Risk Management – Don’t Trip Over Your Own Sword

Recently our firm was involved in a small claims court action where the business principal, who signed a personal indemnity, was able to mitigate his liability due to a very common credit granting process.

The original credit application was approved with a credit limit of $5000.00. Over the course of several months, the subject company's orders kept getting larger and the payment history was still acceptable, given their industry.

Months past and the credit limit was now up to $20,000.00. The subject company's major customer began to have financial problems, and the trickle-down effect negatively impacted the subject company and consequently his trade suppliers, including our client.

The subject company eventually closed down; however we were able to ascertain that the business principal, who signed the indemnity, had sufficient assets to satisfy the claim. The business principal was not willing to negotiate, so our client sued. During the hearing, the business principals lawyer argued that his clients liability should not exceed the originally approved credit limit of $5000.00 and the judge agreed.

The take away - have your credit department regularly update your customer records and ensure that all limits are acknowledged in writing.