Don’t write off debts: How to navigate supplier or client insolvency

The news that Eagle Boys Pizza had gone into voluntary administration, owing millions of dollars to creditors, was enough to make any business owner nervous.

In business, we’re always in a position where others owe us money. So what would you do if one of these people or businesses suddenly went bust? Would you ever be able to recover the money you were owed?

Well, it depends. The insolvency world can be a confusing one. However, quite often, unsecured creditors will write off debts when they still have options to recover the full debt or at least a portion of the debt owed.

But first, it all really comes down to one question: has the business gone into receivership, voluntary administration or liquidation?

Each situation needs to be treated differently and will determine your chances of debt recovery.

Here is a quick rundown of the most common insolvency appointments and how you can ensure you get back every dollar possible.*

Receivership

When a company defaults in paying a secured creditor’s debt, a receiver may be appointed to recover the amounts owing.

A prime example is when a bank holds a mortgage and a company has been struggling to make the minimum repayments. While it is completely discretionary on whether the bank chooses to evoke their rights under the default clauses of the mortgage, they may ultimately choose to appoint a receiver.

The receiver will sell the company’s assets to satisfy the secured creditor’s debt. SME’s should note, the receiver has no obligation to recover or pay any other debts except the secured creditors.

An SME will usually have an unsecured debt ⁠— being a debt that doesn’t have any security to rely on if payment defaults ⁠— so it is important to know that the appointment of a receiver does not stop an unsecured creditor’s rights to recover their debts from the company.

If a receiver is appointed to a company and you are owed a debt, you can continue to seek to recover the debt from the company. You can also pursue the company through legal debt recovery. This means you can obtain and enforce a judgment or make an application to wind up the company and appoint a liquidator.

Voluntary administration

An external administrator will usually be appointed when the company is insolvent or is likely to become insolvent. Solvency under the law is defined as when a company can pay their debts as and when they fall due.

Once appointed, the administrator steps into the shoes of the directors.

The administrator is required to hold an initial meeting of creditors within eight business days of their appointment. They will conduct investigations into the affairs of the company and issue a report to creditors on their findings and recommendations.

There are three options for the company that the administrator must make a recommendation on. It can:

• Enter into a deed of company arrangement;
• Have the company placed into liquidation; or
• Return the company back to the directors.

The administrator is required to hold a second meeting of creditors (within 25 or 30 business days) to allow creditors to vote on the options.

Unsecured creditors cannot begin (or continue) debt recovery action during the administration period. To ensure the administrator is aware of an unsecured creditor’s debt, a proof of debt form should be lodged with the administrator.

If there are sufficient funds available, unsecured creditors will be paid in full or paid a portion of their debt (subject to monies available). In order to have your debts counted, it is important for you to:

1. Lodge your proof of debt with the administrator;
2. Review the report to creditors; and
3. Attend the second meeting to vote on your preferred option for the company.

Liquidation

There are three different types of liquidation:

• Court-ordered;
• Creditor’s voluntary liquidation; and
• Members’ voluntary liquidation.

A liquidator is appointed when a company is insolvent (or presumed insolvent and the presumption is not challenged). Once appointed, a liquidator is required to realise all of the company’s assets with a view to paying off all creditors’ debts. The liquidator acts in the interests of all creditors, both secured and unsecured.

Once a liquidator is appointed, you are not entitled to pursue recovery action. In order to ensure your debt is taken into consideration in the division of assets, you should contact the liquidator to lodge a proof of debt.

The liquidator will conduct investigations into the affairs of the company and issue reports to creditors advising on the progress and conduct of the company, with potential avenues to recover further funds. A liquidator has the power to pursue directors and third parties who have benefited from preferential payments.

Once the liquidator has funds available for distribution, under the law there is a list of priority payments, which are paid in their order of entitlement. For example, employee entitlements have a higher priority payment compared with an ordinary unsecured creditor.

Act fast and know your options

As a business owner, it’s important to pay close attention to the debts owed to you. If you notice even a slight delay or difficulty in getting paid, you need to act fast to recover your money. For some tips on how to do this, check out this recent post from Luke Hally.

If you are owed money when a company goes bust, just remember if the company is in receivership, you can continue your recovery action. If the company has appointed an administrator or liquidator, be sure to lodge your proof of debt as soon as you can to ensure you give yourself the best chance of recovering your debt.

*The above are general guidelines only and should not be taken as absolute advice.

This article was first published on August 3, 2016.

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