Contract Countdown Series – Most Dangerous Risks #11
#11 No Charging Clauses in Personal Guarantees
We’re up to #11 in our Contract Countdown for the most dangerous risks in your Terms and Conditions and like most things in life, we need to start, well… at the beginning!
So picture this…
You’ve started the onboarding process for your new customer. After determining that your new customer’s risk profile warrants the extension of credit (or as one of our Clients calls it, “the privilege of credit”), you’re now looking for some comfort to help mitigate any potential risks.
So how do you move from being a potentially unsecured creditor to a secured creditor and give yourself the best chance at recovering any unpaid debts down the track?
This leads us to #11 on our countdown… not having proper charging clauses and security in your personal guarantees. Yes, you have PPSA provisions in your Terms and Conditions of Sale (and if you don’t, stay tuned for when PPSA makes an appearance in the Contract Countdown!) You may even have a clause in those Terms enabling you to place a caveat over any real property that the Customer may own. But you are dealing with a Company so, naturally enough, your mind turns to the personal guarantees you ask for from the directors. Many of the guarantee documents we see don’t actually ask for any security from the individuals signing the guarantees.
We always recommend that any personal guarantee you use should include a charging clause where the guarantor charges his or her interest in any real property with the obligation to pay the customer’s indebtedness. This type of charging clause creates an interest in land that can be used as legal justification for lodging a caveat on that real estate to “secure” the indebtedness. You should also ensure that your guarantee includes a power of attorney which allows you to lodge a mortgage over any property owned by the guarantor if they fail or refuse to provide this voluntarily.
But what about personal property? Why not revisit and revise your personal guarantee to also include PPSA provisions. This will specifically allow you to register your interest in any personal property owned by the guarantor on the PPSR to secure any outstanding amounts owed. Personal property is any property that is not real estate and can include things like shares, coin collections, jewelry, vintage cars, art works and even seagoing or other vessels (that tinny might be worth something on Gumtree).
There is a time in the life of every unpaid account when a line is crossed. It’s no longer about customer service or goodwill. The relationship is finished and it becomes about protection of the asset. This is when your foresight and proactive steps in getting the best security possible at the outset will help protect and recover that asset.
How do you add extra security to your documentation? Easy – get your T’s and C’s LEDchecked at no charge. We will highlight the areas where you are most at risk and how you can cost effectively correct them. Contact us for a free assessment of your current Terms and leave the rest to us.
And of course, stay tuned for #10 in our Contract Countdown…
For more information, contact Ledlin Lawyers:-