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When entering business relationships with new suppliers, it’s crucial to carefully consider the terms of trade offered to your business. If you later have a dispute with the supplier or are encountering difficulties clearing your account, the terms of trade will be the main determiner of the outcome. The impact on your business and self can be drastic.
Terms you've agreed might lead to your business or self being placed in receivership – effectively removing your ability to run your business or manage your personal financial affairs.
One item that we're seeing included more often in terms of trade is the granting, via the general terms, of a General Security Agreement (GSA). While a GSA can provide benefits such as easier access to credit with the supplier, it also introduces several risks that need to be understood and managed.
"The Customer gives Supplier a general security interest in all of the Customer's present and after-acquired property that Supplier has performed services on or to or in which Products or materials supplied or financed by Supplier have been attached or incorporated - further as additional security the Customer/Guarantor give(s) Supplier a security Interest on all their present and after acquired property as well with rights to appoint Receiver(s) for collection at its sole discretion, under Receiverships Act 1993, treating this application as 'General Security Agreement' signed by the Customer/Guarantor with full secured party security interests, rights & benefits in all of the assets and undertakings of the Customer/Guarantor to Supplier."
A GSA can grant the supplier a security interest in your assets, which means they have a claim over these assets if you default on your obligations. This could potentially lead (if a receiver is appointed) to the seizure and sale of essential equipment, vehicles or inventory - disrupting your business operations, affecting your ability to serve your customers effectively and greatly increasing the cost (the receiver’s costs will be added) to resolve the default.
The terms associated with a GSA might restrict your ability to freely use or dispose of your assets. For instance, you may need to seek the supplier’s consent before selling certain assets or taking on additional debt. These restrictions can limit your business's flexibility and ability to make timely decisions.
Existing GSAs can affect your ability to obtain additional financing. Potential lenders may view your current registered security interests as a risk, making it harder or more expensive to secure further credit. This could impact your ability to grow or manage cash flow.
The existence of a GSA might alter your negotiating position with other suppliers, customers, or financial institutions. Concerns about your financial stability or the priority of claims in case of default may affect how others engage with your business.
Carelessly granting a GSA or agreeing to overly broad terms can lead to unintended consequences and give the supplier a large power advantage should you have a balance owed. It’s vital to ensure that the terms of trade are appropriate for the relationship and to consider if the risks to your business are acceptable.
In the event of a default, the terms of trade and an inadvertent agreement to a GSA could become the subject of legal disputes, which may involve costly and time-consuming legal proceedings. Ensuring clarity and fairness in the terms of trade can help mitigate these risks and avoid surprises.
It’s essential to understand the risks involved in accepting terms of trade from a supplier. Careful consideration and effective advice are crucial in understanding and/or negotiating the agreement which will govern the parties moving forward.
If you need assistance with considering (or drafting) proposed terms of trade, contact McVeagh Fleming for effective advice and protection.
Email: hcoupe@mcveaghfleming.co.nz
DDI: 09 950 5986
© McVeagh Fleming 2024
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
