Protection from customer insolvency: How to prevent losses

Tuesday 19th September 2023

Protection from customer insolvency: How to prevent losses

Tuesday 19th September 2023
Written by Jeff Shute

The current economic climate certainly isn't making it easy for those of us in business. 

Corporate insolvency has increased in the past 12 months, and even if it's not affecting you directly, it could be something your customers may face or are already facing. And this can have an impact.  

In this guest post, Jeff Shute from Shaw Gidley shares his insights on protecting yourself from losses that aren’t on you—unless you fail to act smart.   

Protection from customer insolvency: How to prevent losses – Jeff Shute, Shaw Gidley

In the current intricate web of economic uncertainties, it's become increasingly crucial for businesses to fortify their financial defences. 

Here are some practical insights and proactive measures to help you mitigate the risks associated with customer insolvency and liquidation, ensuring your business remains resilient and adaptable instead of falling prey to the downfall of others.    

Spot the signs of customer insolvency

The two biggest tell-tale signs that a customer in any industry may have some solvency concerns and is possibly heading down the path to liquidation are:

  • Delayed/missed or stalling payments
  • Asking for extended trading terms

Without adequate security, your chances of recovering money from customers once they've entered liquidation are significantly reduced. 

In fact, industry figures suggest that the average return to suppliers in a liquidation scenario is between 0-10 cents in the dollar.

Safeguard your business from invoice non-payment in liquidation

While there's no way to guarantee full repayment of customer invoices once they've entered into liquidation, there are some practical steps we recommend you take to minimise your exposure and maximise recovery of any amounts owing.

We've broken these practical steps down into three different stages of a business relationship.  

1. At the beginning of a new business relationship 

At the onset of a fresh business association, it's crucial to implement strategies that reduce your vulnerability to customer insolvency:

  • Conduct a credit check – Before committing to supply goods or services, perform a credit check. If a potential customer has a poor credit history, consider requesting upfront funds or cash on delivery. Credit checks can be obtained from online platforms, including ClearScore Australia or Equifax
  • Request a personal guarantee – When dealing with a corporate entity, ask for a personal guarantee from the director(s). Plus, conduct a property search to determine if the director owns property in their personal name. This allows you to pursue payment from the director personally in case of insolvency. If the director has property, consider obtaining a caveatable interest to enable a caveat to be registered on the title to the property to secure the personal guarantee. 
  • Prepare documents with care – Ensure that your paperwork, whether it's a contract or your standard terms of trade, is up-to-date, legally sound, and contains adequate security clauses and interests. This will make it enforceable if payment collection becomes necessary. 
  • Understand the Personal Properties Securities Act – Seek legal advice on registering your interest on the Personal Properties Securities Register (PPSR) and ensure correct and timely registration.
  • Precise entity registration – Be cautious when registering your PPSR interest, especially when dealing with trading trusts. Ensure you secure the trust's property, not just the assets of the corporate trustee. The latter often lacks its own assets.

2. During the course of your relationship 

Maintain vigilance throughout your business relationship to manage exposure to customer insolvency: 

  • Frequent Invoicing – Invoice regularly to promptly identify signs of financial stress in your customers. 
  • Implement appropriate debtor collection processes – Ensure you have appropriate systems and processes in place to follow up on any outstanding debts promptly. 
  • Enforce terms of trade – Be firm about your terms of trade, preventing outstanding amounts from spiralling out of control. Be ready to halt supply if payments are overdue. 
  • Documentation and PPSR updates – Keep your paperwork current. Ensure personal guarantees cover all amounts owed and that PPSR registrations remain up-to-date for new equipment or security interests. 
  • Consider updating terms of trade or amending contracts – Regular reviews of customer account applications, terms of trade, and other documentation are crucial to ensure you're protected. Changes in directorships, corporate structures and legislation could render current security worthless and expose you to non-recovery of debts in the event of a liquidation.
  • Update credit checks – Regular credit checks allow you to identify any perceived risks associated with ongoing trade with customers, such as court proceedings commenced or outstanding tax liabilities. 
  • Legal action – Be prepared to initiate legal proceedings if necessary, even though it may not be your preferred course of action.

3. When the customer is facing insolvency

When an administrator or liquidator is appointed to your customer, consider these crucial steps: 

  • Determine secured creditor status – Seek advice to confirm if you qualify as a secured creditor, which typically grants priority over unsecured creditors. Properly registered PPSR interests often provide secured creditor rights. 
  • Avoid filing a proof of debt – If you're a secured creditor, refrain from submitting a proof of debt with the administrator or liquidator. Doing so may jeopardise your secured status. Instead, communicate separately with them to assert your security interest. 
  • Submit a proof of debt as an unsecured creditor – If you're an unsecured creditor, submit a proof of debt along with all relevant contracts, terms of trade, and invoices. This will ensure eligibility for voting and potential dividends from the liquidator. 
  • Stay Informed – Keep your contact details current, read reports from the administrator or liquidator attentively, ask questions, and attend creditors' meetings. This proactive approach helps you gauge expected returns, decide on any proposed company arrangements, and stay informed about ongoing legal proceedings.
  • Watch for unfair preference claims – Be mindful that payments received from your customer within six months before their insolvency may be subject to scrutiny by the liquidator as unfair preferences unless you've obtained security and registered your interest on the PPSR. Seek legal advice to assess the strength of such claims and strategize negotiations with the liquidator. 

Be diligent, proactive and engage advisors

Protecting your business against customer insolvency demands a multifaceted approach encompassing diligence, legal compliance, and adaptability. Stay proactive to safeguard your interests in an ever-changing business landscape.

We recommend that you regularly engage with your business and legal advisors to monitor your debtor collection processes and documentation to ensure you're in the best possible position to mitigate any losses in the event of a customer liquidation.

Guest profile 

Shaw Gidley is a regionally-based insolvency firm specialising in business recovery, liquidation and bankruptcy with offices in Newcastle, Port Macquarie and Tuggerah. We strive to provide the best possible solution for companies or individuals experiencing enduring financial distress, maintaining integrity through the process.

(02) 4908 4444 |