How to recover debts from an insolvent company?

To recover debts from an insolvent company, you may need more than your in-house debt recovery team as dealing with insolvent companies can be more challenging. In this article, we explore several ways on how you can successfully recoup unpaid debts from an insolvent company.

But first, what is an insolvent company? There are typically 14 indicators of insolvency. The presence of two or more of these signs could mean your debtor is insolvent. Although there is no need for you to wait for two or more of the signs to appear before you act — any time your debtor is unable to pay you on time, you have to act immediately.

Two scenarios could happen when a company is insolvent: 

  1. the company goes into external administration, or 
  2. the company stops trading. 
Recover debts from an insolvent company

What do you do when a company is in external administration? 

When a company can no longer pay off its debts, its directors may appoint an external administrator to control the company’s affairs for the benefit of creditors. You call this voluntary administration. Once in administration, you must send all communications relating to debt payment to the administrator. This could explain why your demand letters came back unanswered.

Oftentimes, the creditor is left in the dark as to the status of the debtor company and may never know the true situation until months later. As due diligence, you can do a quick check with the ASIC’s Published Notices website to see whether your debtor is in external administration or not. A recent check with ASIC showed that on 9 April 2021 Intracon Pty Ltd appointed Gregory Stuart Andrews as administrator.

To recover debts from an insolvent company, you need to participate in the administration proceedings. This way, you are notified of any update and can take part in any voting. Also, you will be notified of any distribution to creditors.

Creditors may appoint an external administrator

If you think your debtor is insolvent, creditors also can appoint an external administrator for that company. This is one way that creditors can influence the outcome of the administration proceedings. Courts also schedule creditors’ meetings where the administrator will update you on the debtor’s financial position. During creditors’ meetings, you can vote on any new courses of action, such as executing a deed of arrangement, decide whether the proceeding should end, or make steps in winding up the company.

Should you find yourself a creditor to a company in administration, you may need legal advice and thus we recommend you consult a commercial debt litigation lawyer to help you navigate the ins and outs of the proceeding, guide you on how you can use your status as a creditor to gain leverage in the administration proceeding, and give you an assessment of your percentage of the recovery.

Creditors are not guaranteed 100% recovery

Once your debtor is in administration, you can no longer be guaranteed 100% recovery of the full amount of the unpaid debt. There will be other creditors lining up to get their share of the company’s assets.

Creditor priority changes once a company enters administration. There is a hierarchy of creditors to be paid, with secured creditors having the top-most priority. Unsecured creditors usually come last. If you are a supplier or service provider, there is a huge chance that you are an unsecured creditor. 

What do you do when the debtor has stopped trading? 

Some companies just stop trading when they are no longer able to pay their debts. This becomes a more difficult scenario for you as there seems to be no way for creditors to recoup the unpaid debt obligations from a company that is no longer operating.

A debtor company – who seemed to have stopped trading – may have only transferred its business to another company. This is called a phoenix activity and is illegal. For suspected phoenixing activities, report this to the Australian Taxation Office. Make a complaint with the Australian Financial Security Authority if you are dealing with an insolvent sole trader or an unregistered company.

3 other ways to collect the debt as they become due

Here are three other ways you can collect as soon as the debt becomes due for payment:

File a claim under the BIF Act 2017.

If you owe a debt to a subcontractor or supplier in the building and construction industry, then you may be facing a claim under the Building and Construction Industry Security of Payment Act 2009, now called the Building Industry Fairness (Security of Payment) Act of 2017. Read more about what you can do to file a claim under the BIF Act of 2017

Obtain and enforce judgment using garnishee order.

A garnishee order is a legal notice that directs a third party to pay the debt. Garnishee orders work when a debtor has not paid for a long time or when you have not reached an agreement regarding debt repayments. Garnishee orders also work when you are unable to recover money despite using all other debt collection avenues. The garnishee order will be addressed directly to the garnishee and they are legally required to comply with it. Read more about how garnishee orders work here.

Pursue personal liability against directors.

You can also pursue the director of a debtor company if the director has given a personal guarantee. While safe harbour provisions are available for companies and their directors, a creditor can pursue the director(s) of the debtor company if the terms and conditions in your contract include a director’s guarantee clause. Director’s guarantees are usually required in loans, leases, and other types of contracts. Read more about safe harbour rules here.

Collect debts at the earliest time possible 

Don’t let your debtors’ situation dictate your debt collection strategy. In other words, no do not wait until your debtor is insolvent before you follow up on unpaid amounts.

You must act quickly in chasing your debts because it might be too late and your debtor may now have been in administration or, worse, has stopped trading. If you have difficulties chasing after difficult debtors, do not hesitate to tap the services of a business debt collection agency to do the hard work for you. 

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