It’s not that unusual to be owed money by another business. But if that company no longer has any money to pay you, or anyone else, back, what can you do? Follow this expert advice to recoup debts owed to you.
While Australia escaped recession, the nation’s business world has felt the ongoing effects of the Eurozone crisis, America’s recession and China’s slowdown. Consequently, many companies have fallen on hard times.
Unfortunately, when a company can no longer afford to pay its creditors, it should go into administration, and creditors have to form a queue with the administrator to get their money back. This article examines what options are available to you if you find yourself a creditor to a company that has gone under.
To begin with, it’s important to properly understand all the terms:
Insolvent: means that a company is no longer able to pay its debts. It may not be able to get cashflow, it may simply have lost track of its ingoings and outgoings. Trading while insolvent can result in serious, even criminal, penalties imposed on directors.
Voluntary administration: this is when a company or its board appoints an administrator to take over the company’s financial activities to determine if it can be saved. If it can’t, the administrator’s aim is to get a better result for creditors than if the company had gone straight into liquidation.
Liquidation: if a company is insolvent, a liquidator can be appointed to wind up the company’s activities in a way that will fairly benefit the company’s creditors.
Receivership: is when a secured creditor of a company appoints a receiver to collect and sell the company’s assets to repay the debt owed to the creditor.
Knowing the difference between these terms is important in order to understand avenues you can pursue to get your money back.
Here are some of the legal paths that you can follow:
Voluntary administration/Liquidation/Receivership: if your final demand letters are suddenly answered by an administrator, you’ll understand why your invoices haven’t been paid. More importantly, depending on the business in question’s accountancy practices, you might not hear from an administrator at all, if your invoice is crumpled in a shoebox at the bottom of a drawer. If you have a seriously outstanding invoice, you’d do well to check the company’s status with ASIC or with a credit reporting company like CreditorWatch.
In this situation, you need to have your company officially listed as a creditor by attending a creditor’s meeting and submitting a proof of debt. If this is the case, “the issue faced is that more often than not, there is more than one debtor putting their hands up,” says Stephanie Borg, a solicitor with Neville and Hourn Legal. “In these circumstances, we have advised clients to look at other sources, related to the company, to recover the funds. This includes pursuing the directors for insolvent trading or other breaches of the relevant laws.”
If it’s found that the company in question has been trading insolvent, the Corporations Law imposes liability on the director of a company that has allowed a debt to be incurred while the company is insolvent. This is reliant on the Australian Securities & Investment Commission (ASIC) and the liquidator bringing proceedings against the company, however, “A creditor can initiate proceedings if the liquidator has failed to act within three months or if they receive written consent of the liquidator,” says Borg.
There are other issues of which you need to be aware. You cannot receive preference payments from the company if you have become a creditor. A liquidator could reclaim any payments, including partial payments, which you have received if they consider them to be unfair preference payments. Be sure to get legal advice before accepting a payment from a company you suspect to be insolvent.
Certainly, what many companies find is that it’s a long and expensive legal battle to reclaim lost funds when the company owing them has gone insolvent. “It’s known that there are many companies that simply stop trading and that company is left stagnant with nothing left for anyone to pursue,” says Colin Porter, managing director of CreditorWatch. “Hence there are significant debts that go unreported and are not paid. It’s simply written off. Lawyers would advise you that it’s not worth throwing good money after bad.”
Phoenixed companies: Just as the mythical bird rises again from the ashes, when a company ‘phoenixes’, this refers to it becoming insolvent, but then moving all of its assets to another company started by the same directors, usually of a similar name. According to ASIC, “Phoenix activity is typically associated with directors who transfer the assets of an indebted company into a new company of which they are also directors. The director then places the initial company into administration or liquidation with no assets to pay creditors, meanwhile continuing the business using the new company structure.”
If you suspect the company that owes you of taking part in phoenixing activity, there are some measures available. It’s a tricky area however, as technically phoenixing isn’t illegal. However, what occurs when a company phoenixes can be illegal, as Borg explains. “There is no definition of a phoenix company and the concept has no legal basis whatsoever. A person cannot be charged with creating or using a phoenix company.
“However, the actual activities associated with a phoenix company can be illegal or in breach of legislation. It is the specific activities such as insolvent trading or breach of director’s duties that are illegal. It is these activities that are covered by the current laws.” That means if the laws have been broken, you may be able to recover funds.
New legislation, recently passed through Federal Government, entitled The Corporations Amendment (Phoenixing and Other Measures Bill 2012 and The Corporations Amendment (Similar Names) Bill has addressed the issue of phoenixing, with the intention of making the directors of companies personally liable for debts. “The Similar Names Bill would impose personal liability on directors for the debts of similar named companies to failed companies, where the directors have engaged in phoenix company activity. Employees would be able to make a claim against the director of the phoenix company for their unpaid entitlements,” says The Hon Bernie Ripoll MP, Parliamentary Secretary to the Treasurer.
“Proving that phoenixing occurred is the problem,” says Porter. “You have to have proof for both phoenixing and associated activity.” That’s not the only problem, he adds. “You actually have to pursue the company personally as well. Just because you prove that a company has been involved in possibly illegal activity, still does not mean you’re going to get paid because the director themselves might not have any money.”
Borg adds that directors are becoming more savvy as to how to limit their personal liability. “The onerous duties placed on directors means that they are increasingly susceptible to proceedings and financial exposure. In turn, this has resulted in directors structuring the business and their finances to limit their liability. This means that there has been a greater significance of directors and officer’s insurance (D&O) and indemnification under these policies.”
While it might seem hopeless, there may be legal paths for you to follow to reclaim funds. It’s always worth getting informed legal advice if you find yourself in any of the above situations, to see what options can be pursued. Don’t just watch the phoenix fly away with your company’s money.