Creditors beware!

Published by Jared Cains on July 06, 2011

In the current recessionary environment there are many business struggling to stay afloat.

For anyone who is in business, you will be familiar with those debtors and clients who are slow in paying or who you suspect may be struggling to survive. For most businesses in this situation getting paid is the most important outcome and once payment is received that is the end of the story. For some however, there is a potentially serious consequence of receiving payment in these circumstances that could badly affect your business in the following circumstances.

If your debtor client is a company and it:

  1. fails and gets put into liquidation; and
  2. payment of your invoice occurred at a time when the company was technically insolvent and within 2 years prior to the company going into liquidation,

then there is a high chance that the liquidator of that company will require you to repay the money you have received, even though it was received in payment of an invoice. In order to do this the liquidator will have to show that the amount paid to you is more than you would have received had the invoice still been outstanding at the time the company was liquidated. Given that most creditors of a liquidated company receive far less than they are actually owed once the assets of the company are sold this is highly likely – particularly if you are an unsecured creditor.

The sting in the tail is that you probably won’t know if the debtor is insolvent or not, and if it is then any payment received within 2 years before the company is liquidated is liable to be challenged.

There is no foolproof way to protect yourself or your business against this situation however there are a couple of things that can be done to improve your prospects of getting paid. Those are:

  • Ensure that a director/shareholder of the debtor company gives a personal guarantee if goods or services are being supplied on credit; and
  • Ensure that your terms of trade as signed by or provided to the debtor allow you to take a security interest in any goods supplied on credit or other assets of the company. This security interest must then be registered on the Personal Properties Security Register in order to be effective.

Ultimately you may not end up receiving everything that is owed to you but by following these simple steps you increase your chances of that occurring.

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