Due to the competitive nature of the international logistics industry, customs brokers and freight forwarders (brokers) are frequently required to outlay costs on behalf of their importer clients in order to facilitate the timely release of cargo. These costs can relate to customs duties, shipping/ freight costs, clearance and local cartage costs. Often the importer may take 30, 60 or 90 days to reimburse those costs to the broker.
Ultimately the importer is using the broker’s funds to finance its own business operations. This can be high risk to the broker. Not only does the broker not have access to its own funds, funds arrive late and sometimes under payment arrangements with the importer. Cash flow is an issue.
Brokers may obtain some comfort from the fact that they have adequate terms and conditions containing a well drafted lien clause. However, adequate cargo is required on the water or otherwise in the possession of the broker to assist here. This however does not improve cash flow.
Late payment by importers may also be an indication of solvency issues with the importer.
If a struggling importer is placed into Liquidation, the appointed liquidator may attempt to recover, for the benefit of all creditors, certain funds, described as unfair preferences, that the importer paid to the broker during the six months before the commencement of the liquidation.
Should customs duties and shipping costs be included in a preference claim?
Here’s the rub, the claim by the liquidator for repayment of unfair preferences may include not only clearance fees and cartage costs of the broker (the broker’s pure profit), but also payments made by the importer to the broker to cover disbursements paid by the broker to third parties. These disbursement costs include customs duties and shipping/ freight costs, which can make up a substantial portion of the total unfair preference claim by the liquidator.
A creditor (broker) will receive an unfair preference when it receives payment of its invoices from the importer in the six months prior to the importer being placed into liquidation, and such payments result in the broker receiving more than they would have in the winding up if the broker was in the queue with other creditors.
There are a number of defences available to a broker in this situation.
The ‘good faith’ statutory defence is available where the broker can establish;
- That it became a party to the transaction in good-faith,
- That it had no reasonable grounds for suspecting that the importer was insolvent or would become insolvent (subjective test),
- A reasonable person in the broker’s circumstance would have no such grounds for suspecting (objective test), and
- That it provided valuable consideration (supply of goods or services).
There is also a ‘running account’ defence where there is a continual business relationship. This defence is not a complete defence, but may reduce the amount of the liquidator’s claim. The doctrine of ultimate effect is also a defence to a liquidator’s claim.
We recently acted for an Australian freight forwarder/ customs broker who received a summons in the Supreme Court of Victoria seeking over $500,000 in preference payments. Of concern to our client was that the great majority of the amount claimed related to customs duties and shipping costs paid out on behalf of the importer.
We were able to establish, through a detailed analysis of accounting records, expert evidence, and thorough affidavits, that the good faith defence applied, and that importantly customs duties and shipping costs should not form part of any claim. We were successful in obtaining a settlement on very favourable terms for the broker.
It may prove difficult for brokers to argue the good faith defence, for example that they had no reasonable grounds to suspect that the importer was insolvent, if the broker had written to the importer demanding payment, issued a Statutory Demand upon the importer, or issued proceedings claiming payment. Therefore before taking the above steps it is always a good idea to seek legal advice.
Brokers may also consider obtaining a trade credit insurance policy to cover bad debts.
There are also ways to minimise the risk of a liquidator clawing back payments received. Options include;
- Ensure you have well drafted terms and conditions, which are incorporated into your contract with the importer,
- Obtain personal guarantees from directors of the importer company,
- Trading on a cash on delivery basis (although in practical terms this may be difficult), and
- Obtain security before work is commenced, such as a registered interest with the Personal Properties Security Register (PPSR) over company property.
If you have any questions on these issues please contact Tony Greenwood, solicitor at Shire Legal on 9525 3444.