It is an unfortunate reality that your business can be severely
affected when one of your customers becomes insolvent. With the
current COVID-19 pandemic, it is a sobering reality that many
businesses in the supply chain are likely to fail and cause a
domino reaction with their contacts.
In part three of Madgwicks Lawyers’ Coronavirus and the Law
series, Special Counsel Catherine Ballantyne provides some
practical tips for getting prepared in light of the possible
consequences of a customer becoming insolvent due to the
In the beginning
It is important at the start of a new business relationship that
you implement some strategies which can minimise your exposure if
your customer is insolvent:
- Perform a credit check prior to agreeing to supply your goods
or service. If they have a bad credit history, request funds
upfront or cash on delivery.
- Ask for a personal guarantee from the director (if you are
dealing with a corporate entity) and perform a property search to
see if the director owns any property in their personal name. This
allows you to seek payment from the director personally if an
administrator or liquidator is appointed to the corporate
- Have your paperwork in order – whether it is a contract
or your standard terms of trade, ensure that it is current and able
to be relied upon if enforcement is required to procure
- Be aware of the Personal Properties Securities Act – seek
legal advice as to whether you are able to register your interest
on the Personal Properties Securities Register (“PPSR”)
and ensure it is done correctly and as soon as possible.
- Ensure that your PPSR interest is registered over the correct
entity – in many cases if you are dealing with a trading
trust, you need to be careful that you are securing the trust’s
property and not just the assets of the corporate trustee. This is
because a corporate trustee often does not have any assets of its
own. It is a common mistake to register a security interest over
only the corporate trustee and not on the ABN of the trust.
Once you are trading
You should constantly be vigilant throughout your business
relationship to ensure that you keep your exposure to a
customer’s insolvency in check:
- Invoice often so that if your customer is under financial
stress you are aware of it sooner rather than later.
- Be firm about your terms of trade – do not allow
outstanding amounts to get out of control and be prepared to stop
supply if payment is not forthcoming.
- Keep your paperwork up to date – ensure that any personal
guarantees cover all amounts owing and that PPSR registrations are
current and do not need to be updated for new equipment or new
- Be prepared to take legal proceedings – although it may
not be palatable, sometimes the only way in which to be paid is to
have your lawyers commence legal proceedings.
Although a customer’s insolvency cannot be avoided, if you
follow these tips you place yourself in the best possible position
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances. Madgwicks is a member
of Meritas, one of the world’s largest law firm