Act 2001:
Liquidator bears onus of proof
Unfair preference is one given by the company
to a creditor:
• The company and creditor are parties to the
transaction (even if someone else is also) –
i.e. a debtor / creditor relationship;
• It results in the creditor receiving from the
company in respect of an unsecured debt
that the company owes, more than the
creditor would have been entitled to receive
as a dividend in the liquidation of the
company (the “preferring”).

46. The Unfair Preference Claim
• Must have occurred within 6 months of the “relation-back day” or
between that day and the commencement of the wind up.
“Relation-back day”: When the winding up is taken to have begun:
• Date the winding up application was filed at the court;
• Date the Administrator was appointed.
• Date of the members’ meeting at which the liquidator was appointed
Example:
• Winding up application lodged at court 2 January 2017.
• Order of court winding up the company is made 2 February 2017.
• Relation back day is 2 January 2017
• Relation back period: 2 July 2017 to 2 January 2017 (plus to 2 February
2017).

47. Fending off an Unfair Preference Claim
• You became a party to the transaction in
‘good faith’; and
• at the time:
(i) you had no reasonable grounds for
suspecting that the company was insolvent
or would become so; and
(ii) a reasonable person in your circumstances
would have had no grounds for so
suspecting; and
• You provided valuable consideration for the
transaction or changed your position in
reliance on it
• Suspicion = more than mere idle wondering
Tip: Don’t put your suspicions or wondering in writing!

48. So ………..what should I do?
• Review your trading arrangements
• Identify if your agreements / terms
need updating to be compliant
• Establish a procedure for setting up
accounts and verifying information
given by customers
• Establish a procedure for monitoring
accounts
• Establish a procedure for registering
and renewing PPSA security interests
• Educate staff on the procedure
• Outsource, if internal resources are
in sufficient

49. ???

50. Please complete your Feedback Forms

51. Thank You