Ensuring Payment for Your Business

Ensuring Payment for Your Business

Stephen Gethin - Director, Fortuna Legal

In these challenging economic times, the last thing any business needs is late or non-payers. Below are various common legal issues which can make it harder for you to get paid, and simple legal steps you can take to reduce that risk.

You are not entitled to charge interest on late payment or charge your customers for debt collector’s or lawyers’ fees unless your contract says so. It is a simple matter to ensure that your Ts and Cs provide for this.

Ideally business would not extend significant credit to a Pty Ltd company without a personal guarantee from the directors and/or shareholders. This is achieved by inserting the required wording in your standard Ts and Cs. Personal guarantees may not be acceptable in all industries, but they are not used nearly as often as they should be. Sometimes the question of whether you can get a personal guarantee in your contract will come down to who has the greater bargaining power. If you have a personal guarantee in your contract, many clients will sign it without questioning it.

Contractual clause deeming the customer to be liable when you say they are

Many court cases are decided by who has the onus of proof. The party who has the onus of proving something is often unable to do so. If you claim to have supplied goods or services to your customer but have not been paid, you have to prove you supplied them. In some cases, this can be difficult, particularly in the case of services.

Your standard terms of contract can include a clause that states that you may give a certificate in writing stating that you have supplied goods or services, or that a certain amount is owing from the customer, and that this is deemed to be proof of its contents unless the customer proves otherwise. This will give you a significant procedural advantage in any court dispute which may arise. In that case, the customer will have to prove that you did not supply the goods or services.

Taking security over customer’s property

I am often asked: “X owes me money, can I put a caveat over their house?” The answer is: “No, unless you have an agreement with them which says that you can”.

For most purposes there are two different kinds of security: security over real estate and security over other assets. If you commonly supply to businesses, often enough they will not own any real estate. And if they do, most customers won’t give you a mortgage over their house to secure the amount they owe you under a contract! If the amount is big enough, however, you may wish to insist on this.

Your agreement can, however, contain a clause stating that the customer grants you a general security interest over all its assets, including the goodwill of its business, to secure payment of any amounts owing to you.

For you to be able to enforce this security in priority to other creditors, however, you must register it on the Personal Property Securities Register (PPSR). And if the customer has a bank loan, that will already be protected by a security on the PPSR. The lender’s security will take priority over yours. But at least if there is equity in their assets after the bank security, you will have a claim on it ahead of their unsecured creditors.

Your Ts and Cs can also state that if the customer owns any real estate it grants you an equitable mortgage (a mortgage that is not registered at Landgate) over that real estate to secure payment of amounts owing, and that you may lodge a caveat to protect that mortgage.

Ensuring the person who is signing has authority to bind the customer 

If your customer is a company or partnership you will, of necessity, be dealing with one or more individuals on behalf of the customer. Most of the time they will have the legal authority to bind the customer, but sometimes they do not. If the person who purports to sign the contract with you on behalf of the customer did not in fact have the customer’s authority to sign, the contract will not be binding on the customer. (You can still sue the individual who signed, but they may well not be as good a target to sue as the customer you thought you were dealing with.)

Before signing any contract with a company, obtain a current ASIC extract of it, at a cost of only $9. Make sure that the contract is signed by at least one Director and another Director or the Company Secretary named on the ASIC extract.

If a company has a sole Director who is also the Company Secretary, that person can sign to bind the company. There are problems, however, with the Director of a sole Director company which does not have a Secretary signing a contract by their sole signature. In that case, you should require them to also give you a Director’s resolution signed by them stating that they can sign contracts by their sole signature.

Some customers will simply give you their business name as the customer name for your contract. For example, David Smith might have a business name “Dave’s Flowers”. In that case the correct customer name is “David Smith”, not “Dave’s Flowers” although they can add “trading as Dave’s Flowers” for more definition.

A business name is not a legal entity: you cannot contract with it. If the customer is just named on the contract as “Dave’s Flowers” you may not be able to prove who you were actually contracting with if a dispute arises, particularly if the business name is not registered.

Where the customer is a company, it is critical to include “Pty Ltd” and its ACN, because these are part of its legal name.

Also ensure that the contract includes the customer’s full street address, not just a PO Box. Some customers have common names. An address is an important part of a person’s identification if a dispute arises as to who you were actually dealing with. If you need to serve a court claim on the defendant in debt collection proceedings, you will need a physical address to which to send the claim: it cannot be sent to a PO Box.

Where the customer is a company, obtaining a current ASIC extract will confirm that the company actually exists and has not been deregistered. On some occasions directors have let their company get deregistered without realising it and continued entering contracts in the name of the company. Those contracts are invalid.

Conclusion

Many of the above issues can be addressed by having proper sale terms and conditions. At Fortuna Legal we can prepare these for you, or review your existing Ts and Cs.