I met with a client recently who I will refer to as Tom.
Tom’s company was providing services to XYZ company for 3 years. During this time he had billed the company over $1 million. During the last 12 months he was not providing services as an invoice was not paid.
Tom received a letter in early February 2021 stating that XYZ company was placed into involuntary liquidation. XYZ company had debts of $66 million and $42 million of that debt was secured. Tom’s outstanding debt was not secured and he never held security over his debts.
Tom received another letter from the liquidator stating that the liquidator believes the payments to Tom’s company were preferential payments. Preferential payments are payments made to a creditor in preference to another creditor. The liquidator was seeking to recover the monies paid to Tom’s company, to pay the secured creditors. Tom contacted me in panic about this. I hadn’t seen a matter like this before, but amazingly the law allows them to do this.
There is a subjective test that is applied by the court. The test basically says that if a supplier knowingly provides services to a company that is in financial difficulty and receives payments from that company, then those payments can be clawed back by the liquidator.
What evidence does the liquidator rely on?
- Payments received outside ordinary trading terms (i.e. late payments)
- Payments to you in round numbers. e.g. $30,000 of a debt of $150,000.
- Demanding and Receiving upfront payments before services provided.
- Emails/letters of demand issued by you in respect of debts outstanding.
- Published news and social media about the financial wellbeing of the company
I find it absurd that a liquidator can rely on the above and compel the payee to return the money, but that is the law. Our client Tom is in building and construction. He is chasing debts all the time.
What can you do to avoid this?
- Monitor the payments in respect of your trading terms.
- Consult with other creditors about their dealings with the company.
- Keep an eye on social media and news sites for negative commentary on the financial wellbeing of the company.
- Consider not providing services to the company if you believe an issue exists.
- Make phone calls chasing debts rather than any written correspondence. Written correspondence can be used as evidence against you.
- Restructure your company to protect against this.
How did it work out for Tom?
In NSW the liquidator can only go back on payments made for the 6 month period prior to the to liquidator’s appointment (12 Months in Queensland). Luckily for Tom the last payment was greater than 6 months ago, so Tom is in the clear. However, given the industry Tom works in and the likelihood of this happening again, we are in the process of restructuring Tom’s company, to protect against this in the future.
If you believe you could be in a similar situation as Tom, we recommend you contact us to discuss your situation and possible restructuring options.
This article appeared in our March 2021 newsletter and the author was Peter Gill.