Managing Your Personal Liability Risk in Supplier Credit Contracts

credit finacnce

The use of ‘trade credit’ or ‘supplier credit’ has become increasingly prevalent in modern commerce, particularly in industries where there are high inventory costs. As a director of a company that purchases inventory on credit, you may be personally liable for any debts owed, leaving you on the hook if things go sideways.

What is supplier credit?

Supplier credit, or trade credit, is an agreement in a commercial contract under which a supplier will supply goods and/or services on credit terms such that the buyer pays at a deferred date. At its core, it operates as a ‘buy now and pay later’ scheme, maintaining cash flow and ensuring a steady supply of goods (and also payments for the supplier). Putting aside the risk of bankruptcy on the buyer’s end, there is little reason why businesses shouldn’t enter into these agreements.

Industries that often use supplier credit as a key source of external financing include the construction, retail trade and wholesale trade industries. For instance, builders often enter into agreements to delay payments to their supplier for materials, allowing building to occur without needing to have secured tenants.

Personal Liability

Whilst these supplier credit contracts may be of great benefit, the dangers and risks of these supplier credit agreements should not be overlooked. In particular, you, as a party to a supplier credit agreement, may unknowingly be exposed to personal liability for the agreement. This generally arises where an officer of a customer/applicant business signs the application form for credit, guaranteeing the performance of the business.

Crucially, personal liability is determined through whether objectively there is an intention that the signatory be personally bound to the contract. The intention is found through examining the contract as a whole, including whether a qualification is attached to the signature, and the surrounding circumstances of the contract.[1]

One particular instance of personal liability was Crane Distribution Ltd v Yang [2016] NSWSC 620. Crane Distribution sold building supplies to Mr Yang’s company Steve Yang Construction Pty Ltd on credit. Mr Yang signed an agreement and a separate guarantee as part of the application for credit with Crane Distribution on four previous occasions in the span of 11 years, each affixing him with personal liability if Yang Construction defaulted. However, in the latest application that Mr Yang signed, he did not sign the guarantee but only the agreement. This latest agreement contained a section requiring “particulars of directors” and “details of property (to include all private land and residences)”, as well as a section stating “If the applicant is an incorporated body… I the undersigned… in our own name accept liability to the supplier for the payment as principal debtor of all monies owed”. It was held by the court that these constituted the objective factors made Mr Yang personally liable. It was not enough for Mr Yang to claim that the non-signing of the guarantee, in contract with his previous actions, constituted an intention to not be personally liable.

This case highlights the crucial nature of managing your personal liability risk exposure in signing off as a guarantor. Individuals (often, directors), in providing guarantees, may expect the protection of the corporate veil but may, to their surprise, find that the structure or drafting of their contract has put them in a position of high personal risk.

What can you do?

Now is the time to look through whether your business has been part of supplier credit contracts. If you are uncertain about your liabilities, BAL regularly provides advice on commercial agreements such as supplier credit contracts and may be able to help you manage you and your company’s risk exposure. Please contact our Business and Commercial Team at 02 6274 0999.

[1] Clark Equipment Credit of Australia Ltd v Kiyose Holdings Pty Ltd (1989) 21 NSWLR 160

First published on 22 August 2023.

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