What a supplier can actually do when you cannot pay

A supplier that is not being paid can suspend your trading account or move you to cash on delivery, and where the credit application carried a retention-of-title clause it holds a security interest in the goods it supplied until they are paid for. Where a debt due and payable reaches $4,000 it can also serve a statutory demand on the company.

Stopping supply is a credit control step, not a verdict

Somewhere in the last day or two a trading account was suspended, or moved to cash before delivery, and the first thing worth knowing is how little judgement was involved. Credit controllers work to an aged balance and a threshold. When the balance crosses the threshold the account stops, and in a great many cases nobody sat down and formed a view about you or your business at all. That is also why it so often arrives with no warning: there was no decision to warn you about.

What makes it feel worse than a bill of the same size is that it does not cost you money, it stops you working. A suspended account is a stopped production line rather than an invoice. But suspension is also the mildest of the things the account terms allow, and the reason to read them today is that the rest of the list is not obvious from the email that told you supply had stopped.

You are not the first one this week

Most owners in this position ring their bank first. The bank usually says no, and it says no for reasons that have nothing to do with whether the loan would be repaid: the last financials look wrong, a lodgement is late, the credit file has a mark on it. Those are the things a bank exists to care about. None of them says anything about whether there is equity in a property.

That gap is where HomeSec has been since 2004. We are not here to judge the situation — we are here to find solutions, and we have seen this one often enough that it does not surprise us. What we look at is whether there is sufficient unused equity in real property and whether the purpose is a genuine business one. No financials, no credit score, no interrogation about how the account got where it is. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months, so there is nothing payable while the business gets its feet back under it.

Back to the account itself, because what the supplier can do next does not depend on where the money comes from.

What is actually in the credit application you signed

Trade credit is opened with a two-page form, usually years ago, often by whoever happened to be free that afternoon. It is a contract, and three things commonly sit in it that nobody remembers agreeing to.

1. 1
   A retention-of-title clause.Title in the goods stays with the supplier until they are paid for. The PPSR's own guidance treats supplying goods on credit as a retention of title agreement, and says it generally creates a purchase money security interest — an interest that takes priority over other security interests in the same property even if those were registered first.
2. 2
   A right to register that interest on the PPSR.The priority is not automatic; it has to be registered in time. Before the company takes possession, where the goods are inventory. Within 15 business days of possession, where they are not. For a corporate customer the general rule is within 20 business days of the agreement being signed. A supplier who missed those dates still has a contractual claim and has lost the queue position.
3. 3
   A personal guarantee.Many trade credit applications contain one, signed by a director in their own name. Where it is there, the balance is the director's debt as well as the company's, and the supplier can pursue the person rather than only the business. It is the clause that most often comes as a surprise, and our guide on a personal guarantee being called in covers what follows if it is.

All three are checkable this morning. The credit application will be sitting in an email from whenever the account was opened, and the supplier will send a copy if asked. The registration is checkable without asking anybody: the PPSR can be searched against the company's ACN, and ASIC's guidance for creditors points people at exactly that search to find out whether anybody holds a security interest in a company's assets other than a mortgage over land.

Taking the goods back, and what that takes

Where a supplier holds a security interest in goods it has supplied and the account is in default, it may seize them, and the PPSR's guidance is explicit that it must use a lawful method to do so. Before selling what it has seized it must give notice to the company and to any higher-priority secured parties; if it wants to keep the goods rather than sell them, it must give notice to the company and to anyone else with a registered security interest.

There is a catch in that, and it is worth knowing before anybody tells you what your rights are. Those enforcement steps can be contracted out of where the goods are not mostly for personal, domestic or household use — which is to say, in almost every commercial supply agreement. The notices you would expect may have been signed away in the same two pages that created the security. What applies to your account is what your contract says, not what the general rule says.

Goods that have been installed into a building, resold to your own customer, or mixed into something else are a different and much more technical question. That one is genuinely for a lawyer, and the answer turns on provisions this page is not going to summarise.

The balance is also a debt, with its own machinery

Supply and payment run on separate tracks, and the second one keeps moving after the first has stopped. A supplier is a creditor like any other: where a debt or debts due and payable total at least $4,000, it can serve a statutory demand on the company, and a demand that is neither complied with nor set aside inside the statutory period creates a presumption that the company is insolvent. Our guide on what a statutory demand actually demands sets out those deadlines, which are short and which the courts apply strictly.

The other thing to understand before paying anybody is what a payment can look like later. ASIC's guidance for creditors explains that where a company goes into liquidation, a payment made in the six months before the liquidation began can be recovered from the creditor as an unfair preference, if the company was insolvent when it paid and the creditor received more than it would have received from the liquidation. Under the simplified liquidation process the window is three months and the payments have to total more than $30,000. None of that is a reason not to pay a supplier. It is a reason to know, before choosing which creditor gets cleared, whether the company is solvent — and to get that view from somebody qualified to give it.

The first 48 hours

1. 1
   Find the credit application and read it.Specifically: retention of title, a right to register on the PPSR, a right of entry, and a personal guarantee. Those four clauses decide what the next fortnight looks like.
2. 2
   Search the PPSR against the company's ACN.It takes minutes and it tells you which suppliers took security, which did not, and in what order they sit. Several accounts in arrears and only one registration is a very different picture from the reverse.
3. 3
   Ring the credit controller before they ring you.Ask the direct question — what, exactly, reinstates the account — and get the answer in writing. Credit controllers reinstate accounts brought current far more readily than most people expect, and they remember who called them.
4. 4
   Count the other accounts.If one supplier has stopped, the question is whether three more are about to. Clearing the loudest account and waiting for the next one is the most expensive way through this, and dealing with all of them in one settlement is usually the cheaper structure.
5. 5
   If the balance is disputed rather than simply unpaid, say so formally.The Australian Small Business and Family Enterprise Ombudsman assists small businesses with contract and payment disputes and refers businesses to the small business commissioner in their own state or territory. A disputed invoice is a dispute, and it should not be paid as though it were a debt.
6. 6
   If the company may not be able to pay its debts as they fall due, speak to a registered liquidator first.Not because the answer is insolvency, but because the question of who gets paid is a different question once a company is in that territory, and because a registered liquidator will tell you plainly whether they think the business is viable.

Where money fixes this, and where it does not

Clearing an aged supplier account is one of the most straightforward uses there is for a secured business loan, because the benefit is immediate and you can measure it: the account reopens, materials arrive, the jobs that were sitting idle finish and invoice. Funds can be paid direct to the supplier at settlement, so the balance is cleared on the day rather than a week after the money lands. Our page on funding to clear a supplier account covers how that is structured.

It is the wrong answer in three situations, and they are worth saying plainly. If there is no unused equity in real property, this is not our answer — the conversation is with the supplier and with an accountant, not with a lender, and we will tell you so on the first call rather than after a week of hope. If the balance is genuinely disputed, borrowing to pay it funds somebody else's error and loses you the argument; take that one to the Ombudsman or your state's small business commissioner first. And if the business is losing money every month and the stopped account is simply the most visible part of that, more borrowing against the family's equity is how people lose the house as well as the company. That conversation belongs with a restructuring practitioner.

This page explains what a trade credit contract commonly contains and what the general rules are. It is general information, not legal or insolvency advice: what applies to your contract and your company is a question for a lawyer, a registered liquidator or your accountant, and the PPSR's own guidance at ppsr.gov.au and ASIC's insolvency guidance are the primary sources behind what is set out above.

Reviewed by Paul Stone, Joint Chief Executive