Set future supply terms when a creditor becomes a shareholder
Separate continuing supplier terms from shareholder rights following a proposed debt-for-equity exchange.
Corporate Recovery Partners
01 / 06
Ownership does not describe the next purchase
A key supplier proposes taking shares for an old debt and continuing to supply the business. Discuss the future trading arrangement as well as the ownership proposal. Obtain legal and accounting advice on both. Do not assume the supplier will provide unlimited credit, keep old prices or support every future order simply because it would become a shareholder.
Imagine a manufacturer considering shares for an overdue component account. Record the historical balance proposed for exchange and the terms requested for new components separately. Ask who would approve future orders and negotiate prices. Keep shareholder rights under the company documents distinct from the supplier's rights and obligations under any new or continuing supply agreement.
business.gov.au recommends written contracts describing work, payment and other responsibilities. Have advisers review the proposed supply arrangement, including pricing, quantities and payment timing. In the manufacturer example, an expectation of priority access to stock should not be treated as an agreed commitment unless the relevant terms actually establish it. A friendly investment discussion may leave important commercial details unresolved.
If the supplier would gain a board role or influence company decisions, ask the corporate lawyer how relevant interests and approvals should be handled. Do not assume the same person can settle every issue informally because the parties now share an interest in the business. Keep decisions and the advice supporting the appropriate process accurately recorded.
Ask the accountant whether the retained business plan depends on favourable credit or supply assumptions that have not been accepted. A debt reduction may improve one balance without providing cash for the next order. If payment capacity remains in doubt, obtain qualified insolvency advice. Do not present a proposed shareholder relationship as a guarantee of continuing operational support.
Before committing, confirm that the ownership terms, old-debt treatment and future supply agreement fit the intended arrangement. Retain final versions and assign responsibility for monitoring trading performance. Separating the supplier and shareholder roles helps the parties build a workable relationship after the exchange, rather than discovering that each expected different benefits from the same shares.
