Australia: Effective debt recovery starts with identifying your debtor

In brief - Clarify your business relationship early on

Written contracts may not always be clear about who your business relationship is with. Factors to consider when determining which entity owes you money include identifying the contracting entity and realising when you are dealing with a trustee. Conducting research on the company's name and confirming with the counterparty will make identifying your debtor easier.

Written contracts provide more certainty than oral agreements

When recovering money owed to your business, the first thing to consider is identifying who it is that you are actually dealing with. This is a particular issue in longstanding business relationships, as the origin of the relationship may be lost in the mists of time and have changed since then.

Of course, your written contract with the debtor will set out all of the relevant details for the parties.

Don't have a written contract? Not having a written contract does not mean that there is no contract in place, as contracts formed by oral agreement are equally as binding as written contracts, but the terms will often be less certain or disputed.

If the agreement was oral, it is important to identify a particular conversation that was the essential discussion establishing the business relationship. The detail of that conversation will be the most important factor in identifying your debtor.

For example, if your sales manager had a discussion with John Smith and he knew that John Smith was the purchasing manager for ABC Pty Ltd, even if John Smith did not expressly state that he was acting for and authorised by ABC Pty Ltd, it is likely that any contract was formed between the business entities represented by your sales manager and John Smith.

However, as will be abundantly clear from this brief example, lacking a written contract is a recipe for uncertainty.

Clarifying purchaser's identity when entering into credit terms is best

Even if you do have a written contract, there are a number of issues that may arise in identifying the particular entity with whom you have contracted. Continuing our example, John Smith may have signed your standard credit terms and listed the purchasing entity as "ABC", because that is the commonly used abbreviation for John Smith's employer, ABC Pty Ltd.

However, extending this particular hypothetical, in addition to ABC Pty Ltd, there is a registered business name "ABC Group", which is registered to "Australian Building Controls Pty Ltd" which is, unknown to you, the holding company for a number of related companies that share common ownership and have similar names. Companies within the group have very similar names and trade in different locations, so that there is a company that is named "ABC [your state] Pty Ltd" that conducts business in your state. If your contract just says "ABC", which of these entities is the one that owes you money?

With the benefit of hindsight, it is obvious that the time to clarify the identity of the particular purchaser is at the time of entering into the credit terms. Assuming that that did not occur, then you are left in the position that your counterparty is not adequately identified by the standard credit terms, and it is necessary to look beyond those terms to attempt to identify the correct debtor.

In some circumstances, it may be that you have individual purchase orders or invoices for particular transactions that identify a particular entity, and the presumption would be that that named entity is the contracting party.

This, of course, can lead to complicated situations where you may have received orders from one particular entity, delivered to a separate entity, and invoiced a third entity, all within the same related group. Resolution of this tangled web is always based upon the particular situation that arises, but the most likely outcome is that the correct debtor is the party that placed the order with your company.

Trading trusts make accessing trust assets more complex for creditors

Just for some added confusion, when you make your demand for payment on ABC Pty Ltd, you receive a reply that ABC Pty Ltd acted "as the trustee of the ABC Discretionary Trust" at the relevant time, is no longer the trustee of that trust, and has since been deregistered.

"What trust?" I hear you say. A large number of businesses in Australia are operated by what are loosely termed "trading trusts". What this actually means is that there is a trustee, usually a company, who holds the business assets on trust for certain beneficiaries pursuant to a trust deed.

The general position at law is that a trustee incurs obligations on its own behalf and as trustee of the trust. The trust company itself is liable for any debts that it incurs in its capacity as trustee, but the trustee company has a right of indemnity against the trust assets for those debts incurred.

Where the corporate trustee only acts as trustee of a single trust (it does no business in its own right or as trustee for other trusts), this is not usually a problem for a creditor. However, where the corporate trustee trades in its own right and as trustee for the trust, then those obligations are separate and a counterparty who has a claim against the corporate trustee in its own right has no claim against the trust assets.

Clearly, it is important to know whether a company with whom you are dealing is acting in its own right or as a trustee of a trust. Even where a corporate trustee acts only in its capacity as trustee, if that trustee ceases to be the trustee of that trust, then the path for a creditor to access the trust assets is complicated, though still legally available.

Search entity name on ASIC and the Australian Business Register but always confirm with counterparty

If all of this seems unnecessarily complicated, then you are right. Taking a bit of time when establishing a business relationship can save you a lot of time and trouble chasing any debts. There are some things that you can do to make the process easier. For example, when a potential counterparty nominates an entity, use the ASIC free company search function to search the name provided which will return a list of business names and entities that are similar to that name. However, don't assume that a matching search result means that that is the correct entity. Use the search result as the basis for confirming the correct entity with the counterparty.

It is also worthwhile conducting an ABN search for the name on the Australian Business Register. Hopefully, the exact company name appears with an ABN and that ABN can be used in your contract. While it is perfectly adequate when dealing with a company to use its ACN on the contract, it is important to remember that each trading trust will be allocated its own ABN (actually listed as "trustee for the [trust]").

If you are contracting with the company as trustee for the trust, then you should use the trust's ABN. In most cases, a quick search of the ABN register will highlight whether there is a trust in place. Those details should then be confirmed with the counterparty.

So, you have identified the correct entity that owes you money. What next? This is the first article in a series that will focus on aspects of recovering money owed to your business. Look out for our next article in the coming months which will focus on identifying your claim, ensuring that it is valid, and starting the claim process.

Damien Butler
Restructuring and insolvency
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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