Australian Credit Law Bulletin - Vol 10, No 3, 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 Australian 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:
- A debtor negotiates a payment arrangement, then looks for a way out
A case study of some of the issues of setting up long-term repayment plans - The case for employing more credit staff
Think about how you structure your credit team and how the team will handle the increasing workload as the economy worsens - How can your customers keep the support of their bankers?
If the bank blows the whistle, it’s “game over”, so trade creditors need to understand the attitude of the banks
1. A debtor negotiates a payment arrangement, then looks for a way out
Australian Agriculture Commodities Pty Ltd (AAC) of Wee Waa, New South Wales had exclusive marketing rights to certain strains of chickpea. One of six shares in AAC was held by Young's Rural Services Pty Ltd, a company run by Daryl William Young.
Young's Rural Services Pty Ltd, was also the majority shareholder in Namoi Valley Grain & Grading Co Pty Ltd. Young was a director of Namoi.
AAC granted a sublicence to Namoi. Namoi undertook to pay AAC $15.00 per metric tonne of all commercial production of the strains of chickpea.
In June 2002, Namoi as agent for AAC entered into a Grower's Licence with ICM Agriculture Pty Ltd. ICM would grow the chickpeas and Namoi would buy the crop. ICM undertook not to release the seed or plant material to any person or company other than AAC or its agent, Namoi. ICM agreed that the seed supplied and the product of that seed would remain the property of AAC. ICM and Namoi also signed a Commercial Crop Contract.
Young signed a guarantee, guaranteeing Namoi's performance under the Commercial Crop Contract.
On 29 May 2003, Young attended a meeting in Wee Waa with ICM. Mr Young told ICM that Namoi would not be able to pay the Guaranteed Minimum Prices by 30 June 2003. As a solution, he proposed that ICM have control and ownership of the chickpeas and market them over time to reduce the losses associated with Namoi's foreshadowed breach.
ICM emailed Mr Young under the subject heading "Confirmation of new arrangements" as follows:
[1] Thank you again for taking the time to meet … on Thursday. As we expressed at that meeting, we are grateful for your candour and, as a result of your openness, we are prepared to investigate options to assist you, subject to cashflow constraints.
[2] It is my understanding from the meeting that you will not be in a position to meet the contract delivery and payment terms and therefore will be in breach of the contract.
[3] Based on current market quotes … sale of the chickpeas today would result in a loss of approximately $200,000. You would like ICM to maintain control and ownership of the chickpeas and eventually to market those chickpeas over time, under an open book arrangement to mitigate these losses if possible.
[4] You acknowledge that at current prices there is a loss which should be calculated and would then fall due. You will prepare a repayment schedule of this debt for approval by ICM, being mindful that any improvements in the price finally achieved by ICM, above current prices, would be used to reduce the debt owing. An interest component should also be included…
Young replied, "In essence the email is what was discussed…"
Young then took legal advice and on 7 July 2003 wrote to ICM on behalf of Namoi. He said that at all times ICM had known that the Commercial Crop Contract was "governed by a Closed Loop Marketing arrangement" and that Namoi had been acting as agent of another company (AAC). The letter said that Namoi was not in a position to vary the closed loop marketing arrangement and that Namoi could not allow ICM to market the chickpeas.
Four days later, Namoi went into administration. A month later, it was put into liquidation.
ICM sold the chickpeas to third parties in order to mitigate its loss, then sued Young for $174,731.10 in the District Court of New South Wales under his guarantee. They settled by means of a deed. Young agreed to pay $175,000 to ICM by instalments payable on 1 July on each of the years from 2005 to 2011. Time for payment was declared to be of the essence (meaning that any delay was sufficient breach to end the arrangement). The parties executed a consent judgment, a copy of which was attached to the deed, and the original of which was to be held by ICM's solicitor. If Young defaulted, ICM would be entitled, without notice, to file the judgment in the Registry of the District Court and enforce it. In such a case, the amount of the judgment would be reduced by the amounts of any payments that had been made.
Subsequently, Young acquired AAC's purported right to sue ICM. Acting as an officer of AAC, he purportedly made an assignment to himself under s 12 of the Conveyancing Act 1919 (NSW) of any claim for damages that AAC had against ICM, including.
On 13 August 2007 Young sought an order in the District Court setting aside the deed of settlement and seeking leave to file the defence and also a "cross-claim to join AAC". The next day, ICM filed a notice of motion seeking an order reinstating the proceeding so that the consent judgment could be entered.
Both motions were heard together. The court rejected Young's arguments and entered judgment against him.
On 19 November 2007, on ICM's application, the Official Receiver issued a Bankruptcy Notice, which was addressed to Young and required him to pay a total of $198,278.06. On 21 December 2007 Young sued ICM in the District Court for $257,355.00 plus costs for losses to AAC caused by ICM selling the chickpeas.
In order to succeed in setting aside the bankruptcy notice, Young's counterclaim had to have "a fair chance of success". The magistrate in the Federal Magistrates Court of Australia accepted that it did, and set aside the notice.
On appeal, the judge held that though AAC's claimed losses were claimed to relate to "Royalties Due and Payable" in accordance with the sublicence, those losses could not be said to have been caused by a breach of the Grower's Licence by ICM. ICM didn't owe AAC any royalties, Namoi did. The agreement entitled "Sublicense Agency Agreement" and dated 8 September 1998 was between AAC and Namoi. Not being a party to it, ICM could not be in breach of it. AAC's losses were caused by the insolvency of Namoi. The application to set aside the Bankruptcy Notice was dismissed.
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2. The case for employing more credit staff
(This article appeared in NBR in February 2009)
A Malaysian banker emailed me his CV, unsolicited, last weekend. He likes the lifestyle in New Zealand, so he 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 most New Zealand 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 wants to raise his kids in New Zealand.
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. How can your customers keep the support of their bankers?
Surviving the credit crunch
(A version of this article first appeared in MG Business in October 2008)
I don't think I have to waste too much space making the case that plenty of New Zealand businesses are hurting. The question I've been asking bankers and former bankers - all of them old enough and experienced enough to have lived through the recession of the early 1990s - is this: what should struggling businesses do to keep the support of their bankers during this tough time? I know there are many business owners at the moment who are spending sleepless nights wondering about this and related issues of business survival.
David Tripe is director of the Centre for Banking Studies at Massey University. He was working for a bank during the last recession. Among other recollections, he told me about a customer who later told his (Tripe's) wife that the best advice he ever had from a banker was Tripe's recommendation to abandon his business and get a job.
The bankers I spoke to had stories of helping many businesses to find solutions and survive, but I put this story first because clearly it relates to a business which had no hope of survival, where the bank's recommendation was obvious and necessary (as the owner later accepted, gratefully), but where the owner couldn't work it out for himself. It raises another important question: why are some business-people unable to work out the obvious solution for themselves?
The bankers I talked to (in New Zealand and Australia) described a scenario which they believed covered a great many failed or failing businesses. First, something in the business changes and the business starts running out of cash. In the current environment the change is often that sales dry up, and debts go bad. The business owners are unable to come up with an effective "plan B". In such a case, obviously you seek help from others. The people who should be helping are a board of directors, if the company is big enough, or the usual business professionals - accountants, lawyers, consultants, and bankers. Note that it may also include key suppliers whose support is needed to make a survival plan work.
However, many business owners are not used to paying for real business advice. They fear the cost. They can't come up with a plan to deal with the situation (or more likely, they come up with plan B, but when that doesn't work, they can't come up with plan C). So they sit on their hands.
Gerald Sare is Head of Strategic Business Services at the Bank of New Zealand, in charge of a team of 21 people which deals, in part, with businesses which are in trouble. Gerald's team can often identify solutions (though will always recommend independent advice). "We'll look at who is advising them and how they capitalise on legal and accounting advice." He says that often, business owners don't use their accountants to best advantage, with no business plans or budget monitoring in place.
"Don't be afraid to talk to professional advisors," stressed Sare repeatedly. "Often they have management information systems to monitor what's happening. They may have a number of clients in same industry and can suggest other ideas."
Of course, it has to be asked: does your accountant have the skills to help? Some accountants are brilliant business-people but others are really only bookkeepers. Ian Blair, Westpac's New Zealand General Manager Business Banking, says that often business bankers are equally good at this sort of advice.
I mentioned to one businessman the idea of telling your bank about your problems; he was horrified at the idea. This, he thought, would just lead the banker to "pull the plug". Blair disagrees. "There is no upside for bankers in not acting in the best interests of all involved," he says. "It's in the bank's best interest to have successful, satisfied business customers. How well we deal with clients when they are in difficulty determines the quality of the relationship. If we're able to work with them and support them in difficult times we end up with a client for life." David Tripe supports this view. He sees no evidence of banks pulling the plug unnecessarily. This would aggravate the economic problems, damage the banking relationship, and imperil the bank's reputation. Of course, the reality is that we have a long, tough period ahead. Sitting and waiting and hoping is just not going to work.
Of course, as Blair points out, "it's our responsibility to talk to our customers as well as theirs to talk to us. At the moment, it's not a surprise if retailers or property developers [for example] are striking problems. We should be talking to those customers."
Sare says that in many cases the bank ends up going to the customer and saying, "we think there is a problem." At that point the customer says, "I've been waiting for someone to say something me." Now it's out in the open, they can discuss it and find out whether there's a solution.
Whoever starts the conversation, it's much better that it starts when the problem is smaller and more manageable. "We see cases," says Sare, "where the business could have been saved if we'd known about the problem 6 months earlier when there were more options. Don't wait until there's an enforced trigger like running out of cash and having your suppliers put you on C.O.D. Trust your bank relationship manager. Talk to him or her."
The very best thing, all agreed, is to go to your banker with a viable plan, and say, "we have a problem, but here's how we're going to address it." It's much easier for the bank to deal with someone who has a workable plan. "Make sure your presentation to the bank is top notch," recommended one ex-banker (now CEO of a substantial business), but even a plan which is just, "I will talk to my professional advisers and come back in two weeks with a plan," is better than sitting on your hands.
Let's look at some examples, not from the current recession, because these problems are still being worked through, but from the last one. The key to the continued survival of any business is the ability to handle change. One former banker gave an example of a foundry, which came to its bankers with a problem. Its market - it made manhole covers and the like for councils and government departments - was still there but it was being undercut on its core products by cheaper imports. Its accountants helped to develop a plan to lower its manufacturing costs by increasing the automation of its processes. The business reported regularly to the bank throughout this period. Ultimately it survived.
Another case was a Sydney car dealership for a major vehicle brand. Sales were down, it was only just managing to pay the "floorplan" financing on the cars it had in stock, and it had stopped paying the manufacturer for the parts it had purchased. The owners talked to the finance company that had the floorplan and the bank that had the overdraft. The dealership's accountants came in, verified the assets, and identified that the business had too many vehicles and parts that were more suited to a rural clientele. Under the dealership agreement, the carmaker had the right to push stock onto the dealer even though it wasn't appropriate for this dealership. A deal was worked out by which the dealer gave some stock back, and the business survived.
What if there are no up-to-date accounts? "Banks need to know the numbers," points out Geoff Allott, an insolvency practitioner, "but many small businesses don't know them, or don't know what they are at the moment."
Blair agrees that if the owner doesn't know how the business is performing, it's difficult to manage the business and difficult to explain to the bank. "But we understand that many small businesses don't have great financial data," he says. "We generally have a pretty good feel for how a business is tracking from its account activity. We can use that as a tool when assessing viability. We can also make this information more meaningful for our client."
What if there is no solution? The funding of most small or medium-sized New Zealand businesses will depend on a mortgage over the owner's house. In general, only relatively big companies or businesses with very small loans will be exceptions. So the failure of a business will, in many cases, lead to the sale of the owner's house.
"I sold a lot of houses in the early 90s," says Tripe. "The process works much better if the borrower cooperates. If they talk to the bank, they can negotiate an exit; they're not marched out by the bailiffs." A homeowner will almost always get a better price than a bank selling in a mortgagee sale. In some cases, Tripe said, the cooperation of the business owner meant that although the bank lost money, it didn't feel the need to bankrupt the owner. "If someone is obstructive, you're less likely to believe they don't have other assets."
Of course, sometimes a business comes to the natural end of its life. "In that case," says Sare, "how do you close it down or position it for sale to get best result for all? Often, the owner can see business running down but can't see way out." Again, talking to bankers and professional advisors may help - they may know someone who wants to buy a business.
There are people out there wanting to buy a business, says Tripe, but waiting for the market to drop before they do. Westpac's Blair agrees. Already, he says, there are cheap assets available. "Our focus is on supporting existing clients but we're very open to new business and keen to support businesses to grow."
So the bottom line is that if you're a business-owner and it's all turning to custard, go to your bank and ask them if they can help. Even better, show them a viable plan that you intend to implement, and ask for their support. And if your business is still going well, ring your banker anyway. Smart businesses keep in touch with their bank.
SIDEBAR - 10 SUGGESTIONS FOR STRUGGLING BUSINESSES
Every business is different, so it's not sensible to generalise too much. However, here are some points raised by the bankers I spoke to which may give businesses some useful guidance.
" First, it's all about dealing with change. It's about coming up with a new plan that will cope with the new situation.
" Businesses fail because they run out of money. "Cashflow is king - absolutely critical," says Blair. "Businesses are getting stretched both ways, by suppliers who want to be paid earlier and customers who want to pay later. Managing that is key."
" Look closely at the value of your stock and the quality of your debtors. When things go wrong, it's often found that there is a lot of old stock which is not worth the book value. If so, have a sale and run the stock right down.
" Are your debts really collectable? Work harder to collect them.
" Coming up with a plan to solve your business's problems may involve the sorts of things people do in strategic planning sessions. Do a "SWOT analysis" (strengths, weaknesses, opportunities, threats). Understand where you are in the business cycle. Come up with a plan, then put together a budget and cashflow projections. Is more money required? If so, from where? Once you start putting the plan into action, keep measuring performance against the plan. And if you don't have the skills to do these things, or do them well enough, involve people who do.
" Make sure you're ordering "just in time". When sales drop, businesses are often caught with excess stock, one experienced former banker told me. Instead of selling ten boxes a month, they only sell three, but they keep ordering as if they are selling ten.
" Understand which parts of your business are going well and concentrate on those. As one banker put it, if you sell cars in a small town, you may find that sales revenue is down as people make do with the old car for longer, but revenue from repairs is up. If your customers are being affected by the downturn, you need to understand this, understand how it will affect your business, and concentrate on those who are still doing well. This is also the sort of thing you need to explain to the bank.
" What assets do you have to borrow against or liquidate?
" What costs can you reduce? If you haven't reduced your personal spending and your drawings, do so.
" If wages and salaries are a significant cost, should you reduce staff, and what will be the process for doing so? (This is one of the key areas where businesses can benefit from legal advice.)
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article is not legal advice.
