If a customer defaults on payment, what you recover (and whether you recover anything at all) often comes down to the quality of your credit documentation. That’s a statement we can make with some confidence, because effective credit risk management is something our team works on every day.
At AMPAC, we regularly rely on our clients’ terms and conditions of trade and related documents when pursuing overdue debts on their behalf. Sadly, we often find those documents aren’t up to the task. Clauses are missing. Security interests haven’t been registered. Guarantees haven’t been obtained. By the time a debt is placed for recovery, it’s frequently too late to fix those gaps.
The context for all of this is difficult. According to ASIC, over 11,000 companies entered external administration in FY2023–24, a 39% increase on the prior year and the highest level since 2012–13. In the first nine months of FY2024–25, a further 10,880 companies had already entered external administration, up 40% on the same period the year before. For businesses extending trade credit, those numbers translate directly into real risk.
Sound credit risk management starts before you extend a single dollar of trade credit. This article explains what your documentation suite should include, why each element matters, and what tends to go wrong when it’s missing or outdated.
Australian corporate insolvency figures have reached their highest levels in over a decade. In the first nine months of FY2024–25, 10,880 businesses had entered external administration. Construction, accommodation, and food services continue to account for the largest share of failures, but the trend is broad-based.
Those statistics matter directly to businesses that extend trade credit. When a customer enters liquidation, what happens next depends heavily on the paperwork in place before the first invoice was issued.
The consequences of weak documentation are not abstract. We see them regularly in our commercial debt recovery work. Common outcomes include:
Effective credit risk management means addressing these risks upfront, through well-drafted documentation that can actually be relied upon when it matters.
A credit application is the foundation of your credit documentation suite, and it’s the first document to get right. Its purpose is not simply to capture contact details. It’s to ensure you know exactly who you’re extending trade credit to and have the information needed to pursue that party if a debt arises.
The most important details to capture include:
Incomplete credit applications are a recurring source of difficulty in trade credit risk management. By the time an account is in default, tracking down missing entity information takes time and effort that could be spent recovering the debt.
Your terms and conditions of trade define the rules of the credit relationship. Each clause serves a specific function, and when one is missing or poorly drafted, it creates gaps that debtors – and their advisers – are often quick to identify.
A PPSR Security Agreement grants you a security interest in the goods (not services) you’ve supplied on credit. Combined with a retention of title clause, it establishes that ownership of those goods remains with you until payment is received in full.
This is critical in an insolvency scenario. Without a properly documented security interest, your stock becomes part of the insolvent estate. You join the queue with every other unsecured creditor – and unsecured creditors typically recover very little, if anything, from a liquidation. The retention of title clause establishes your ownership position; PPSR registration gives that position legal priority against third parties.
Clearly defined default triggers are often overlooked in businesses’ terms and conditions of trade. Without them, debtors can – and often do – dispute whether they are technically in default at all. That dispute creates delay and expense at exactly the moment you want to act decisively. Your terms should specify what constitutes a default, what rights are triggered by it, and whether you can accelerate payment or recall goods.
This is arguably the most impactful single clause for businesses that work with a collection agency. A cost recovery clause means that when you engage an agency to recover a debt, the commissions and most legal fees incurred are recoverable from the debtor, not absorbed by you.
Without this clause, the cost of recovery comes directly out of what you collect. With it, you have the contractual foundation to pass those costs on. It doesn’t guarantee recovery, but it substantially changes the economics of pursuing a debt.
A jurisdiction clause specifies which state’s courts govern any dispute under your terms. Without it, a supplier in New South Wales chasing a debtor in Queensland faces genuine uncertainty about the applicable forum – and that uncertainty can become leverage for a debtor looking to delay or complicate a recovery. Specifying governing law and jurisdiction removes that ambiguity from the outset.
Liability limitation provisions reduce your exposure if a debtor raises a counterclaim during recovery proceedings, which happens more than it should. Warranty clauses establish the basis on which your customer has provided information about themselves, supporting your position if that information later proves to be inaccurate or misleading.
Legislation changes. Business practices change. Your terms and conditions of trade should include a mechanism for updating them via email or website notification, without requiring new signed agreements from every existing credit account. Without this provision, an update to your T&Cs may not bind existing customers, leaving you exposed when the law changes or your terms become outdated.
For businesses that extend credit to corporate customers, a deed of guarantee and indemnity provides an additional layer of protection beyond what your terms and conditions of trade can offer alone. Its core function is to give you recourse against individuals – typically directors or trustees – if the company itself cannot pay.
A well-drafted deed covers several distinct protections:
A deed of guarantee and indemnity is particularly important in construction, wholesale, and manufacturing, where individual invoice values are high and insolvency risk has been elevated. We recommend seeking independent legal advice on the drafting and execution of any guarantee to ensure it is enforceable in your specific circumstances.
The Personal Property Securities Register (PPSR) is a national online register where businesses record their security interests in personal property, which covers most assets other than land and buildings. For suppliers extending trade credit, PPSR registration is one of the most effective credit risk management tools available, and one of the most commonly overlooked.
The critical issue is timing. Under the Personal Property Securities Act 2009 (Cth) and Section 588FL of the Corporations Act 2001 (Cth), a security interest against a company must be registered within 20 business days of the security agreement coming into force, or more than six months before the customer enters insolvency. Miss that window, and a liquidator may treat your security interest as if it never existed. Your goods become part of the insolvent estate, and you become an unsecured creditor.
A Purchase Money Security Interest (PMSI) provides an additional advantage: super-priority. Where your interest qualifies as a PMSI – which is typically the case for suppliers of goods on retention of title terms – you rank ahead of other secured creditors, even those who registered before you. According to the PPSR’s own guidance, for inventory, PMSI registration must occur before the customer takes possession of the goods. For non-inventory goods, registration must occur within 15 business days of the customer taking possession.
The practical implication is straightforward: PPSR registration should happen at account opening, not when a problem arises. Best practice is to register every customer before or on the day the account is opened, and certainly before any goods are delivered.
Retention of title in your terms and conditions of trade and PPSR registration work together. The retention of title clause establishes your ownership of the goods; the PPSR registration gives that ownership position legal priority against third parties, including other secured creditors and liquidators. One without the other is significantly less effective in a default or insolvency situation.
If you’re unsure whether your existing PPSR registrations are correctly structured or within the required timeframes, it’s worth seeking independent legal advice before a problem arises.
For businesses with an annual turnover exceeding $3 million, compliance with the Australian Privacy Principles (APPs) under the Privacy Act 1988 (Cth) is a legal requirement. A current, accessible privacy policy is a mandatory element of that compliance, and the most straightforward place to publish it is on your website.
If you are collecting personal information as part of your credit application process, your privacy policy needs to explain what information you collect, how you use it, and to whom you may disclose it. Reviewing your privacy policy alongside your credit documentation suite ensures the two are consistent.
There is no single set of terms and conditions of trade that works for every business. The provisions you need, and how they are drafted, should reflect the specific nature of your trade credit exposure and the risks in your industry.
Progress payment provisions, retention amounts, and PPSR registration over materials supplied to site are particularly important here. Construction remains the sector with the highest number of corporate insolvencies in Australia. Any supplier to the industry who is extending trade credit on standard terms without a properly registered security interest over supplied materials is carrying more trade credit risk than they may realise.
Retention of title provisions work differently for perishable versus non-perishable goods. If you supply perishables, your terms need to address what happens when those goods have been consumed or sold before payment is received. Consignment stock arrangements also require specific drafting to ensure your ownership position is protected.
Clear scope-of-work definitions, milestone-based payment triggers, and intellectual property ownership provisions are critical for service businesses. Without them, disputes about what was agreed and whether payment is actually due become more likely and harder to resolve.
Generic terms are rarely adequate and can create more problems than they solve. Understanding which provisions matter for your business model is an important part of managing trade credit risk effectively.
With corporate insolvency activity running at its highest levels in over a decade, the question for any business extending trade credit is not whether robust documentation matters. It’s whether yours is up to the task.
AMPAC’s credit documentation services include a review and update of your full documentation suite through our national panel of lawyers. The process is straightforward and considerably less costly than discovering a gap in your documents when a debt is already overdue.
If you’re already dealing with unpaid invoices, our commercial debt recovery team works with clients across Australia at every stage of the recovery process, from early intervention through to litigation and enforcement. You can submit a new matter for debt recovery directly through our website.
The information in this article is general in nature and does not constitute legal advice. Seek independent legal advice for guidance specific to your business and circumstances.
In the meantime, if you require assistance with debt recovery matters, you will find a convenient link at the top of this page to AMPAC’s Debt Placement Form. Here you can submit a new mater for collection and attach all relevant documentation.
Do you have debt that needs recovering? Are you unsure on where to start? Contact AMPAC Debt Recovery for solutions today and speak to one of our qualified consultants to get you started.
Please fill in your details below to get instant access to Selecting the Right Collection Agency for Your Business
