Chasing overdue invoices is the one of the harsh realities for business owners. How can you ensure you obtain the outstanding money? We asked an insolvency specialist for his tips on debt recovery.
When recovering money owed to your business, the first step is to identify who you are actually dealing with – the origin of the relationship may have changed over time.
Your written contract with the debtor sets out all of the relevant details for the parties, but be clear about which entity owes you money. For example, the purchasing entity’s common name may be the registered business name of a holding company for a number of related companies that share common ownership and have similar names.
Contracts formed by verbal agreement are equally as binding as written contracts, but the terms will often be uncertain or disputed. Identifying a particular conversation that was essential to establishing the business relationship will be the most important factor in identifying your debtor.
If you don’t clarify the purchaser’s identity at the time of entering into the credit terms, your counterparty may not be adequately identified by the standard credit terms, and it will be necessary to look beyond those terms to identify the correct debtor.
In some circumstances, you may have individual purchase orders or invoices for particular transactions that identify a particular entity, and the presumption would be that the named entity is the contracting party.
This can lead to complicated situations, in which you may have received orders from one particular entity, delivered the product to a separate entity, and invoiced a third entity, all within the same related group.
Resolution of this tangled web is always based upon the particular situation that arises, but the most likely outcome is that the correct debtor is the party that placed the order with your company.
It is also important to know whether a company is acting in its own right or as a trustee of a trust. Many businesses in Australia are operated as “trading trusts”, which means that there is a trustee, usually a company, who holds the business assets on trust for certain beneficiaries pursuant to a trust deed.
The general position at law is that a trustee incurs obligations on its own behalf and as trustee of the trust. The trust company is liable for any debts that it incurs in its capacity as trustee, but the trustee company has a right of indemnity against the trust assets for those debts incurred.
The corporate trustee who only acts as trustee of a single trust is not usually a problem for a creditor. However, if the corporate trustee trades in its own right and as trustee for the trust, then those obligations are separate and a counterparty who has a claim against the corporate trustee in its own right has no claim against the trust assets.
Even when a corporate trustee acts only in its capacity as trustee, if that trustee ceases to be the trustee of that trust, then the path for a creditor to access the trust assets is complicated, though still legally available.
Online search tools
Researching the business name will make the process of establishing a business relationship easier. Use the ASIC free company search function to search the name of the nominated entity and confirm the matching search result with the counterparty.
It is also worthwhile conducting an ABN search. While using a company’s ACN on the contract is perfectly adequate, it is important to remember that each trading trust will be allocated its own ABN. If you are contracting with the company as trustee for the trust, then you should use the trust’s ABN.
In most cases, a quick search of the ABN register will highlight whether there is a trust in place, which should then be confirmed with the counterparty.
Damien Butler is a partner in the restructuring and insolvency team at Colin Biggers & Paisley.