Plan for success
Insolvency law usually comes down to one thing – liquidators – and stopping them from chasing you or ripping you off.
You might have been a supplier to a company that went into liquidation and now the liquidator wants you to refund the money you were paid. If your contracts weren’t quite right then you won’t necessarily get your goods back either. You just have the pleasure of working for free or at heavily discounted rates. Of course they say you can submit a proof of debt and they will pay you out of other recoveries but that usually is the same as when you buy the gym membership as part of your new years’ resolution to make yourself feel like you are going to do some exercise.
Directors and shareholders
You might have put a company into liquidation because you thought it was the right thing to do, or you just wanted to close off a headache, but now it has just turned into a bigger headache. Unless you are crafty in how you manage and plan the process before liquidation and in how you deal with and appoint liquidators, you run the risk of being very badly out of pocket. Throwing a company into liquidation is not necessarily the answer. An analysis of your options and planning ahead is the answer.
Liquidators have a lot of power, and once they are appointed your options are limited. They also often paid more if they recover money from you, which unfortunately does tend to create an incentive for them to try to do so if they can. Even the tax office, with its resources and its power as a government agency, often regularly gets ripped off by liquidators.
We’ve had clients who have appointed liquidators on the promise everything would be OK – and it wasn’t. They were chased for money, their credit rating was affected so they couldn’t get loans, the liquidator refused to close the liquidation (but was also not doing anything) so it was left over their heads for years. These clients always tell us how friendly the liquidator was at first, how the liquidator told them everything would be OK, and list all of these promises. Naturally the liquidator has no recollection of making any of these promises.
What is an insolvent company?
An insolvent company is one that is unable to pay its debts when they fall due for payment.
A company can be placed into liquidation voluntarily or by Court order (based on action taken by creditors or members).
The three most common corporate insolvency procedures are voluntary administration, liquidation and receivership. The personal insolvency procedures that apply to a person, not a company, are bankruptcy and personal insolvency agreements.
Is your company having financial difficulties or have you simply had enough? Be smart and plan ahead. Is a liquidator trying to chase you for money? Be strategic in how you respond. Are you selling valuable goods or services to customers who may or may not pay, or may end up in liquidation unexpectedly? Do all you can to give yourself the best chance of not having to pay a refund to the liquidator.
Frequently Asked Questions
Is the cash flow situation looking bad? Are you being chased by a liquidator?
Not necessarily. The company is separate from you – so when it comes to bankruptcy the question is whether you personally can pay all of your personal debts (including debts of your company that you have personally guaranteed). When a liquidator is appointed, the liquidator or even the tax office may try to saddle you with additional personal debts, essentially shifting the company’s debts onto you.
This can push some people over the edge. The key is to plan ahead so you can confidently defend any attempts to saddle you with the company’s debts to keep your personal debt exposure to a minimum.
As a practical matter it is usually better to get back onto your feet as soon as possible. While your company is in liquidation the liquidator will be looking at how you are tracking financially. There are so many ways that a liquidator can try to recover money from you (e.g. claiming you were trading while insolvent) and they will usually try to recover something from you in some way if they think you have the financial means to pay.
Some people will think it is better to lay low for a while until the liquidation is over, thinking that there is safety in not having any money because the liquidator won’t bother to chase you for funds. However, the period of liquidation is outside your control so you could end up laying low and living in a more impoverished state for a while, and the liquidator could still try to get money from you in the end. If you aren’t back on your feet you won’t have the financial resources to take them on. These are all practical factors to consider.
If you have the opportunity to sort out your debts without going into insolvency and needing to appoint a liquidator it is better in the sense that you will retain control over the situation. Once a liquidator is appointed they are in control and you will need to work with them to do anything. Further, even if you sort out all of the debts after appointing them, you will need to pay their fees so there will be an additional cost there.
If you are to sell anything it should be done fairly and at market value. If you end up appointing a liquidator it will be problematic if something is sold for less than market value.
This will depend on how bad your personal situation gets. If you see the signs and plan early enough, then you have the best chance of minimising personal exposure.
This is a difficult question to answer because it will depend on how you approach it. If you plan early, you will be paying a solicitor or accountant to help get everything in order and negotiate any debts to try to avoid going into liquidation, but also knowing that if you do, then you have a plan in place.
In our experience a liquidator will usually want somewhere close to $10,000 at a minimum to work on a job, and they will be paid extra based on how much time they spend on recovering money from others (including from you) and doing other tasks. If the company has no money, they will usually ask to be paid by the director for their work.
If the liquidator decides to chase you for money, then you will incur legal fees defending against them. However, if you have planned ahead then you will either have budgeted for how much you may need to pay the liquidator or have sufficient paperwork to defend yourself properly.
The liquidator’s job is to collect as much money as they can from as many people as they can and they get paid to a large degree based on how much they collect. The Corporations Act is written in a way that gives liquidators incredible power to collect money in a range of circumstances and even demand information from and interview people. The best way to deal with a liquidator is to plan ahead and use the very few avenues that do exist to help you defend against a liquidator’s actions and claims. For example, there are defences a supplier can use to prevent a liquidator being able to recover money from them. Why not have a look at these defences and then structure your supply contracts and the way supply arrangements are managed in a way that will give you the best chance of defending yourself if one of the businesses you supply goes into liquidation? If you haven’t planned ahead there are still things you can do but these will be unique to your circumstances.
In practical terms administration tends to be for businesses that can come back – in an administration you could seek to have your debts restructured through what is called a Deed of Company Arrangement – which basically is an offer to all the creditors that you will pay them a certain amount of what you owe and they should forgive the rest. A liquidation is for when the company is not going to come back and needs to be shut down. A liquidation is also for when shareholders and business owners fall out so badly that the only way to wrap things up is to close down the company and have an independent person such as a liquidator come in and sell all its assets and then divide up the proceeds (less their fees) to all the owners and creditors.
If you have any other questions, please contact us
Strategy is the difference between getting results vs paying a lot of legal fees and being stuck in the bureaucratic maze of the legal system
You can get through this. Let’s work on it together.
You have options.
The quicker (and earlier) you act the more options you will have to work through the situation. It only becomes more difficult and expensive as time goes by.