Inland Revenue (IR) recently liquidated the failed Nosh supermarket chain to recover unpaid tax of around $242,000. The liquidator’s report showed that unsecured creditors, including many small business suppliers, were collectively owed $2.4 million.
IR has priority rights by law to recover tax and penalties due from remaining company funds and assets in a liquidation. On the other hand, unsecured creditors typically recover, at best, a very small percentage of what they are owed.
Will IR go bust if it doesn’t recover its money? No. How about the small business owners standing in line behind IR, Nosh employees (owed $324,200), banks and other priority creditors? Well, it’s more of a possibility.
How could these suppliers have mitigated their risk of substantial loss in this scenario? It’s simple. A business which supplies goods or services on credit terms can ask for security in return. If this is done correctly the supplier will be able to advance up the queue to join the secured creditors who have a far better chance of getting paid.
A well drafted Terms of Trade agreement tailored to the needs of the supplier can include a clause creating a security interest in goods supplied. If this is registered on the Personal Property Securities Register, the supplier will be entitled to recover unpaid goods in priority to unsecured creditors.
Here’s a practical example, courtesy of the New Zealand Companies Office: http://www.ppsr.govt.nz/cms/about-us/case-example
Terms of Trade can also cover a number of other important areas of risk for suppliers.
Read more here: http://businessgrowthlaw.co/making-terms-of-trade-work/