Getting paid

There was an interesting story in the media last week that is worth a mention.

It was a story about a company going into liquidation and owing good hard working folk some $70,000. There appears to be little prospect of recovery. The story itself would not have created headlines had it not involved a former Member of Parliament, Marama Fox. Companies going broke is a very common occurrence. Although the details of this particular liquidation have yet to be revealed, all too often directors fold a company only to incorporate a new one and continue trading, leaving creditors high and dry. The problem is a limited liability company is a legal entity in its own right, quite separate from the directors and shareholders.

What is unfortunate is that creditors can take some simple precautions to minimise the default risks when dealing with a limited liability entity, like a company.

If you are supplying goods or services it is essential that as a condition of supply you obtain a personal guarantee from one or more of the company directors. With that in your pocket you at least have the option of pursuing an individual if the company is unable to pay.

A second precaution is to have terms of trade that include the right to charge (reasonable) interest on overdue accounts and recover debt collection costs, including legal fees. It is not enough to have terms of trade. You must be able to demonstrate that the person you are trading with was aware of those terms of trade at the time the transaction was entered into.

With those terms in place, you can avoid being used as an interest free bank.  If an account is overdue, at least the interest clock is ticking and you can recover from them the costs to enforce payment of the debt should it be necessary.

While these measures are not always successful, my experience is that they significantly reduce the risk of not getting paid.

FRANK NEWMAN IS A DIRECTOR OF SMART COLLECTIONS.

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