Dealing with insolvent companies is an increasing problem for many firms. There are three risks in dealing with a firm that later fails:
- Securities granted can be voided
This is a rarely used provision. However, if a company is insolvent any securities it gives can be unwound by a liquidator. This applies to General Security Agreements and to securities given to existing assets. It does not apply to those who lend money to a firm to buy a specific asset (a PMSI)
- Money paid can be clawed back
This is commonly known, where an insolvent company pays money to one creditor, giving that creditor an advantage over other creditors. Where such a payment creates an advantage, a liquidator can ask for the money back.
- The ‘Six Months No Net-Off’ rule
This is a tricky provision, Section 310. If a company is trading with an insolvent company, and there is a series of mutual debts, then only the debts older than six months can be netted off the debt owing to the liquidated company.So, let’s assume you are trading with a company that has gone into liquidation.
That company owes you ten thousand dollars. Six thousand was incurred the week before liquidation, the other four a year before liquidation.
However, you owe the company twenty thousand dollars. The liquidator can demand from you sixteen thousand dollars. You cannot net off the $6,000 incurred in the last six months of the companies life. If this is a court appointed liquidation, the six months starts at the time legal action commenced, and not from the date of liquidation.
There is one defence to this provision, and that is if you can prove that you did not know that the company was insolvent. This puts the onus of proof on the creditor and not the liquidator.
Below are some options of trying to protect yourself when dealing with an insolvency company:
- The old 9/10 rule
Possession being the 9. If the money is in your bank account, it is up to the liquidator to get it out of you. Even if they do, you at least still have the use of the money.
- Get the money from a third party
If the director pays you personally for a company debt the company cannot claw it back off you. (If the director falls into bankruptcy then the Official Assignee still can but it is one layer of protection.)
- A Personal Guarantee
Remember a personal guarantee needs to have some key elements.
- Get a security
And register it on the PPSR. This allows you to take back goods unpaid for if the company fails. A security over goods already supplied is probably not worth much but one over goods yet to be supplied should be enforceable if the company still has possession of it.
- A work around
If you are dealing with an insolvent company, try and get to do work for their customer. An example would be a building company. Try and contract with the home owner and not the builder, paying the builder a commission.
- Proof of solvency
If you think that the company is insolvent, get the director to sign a statement declaring that it is solvent. If he won’t get a new customer, if he does you at least have a defence from a liquidator.