If a debtor goes into liquidation you could be left out of pocket for large amounts so it pays to plan for this possibility. Otherwise, you could find yourself with limited options and facing financial ruin if the debt is not able to be recovered from.

A Company supplied goods to a number of manufacturers.  Because its customers often wanted to defer payment for their products, the Company included in their terms of trade that they retained ownership (or title) of the goods until they had been paid for in full.

They received some good advice, and also registered a financing statement on the Personal Properties Securities Register (PPSR) over the goods they were supplying.

One of their major customers had been a good customer for many years, and the Company was extremely surprised when they received a letter from the customer’s liquidators. The liquidators informed them that the customer had been placed into liquidation due to a downturn in the market. Increasingly common in the post covid world.

The Company promptly sought legal advice and was told that they could either:

  • Repossess and sell the goods supplied, and lodge a claim for any shortfall as an unsecured creditor;
  • Value the goods and claim as an unsecured creditor for any expected shortfall; or
  • Surrender the security and lodge a claim for the whole debt as an unsecured creditor.

They discovered that the goods they had supplied had actually already been incorporated into finished items, and attempts at repossessing them would probably do more harm than good. They decided to make a claim as an unsecured creditor.

Fortunately for the Company, the liquidator obtained a good price for the stock in the customer’s warehouses, and they were eventually able to recover the debt claimed.

There are two key lessons in this for anyone who supplies good on credit, or any other creditor:

1.    Have sound terms of trade … and register your security interest

If you have a registered security interest, you will have the option of repossessing the goods if the company goes into liquidation. However, there are some priority rules around registered security interests, and it pays to get advice before you take this step.

One step you can take to ensure, as far as possible, that your security interest takes priority over other creditors is to get advice on drafting sound terms of trade.

In this case, for instance, the Company included a ‘retention of title’ clause in their terms of trade, which would have given them security interest priority over ‘general’ security interests if they sought to enforce it.

2.    Get advice …

If you are notified that your debtor is going into liquidation, it is important to get advice as soon as possible. Even if you have a registered security interest, immediate repossession may not be the best option (as in the above case). It is important that you talk through your options with professionals experienced in this area.