New Zealand Credit Law Bulletin - Vol 9, No 3, The Executive Issue, March 2009
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- If you don’t register on the PPSR you’re a bloody idiot
Innovative use of PPSR for service businesses, and a strong message to all creditors - The credit management conundrum
Another column attempting to educate senior managers about the practicalities of credit management - Dealing with people whose lives are falling apart
Why treating people decently is good for business - The case for employing more credit staff
Think about how you structure your credit team and how the team will handle the increasing workload
1. If you don’t register on the PPSR you’re a bloody idiot
(This column by Peter Hattaway which appeared in the National Business Review in January 2009)
Recently, I did some work for an accounting firm which is ramping up its credit management processes. An accountant supplies little in the way of goods that can be taken back, but I wanted them to register a security on the Personal Property Securities Register (PPSR) if they could. I discussed this with credit lawyer, Alan Liddell. Alan and I wrote a book (now out of print) on the Personal Property Securities Act (PPSA), just before it came into force in 2002, so we know a bit about the Act.
Alan drafted a clause for inclusion in the accounting firm's letter of engagement (its terms and conditions). The clause gave clients a licence to use the information the firm supplied, as long as they paid their accounts. That licence is registerable on the PPSR, (at a cost of $3 over the Internet).
What was the benefit for the accounting firm? Well, when a company goes into liquidation, it would be unfair (or so the Companies Act says) if some creditors had been paid just before the company went under, while others missed out. So the law tries to ensure that everyone suffers equally. The creditors who manage to extract payment of old debts in (broadly speaking) the six months before the company went under, may find that the liquidator has the right to claw that money back as an "unfair preference" to share amongst all creditors pro rata (or to pay the liquidator's fees). It's not fair, says the law, that one unsecured creditor should be preferred over another.
However, if our accounting firm has a security which was entered into at least six months before the company fails, it should be above the fray. The law only applies to unsecured creditors. Nothing is certain in law, but any creditor with a valid PPSR registration should be off the hook.
Of course, for any trade creditors supplying goods, the reason for taking and registering a security is less complicated. On 25 November, Auckland furniture store, Eon, was put into receivership. Many suppliers to Eon had retention of title ("Romalpa") clauses in their contracts. These clauses say, in effect, "these goods are ours until they are paid for, so if you don't pay (and you haven't on-sold them) we can take them back."
However, one of the results of the PPSA is that such creditors need to take two minutes and spend $3 to register their "security interest". Suppliers who had failed to register found that their securities were invalid against the receiver. (See http://www.nbr.co.nz/article/shocked-furniture-suppliers-bear-brunt-eon-receivership-38342).
The PPSA was a huge change to credit law. Many credit managers, lawyers, accountants, and business-people do not understand it properly. Simple ignorance is the main problem, particularly amongst small businesses (and their advisers).
However, I also know of some large companies which understand the law but which have failed to register security interests in respect of the tens of thousands of customers to which they supply goods. Why?
Of course there are many reasons, (and some of them may even be valid). For many, however, at the heart of their decision is a cost-benefit analysis which I believe is flawed. They looked at the cost ($3 x number of customers) and the hassle of checking documentation - crossing 't's and dotting 'i's. Then they compared this with the average amount they might expect to save in recovered goods over a five year period.
Now that the world is in the throes of the worst financial crisis since the Great Depression, they should do their sums again.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com. This article is not legal advice.
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2. The credit management conundrum
(This column appeared in NBR in January 2009)
Credit management isn't just about collecting money, it's about keeping customers. Non-commercial organisations tend to struggle with this. Many years ago I did some training for collection staff at a government organisation, one of a number which has the power to take wages direct from their debtor's employers, without notice to the debtor. One of their problems, as I explained to the managers I was dealing with, was that the collectors had worked out that their easiest option was to make only a cursory effort to contact debtors (by mail), then, after a period prescribed in the relevant regulations, seize the money direct from the employers.
By doing this, the collectors maximized the ill-will felt against the organisation, (by both the debtor and the employer) and in many cases, of course, left the debtor in a perilous situation, unable to meet other commitments. When I ran the seminar, I explained that best practice was to minimise the number of debtors for whom they had to take this hard action.
There was an uproar amongst the collectors; my involvement ceased at the end of the seminar and I think it was decided that it was more important to keep the staff happy than the debtors.
At the heart of the collection role is this conundrum: lots of people pay when you put pressure on them, but in putting pressure on them, you risk losing their future business (in the case of a commercial organisation) and creating ill-will.
Every business has some tool for increasing the pressure on non-paying customers. Even if you think your business doesn't have such a tool, you're wrong, it does. In some cases it's taking goods back (e.g. repossessing a car, or selling a house by mortgagee sale) or sending debts to debt collectors. But for most, the major tool is to stop supply (also known as "stop credit"). But all these tools lose customers.
If Placemakers, say, puts a customer on stop credit, he probably goes down the road and buys at Bunnings. Of course, they never know how much business they could have retained, had they worked harder to collect the debt before taking the hard action. Many consumer finance companies, for example, have tended to be cavalier in this way.
Clearly, once you've decided you never want to do business again with a particular customer, this conundrum - the trade-off of debts paid for customers lost - largely disappears. However, there may still be PR implications. If you doubt the potential for credit management to damage a business's reputation, talk to someone at Mercury Energy about the downside of cutting off the power to the Muliaga household in 2007.
How do you manage this conundrum?
Well, you start by measuring it. Most businesses judge credit management by looking at measures of unpaid debt - DSO or "Days Sales Outstanding" is the best known of these. Very few businesses measure the number of hard actions carried out. For most businesses this means the number of stop credits. This is a proxy for the number of customers credit staff upset in order to collect overdue accounts. Boards of directors should give this at least as much attention as DSO.
The hard action is often the easy option, as in my government department story. Once you focus attention on the number of stop credits, credit staff will try harder to collect by persuasion and negotiation.
A business that doesn't track the number of stop credits (or cars repossessed, or customers whose power was cut off, or wage grabs made, or whatever is appropriate for that business) clearly doesn't understand the fundamentals of credit management. Credit management isn't just about collecting money, it's about keeping customers.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com. This article is not legal advice.
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3. Dealing with people whose lives are falling apart
(This column appeared in the National Business Review in February 2009)
Credit management is not always considered sexy, so the fact that NBR has me writing a column about it is significant. Traditionally, CEOs and boards of directors pay little real attention to this aspect of their business. Now they are, so these are exciting times for credit managers. Scary for some, as they realise that if they get it wrong, the business they work for will run out of money and go out of business.
So what do the readers of NBR not know, and what is most important to tell them?
My first column covered Personal Property Securities Register registrations. We'd just done something innovative that I wanted to skite about. The more important issue, though, was that many businesses - even some very large ones - still haven't registered their security interests - the clause in their contract that says, in essence, "these goods are ours until they're paid for." For some, this will be the reason they fail. So that was an important subject to cover early.
The next column was about performance measurements. Your credit team needs to collect debts and keep customers so you need to measure both these elements, so that you push them to achieve the best compromise between the two goals, rather than sacrificing one for the other. This is absolutely fundamental and widely misunderstood so it had to be the subject of an early column too.
Today I want to tell you about an example of debtor behaviour from the owner of a failed building company, which I think is worth talking about. The business had been successful for many years. Some years ago it ran into cashflow problems (as building companies often do) and went into liquidation.
The builder told us about one creditor who he said "should have understood because I know he's been through it himself". Instead of understanding, the creditor got angry, so the builder dug his heels in and swore that he would never pay him a cent. The matter went to court and cost the creditor more money, for no return.
On the other hand, "there was one gentleman who said, 'look, I know what's happening. I've had a few friends in the building trade that have gone down this path, but I can't leave this conversation without an arrangement in place.'" The builder made an arrangement and started paying off the debt.
Here's how I read this. The builder was very stressed because his business was going bust. One creditor, perhaps very stressed himself, took it personally and blamed the builder. He missed out. The other said, in effect, "I understand. These things happen; now how are you going to pay this?" He got paid at least some of his money.
Over the next few years we're going to hear lots of stories of business failure, bankruptcy, and hardship. These are going to be the things that break up marriages and families, and in other ways ruin people's lives. A lot of people are likely to be bitter over how their creditors treated them, or angry over how their debtors walked away from their responsibilities, or guilty over the fact that they let their families or their creditors or their staff down. Many will lose everything, or feel they have. Some will kill themselves or others.
Hard times drain society's reservoir of mutual goodwill. Think about the social consequences of the Great Depression - vast numbers of unemployed, civil unrest, strikes, riots, xenophobia, the rise of fascism, etc. Banks aren't failing as they did then, so this shouldn't be as bad, or as long. But certainly, the way debtors and creditors treat each other over the next few years (maybe longer) is likely to affect how New Zealanders treat each other for the next few decades. We're all in this together.
This is not about blithely letting your debtors off the hook but there is huge benefit - for all concerned - in treating people with respect, listening and trying to understand.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com. This article is not legal advice.
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4. The case for employing more credit staff
(This column appeared in the National Business Review in February 2009)
A Malaysian banker emailed me his CV, unsolicited, last weekend. He is looking to emigrate from Malaysia and was looking for a job. He works in a euphemistically-named "special assets management" team, the special assets concerned being problem accounts. I couldn't help him but I mention him because I'm encouraging many of my non-banking clients to set up this type of team. I think many businesses will find this type of team important as more and more of their customers run out of money over the next few years.
The structure of credit operations is surprisingly important. The right structure assists prioritisation, and without effective prioritisation you won't have a successful debt collection operation. Let me give three variations of the problem of poor prioritisation, and some solutions.
First, there is the common problem of someone - the office manager or the owner or the general accounts person, for example - whose wide range of responsibilities also includes debt collection. They will often procrastinate over making collection calls, probably because they're scared. The more you do it, the less scary it is. If it's possible to change the job so that there are fewer non-collection distractions, it's usually better for both the person concerned and the business.
Then there is the organisation that gives its collectors portfolios of overdue debt which they manage from the day they become overdue until they are either paid or written off. The temptation for the collectors is simply to collect the new debt because that is easiest to collect, and ignore the old. In this case, the easiest answer is to restructure the team. Give some people the debts less than 30 days old, some the debts 31 days to 60 days, and so on. If the collection results from the oldest tranche of debt didn't justify the expense of collecting it, you would write those debts off and forget about them. If they did justify the expense, you'd add some more staff until you maximised the return.
And last, and most important in the current economy, there is the problem of collectors with a mix of debts - some simple, some complex. If your typical collection is a two-to-ten minute phone call, (as it is for many collection staff), what do you do when you strike one that requires much more time? You probably can't easily ignore your other accounts while you invest a day on it, even when the money involved justifies doing so. So you do an inadequate job, or you pass it on to your boss (who doesn't have time either); the matter drags on and on. Eventually you write the debt off and send it to the debt collectors. But by then it's too late.
To address this problem, most banks hand over problem business accounts to a specialist team. This team has more time to look into solutions, carry out negotiations, arrange extra security, restructure debt, and, if necessary, instruct lawyers or receivers.
At least one Australian bank also has a similar team for problem consumer debts, an approach which I understand their regulators believe should be a model for other Australian banks.
Here's the reason many non-banking businesses should think about setting up such a specialist team: it works. If you have the right people with the time to invest in finding the best outcome, you collect more money.
I know that many businesses are cutting back on staff, not employing, but time-consuming debt problems, by definition, take time. You probably don't have enough people and you may not have the right skills in your credit team.
If that's the case, let me know. I can put you onto a Malaysian banker who is looking for a job.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com. This article is not legal advice.
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