It is a sobering reality of the COVID-19 pandemic that many businesses in the supply chain are likely to fail and cause a domino reaction with their contacts. You need to set yourself up now to put yourself in the best position possible to recover your funds.
This article looks at six strategies to put you in the best position to protect your business.
1. Review your contracts
a) Have you registered all security interests granted under the contract?
Be aware of the Personal Properties Securities Act – seek legal advice as to whether you are able to register your interest on the Personal Properties Securities Register (“PPSR”) and ensure it is done correctly and as soon as possible.
b) Is there a force majeure clause and does it apply?
Force majeure is the legal principle used where there are unforeseen consequences that prevents someone from fulfilling their obligations under a contract.
The exact wording of the clause is relevant as to whether it will cover a public health crisis - even if a pandemic isn’t explicitly contemplated, it may be arguable that other phrases used in the clause are relevant.
c) Does the Coronavirus make the subject matter of the contract meaningless?
If so, there might be a “frustrating event” which may allow termination of the contract.
An example is if you have a contract to sell goods at an event that has now been cancelled – a careful analysis of the specific situation will be needed.
2. Take security and personal guarantees where possible
a) Personal guarantee
Ask for a personal guarantee from the director (if you are dealing with a corporate entity) and perform a property search to see if the director owns any property in their personal name. This allows you to seek payment from the director personally if an administrator or liquidator is appointed to the corporate entity.
b) Security – make sure it is registered correctly
Ensure that your PPSR interest is registered over the correct entity – in many cases if you are dealing with a trading trust, you need to be careful that you are securing the trust’s property and not just the assets of the corporate trustee. This is because a corporate trustee often does not have any assets of its own. It is a common mistake to register a security interest over only the corporate trustee and not on the ABN of the trust.
3. Review and update your terms and conditions
a) What are your trading terms?
- Start enforcing your trading terms.
- Consider providing less (or no) credit to high risk customers.
b) Check for default interest.
- Is there interest payable upon default and if so, what is the interest rate applicable? If you do not set this out in your T & C’s you may not be able to charge interest on overdue invoices.
c) Update to include clauses to allow you to take security and personal guarantees.
4. Review your lease and talk to your landlord
a) Consider if your lease is frustrated because the government has imposed restrictions that span a substantial part of the term of the lease – you should seek advice because the doctrine of frustration is quite technical.
b) Negotiate a rental reduction for 6 months.
5. Review your insurance policies
It is important to see if your losses in the case of a pandemic are covered by insurance policies. This could be loss of income from a business shut down due to government restrictions or the loss of rental income from a commercial or retail lease.
6. Take advantage of government policies
The government policies to assist businesses are well publicised and every business should be considering whether they are eligible for any government subsidies being offered.
All businesses should be considering these issues to put them in the best possible position to try and survive COVID-19 pandemic. We are well placed to advise about all of these issues.