Non-Payment and Extending Credit: Ten Considerations

Non-Payment and Extending Credit: Ten Considerations for Contractors and Suppliers

Your company is not a bank. You are not in the business of lending money over extended periods of time.

Just because the general contractor has not been paid does not mean that you should not be paid (see item #1).

Remember that you have other remedies besides a construction lien. Delivering a written notice of lien can be an effective way to stop the flow of funds on a project. Likewise, a breach of trust claim can be a powerful tool.

Agree upon credit terms in advance. Be consistent, clear and concise. Obtain information about your customer by way of a credit application, including the correct legal name of the business, and current banking information.

Do the Due! Conduct appropriate due diligence including: (a) credit searches; (b) reference checks; (c) property and corporate searches; (d) writ searches.

Identify problems early. Warning signs to watch for include: (a) slow or non-payment; (b) N.S.F. cheques or post-dated cheques; (c) cheques coming from someone other than the customer; (d) re-structuring or presence of outside people such as an accountant or “consultant”.

Get something in return. In exchange for revised credit terms, seek an acknowledgement and agreement on the amount of the outstanding debt, or additional security if necessary.

Lawsuits are inevitable. Good procedures and record keeping reduce the cost of lawsuits and increase the likelihood of recovery in collections. Consider whether your company has a clear mechanism for acknowledgement of receipt or pick-up of product.

Know when to cut your losses. $100 today is worth more than the possibility of $125 two years from now. Don’t be afraid to cut deals!

As hard as it is to believe, general contractors and customers do occasionally lie about the cheque having been mailed out!

Frequently Asked Questions

Should you buy a business as an asset purchase?

I am negotiating to purchase a business and my business advisor has strongly suggested I structure the deal as an “asset purchase”. Why is this preferable?

‍There are two principal ways to structure the agreement of purchase and sale of a business: as an asset purchase or as a share purchase. An asset purchase is just that, a purchase of listed assets without taking on liabilities of the business. A share purchase, by contrast, is the purchase of the shares of the corporation that carries on the business and owns the assets. There are a number of considerations as to which form of purchase is preferable. In this article, we want to focus on why your advisor has strongly recommended an asset purchase.

‍Liability

‍A properly structured asset purchase agreement will allow you to purchase all of the desirable assets of the business you wish to acquire while leaving out the unwanted liabilities.

Your advisor has likely identified the business as one either by its nature or by the disclosure you’ve obtained in which there are significant potential liabilities that may be avoided through an asset purchase agreement. For example, if the owner of the business has been pocketing cash payments or using corporate assets for personal use, the business may be exposed to re-assessments and penalties by the Canada Revenue Agency. A purchase of shares would mean that you, through the purchased corporation, are exposed to those claims.

‍Exceptions

‍There are some exceptions to the avoidance of liability by an asset purchase. For instance, if the purchased business employed unionized labour, a collective agreement and any ongoing liabilities thereunder will follow the purchased business, even if structured as an asset purchase. Your legal counsel can assist you to identify and understand the relevant risks and how to avoid them where possible or otherwise obtain protection.

Should I incorporate my medical practice as a professional corporation?

I am a practicing family physician with two young children. My accountant mentioned the idea of incorporating my practice into a professional corporation. How does this work?

As a physician, you are generally permitted to create a physician corporation. The Ontario Business Corporations Act (OBCA) and the Regulated Health Professions Act govern physician corporations. Once incorporated, a Certificate of Authorization from the College of Physicians and Surgeons of Ontario (CPSO) is required for your professional corporation to practice medicine in Ontario.

There may be significant benefits to incorporation arising from income splitting through the payment of dividends to adult shareholders and the deferral of tax through retention of excess cash and investing in the corporation.

A professional corporation carries on the practice of medicine with you as both a shareholder and employee of your corporation. It is important to note that under the provisions of the OBCA, a professional corporation does not shield the shareholders from professional liability as acts of a professional corporation are deemed to be acts of the shareholders. Non-voting shareholders who are not members of the CPSO are exempted from any professional liability.

All voting shares of the corporation must be held by a member of the CPSO. Non-voting shares can be held by a parent, spouse or child (and minor children must have their shares held in trust). Professional corporations are only permitted to carry on the practice of the profession or activities that are related to or ancillary to the profession. Furthermore, a professional corporation is permitted to invest its surplus funds in passive investments.

A Lawyer with experience in incorporating professionals can help you set up your professional corporation such that your objectives may be realized.

Should a lawyer review your small business contracts?

I run a small business and I have several small contracts that I am currently in the process of negotiating. Are these worth bringing to a Lawyer for review?

‍Depending on the type of contract, there are a number of areas a Lawyer’s expertise can provide guidance, including contracts relating to employment or contractor relationships, borrowing and secured transactions, equipment leases, and other commercial agreements. Simply because a document is short, this does not mean there aren’t important clauses or terms that require careful consideration.

Contracts often contain important clauses relating to the limitation of liability, indemnification, and the waiver of important legal rights. Such clauses can have legal and financial implications for you or your business down the road. Understanding these implications is crucial and one of the services a Lawyer can provide.

A Lawyer can meet with you for a short consultation in order to review your contractual document and answer any questions you might have. By communicating to the Lawyer your expectations of the proposed contract, a Lawyer can work with you to achieve your goals as well as highlight and help you understand risks and liabilities that you or your business may be taking on as part of the contract.

If you have some questions about a contract and feel you may benefit from meeting with a Lawyer call and ask to set up a meeting.