|
Business Debtor Securities - so important |
I recently had a call from a creditor with a debt of over a hundred thousand rand from a company which has apparently just made an application to go into liquidation. I was asked the inevitable question of whether we could hold the directors personally liable and what they could do to recover the debt.
I won’t burden you in dealing with the difficulties of obtaining the personal liability of a director here, but it suffices to say that this, in most cases, is grabbing at straws unless you have a suretyship in place.
First Mistake
I asked the million rand question (or in this case the one hundred thousand rand one) of what securities they in fact had. I received the answer that always makes my heart sink…..none. Usually this first mistake is fatal, in that if you don’t ask for security/ies upfront you seldom get a chance later down the line. The different types of securities range from suretyships with the directors / members being the most common, through to bonds. Details of the different types of securities are found in our article over here. That is why we encourage clients to have a sound credit application form , incorporating at least a suretyship in a way that complies with the law, and that is not invalid in terms of the Brink case .
Second Mistake
Sometimes, just sometimes you get a second bite at the cherry and you have to take it quickly. This is when the business debtor initially gets themselves into financial trouble and has the best intentions of trading themselves out of the situation who then contacts you for some grace with their payments. In my client’s case this was in December last year and this is when they made their second mistake as they did not ask for security at that stage either.
When a customer of your company asks for extended terms of payment because they are having a cash flow problem, it is the right time to either put securities into place if you do not have, like our client, or alternatively look at increasing your securities if you do already have. The customer is usually in a corner and willing to do what ever it takes to protect themselves from having to make payment. Also look very carefully at the reasons for non-payment and make a decision for yourself whether it is fatal to your customer or not. In addition while you would like to see your customer trade themselves out of difficulty it best not to be too lenient on your payments, other more prudent creditors will not be, and guess which ones are going to get paid first.
Conclusion
If you don’t have securities in place you cannot expect your attorney to produce near miracles and get directors or members of an incorporated debtor personally liable for the debts of the entity. Also, if you are going to extend the terms of payment of an incorporated debtor, be careful and also use it as an opportunity to increase your securities
Brett Bentley |
