Liquidation and Claw Back of Preferential Payments?

One of our clients has gone into voluntary liquidation.

We received the second creditors report yesterday, the liquidators have concluded that the client was likely trading insolvent since June 2017.

The report also states that they have identified a number of preferential payments in that time and will seek to recoup them.

I didn't really know what they meant, so did a bit of Googling last night.

It looks like payments made to us from June 2017 to date, and possibly even up to 6 months before that date, may be classed as preferential and could be ordered to be paid back to the liquidator?

If they go back to June 2017 it would be around $25k, if they go back 6 months prior it would by around $90k.

We are a 20 month old small business, if they come at us to pay back $90k (for services we completed and provided for at the time of those payments), it would likely close us down.

I spent a few hours researching last night and came across this:-

Statutory Defence

Section 588FG(2) of the Act states that a Court is not to make an order regarding a voidable transaction if a creditor can prove that:

1 - It became a party to the transaction in good faith,

2 - At the time when it became a party: (a) It had no reasonable grounds for suspecting that the company was insolvent or would become insolvent, and (b) A reasonable person in its circumstances would have had no such grounds for suspecting insolvency, and

3 - It provided valuable consideration under the transaction.

The onus of proving the above defence lies with the creditor and the creditor must establish all three elements to be successful.

We certainly comply with all those points, we had no idea the company was in trouble until we got a letter from their liquidator a few weeks ago.

Just wondering if anyone has been through anything similar and what the outcome was?

I'm certain we have a good case based on the above defence, but if the liquidators decide to throw their solicitors at it anyway and take it all the way to court we couldn't afford to fight them.

Cheers.

 

Honestly, I wouldn't worry too much about it. I've been in this situation probably 5 or 6 times over the last 15 years and never had to pay anything back. When someone goes into liquidation of course they have been trading insolvent for a quite some time, otherwise they wouldn't be in liquidation.

 

Yeah, I've been an employee of three companies that have gone into liquidation. This is the first creditors report I have read that has specifically mentioned claw back of preferential payments that they "have identified". It's worded like that already have some in mind rather than the usual fluff they put in the reports with if's, but's and maybe's.

 

Yeah, get used to this creditor reports, you'll be getting them for the next few years as they attempt to unscramble the egg.

 

No doubt @Biz The last company I worked for that went into voluntary liquidation was 2010, it was only a small company and yet I still get an annual report form the liquidator as they haven't wound it up yet 8 years later!

 

Legal Tip 63: Preference payments - being asked to give back money that was owed to you legal tip 63: Preference payments - being asked to give back money that was owed to you

 

There must still be some money to bleed as those leaches oops liquidators don't lift a finger if they're not getting paid

 

Were they late in paying? That could be an issue.

With those size bills it's worth getting someone to show you how to register on PPSR for clients. At least then you are secured creditor, not unsecured.

 

If you are being paid under normal terms and conditions you should be ok.

I suggest you get a lawyer to respond when it happens and t normally goes away. And I have known cases where the liquidator was successful but the preference payments are generally quite obvious - like to associates creditors or the Tax Office.

 

@RPI - yes, always late in paying, but always have been since day one. That is normal in our industry though, we have maybe 15+ clients, all except one are late paying. We stipulate 30 day terms but what generally happens is "we pay you when we get paid", so although the liquidator can argue late payments as a cause to suspect insolvency we can EASILY show from our comprehensive record keeping that that is the industry norm, and in fact this particular clients wasn't as late as many of our others are on a regular basis.

I'll do some reserch on PPSR, thanks.

Also, we have something in our T&C's relating to payments under the Securities of Payments Act, I have to run out now but I'll read our T&C's again properly when I get back, see if there's anything in there that helps?

 

Thanks @Ross Forrester from what I've read I think we should be OK, my worry is whether they decide to throw their solicitors at it for the sake of it and we then have to risk spending a fortune on our own solicitors to fight it, or just bend over.

Just to clarify, we have not been formally asked to pay anything back as yet, this is speculation based on their report which stated they had identified several preferential payments.

 

Liquidators are commercial beasts. They won’t incur fees unless they can see a benefit. They will not incur fees unless their is a benefit to creditors.

I know a lot of people really dislike liquidators - but I know a few and they are genuinely trying to help.

 

I doubt you have a problem.
So long as it is a strictly business relationship.
If it is your brother or cousin you may have more to worry about.

These provisions are meant to prevent an insolvent company using its remaining dollars to pay back directors loans etc. or gift money or assets to related parties.
Marg

 

More love for them than say a lawyer or re agent?

 

We are finding that liquidators are becoming way more aggressive in this area. My guys have had a lot of stoush's over these in the current financial year.

 

Good luck with it all @Propagate
Business is tough enough as it is without having to deal with this ****.

 

RE agents get the most love and then liquidators.

 

@Propagate Just been through this situation - claim for $600K, settled for $150K plus about $50K in legals including barrister opinions. Now pusuing personal guarantees to recover this.

It took 3 years until we received the first claim from the liquidators - so you just have to sit and wait. Every email will be analysed to see if there was indications they were having trouble paying.

Te key information will be credit applications and the terms and conditions of sale. Make sure you have all that information at hand and in order.

Became a bit of an expert on the topic during the course of this.

 

Thanks for the input everyone. Wow @Tonibell what a bugger of a thing to go through, may have to pester you a bit more if we every get the "please pay" letter!

@Marg4000 absolutely 100% strictly business relationship. There's no related parties and there's no preferential treatment in quoting jobs, we often see the same job to quote for several competing clients. they all get the same price & T&C's from us then if one of them win the contract they'll use our services.

What may hurt us is that I regularly e-mail clients (including this one) after about 2 weeks passed due for invoice payments as they were always late, but as I said, that's true of all of our clients and is very common in this industry. The e-mails I usually send or not a "Pay this now or else", my reminder e-mails usually just give the invoice number, amount owing and I request a date to expect it so I can plan cash flow. We've never threatened action against anyone, nor entered into any payment terms. I may have asked for a part payment from time to time to aid our cashflow. Most often, the excuses back are that they are expecting payment from their client and once cleared we'll be paid, again, this is industry standard and I am able to demonstrate by way of invoice raised dates and payments received dates that this client is no worse than 99% of the rest of our clients for late payments, (in fact they paid quicker than a few of the others).

We also have a history of working for them for 12 months prior to the date by which the liquidator is saying they were trading insolvent. So working back 6 months from that date for the claw back, we still have a further 6 months worth of invoicing and delivering projects that prove good faith and show an invoice and payment pattern.

There is nothing in our files on our correspondence nor was there ever any reason for us to believe that they were trading insolvent at any time up to us receiving the letter from the administrator in January that they'd gone into voluntary insolvency. I guess that's is a strong defence, but it's about how we'd actually prove that.

I've re-read our T&C's, there's a few clauses there relating to the "operates under Victorian Law and the Building and Construction Industry Security of Payment Act 2002 for all invoicing and payment". I've looked up the Act but I cant wrap my head around whether that helps us at all.

I also came across the following on a Lawyers blog page regarding defending claw backs, "Ensure the terms and conditions include a retention of title clause (helpful with a secured debt argument)"

For context, we create and supply fabrication drawings to steel fabricators for commercial buildings. These buildings cannot be fabricated, and therefore built, without our drawings. Hence why we are so often late in being paid as the fabricator waits for their payment from the builder, then they pay the drawing office, usually after the steel is already fabricated and erected! If we have been paid then it stands to reason they have been paid which also suggests there'd be no reason for us to expect insolvent trading.

We do have a retention of title clause in our T&C's which is included with every quote sent out, (we're BLD obviously):-

3. Retention of Title
a. In spite of delivery of the drawings, property in the drawings shall not pass from BLD to The
Client until:-
i. The Client shall have paid any amounts due or owing plus GST in full
ii. No other sums whatsoever shall be due from The Client to BLD.
b. Until property in the drawings passes to The Client in accordance with Clauses 3, a,(i) & (ii),
The Client shall hold the drawings and each of them on a fiduciary basis as bailee of BLD.
c. BLD shall be entitled to recover any amounts due or owing plus GST notwithstanding that
Property in any of the drawings has not passed from BLD.
d. Until such time as property in the drawings passes from BLD to The Client, The Client shall
upon request deliver up the drawings to BLD.

I guess we just sit tight now and see if they come at us and go from there.

Cheers.

 

Bit more info, I've just re-read the liquidators report and researched a bit more on preferential payments.

They've identified $1.6m in potential preferential payments, so I think it's fair to say they'll be investigating that very thoroughly.

They've concluded that they believe the company has been trading insolvent since 30th June 2017.

The date of appointment of administrators for voluntary liquidation is 16th January 2018.

I think my reading of the 6 month back date was wrong, I'd gone form 6 month prior to the date that they deemed them trading insolvent, whereas it seems it's from the Relation Back Day, which is the the date of administrators appointment 16th Jan, so the 6 month back date takes us back to July 16th.

In that case, we have only received $19k and that included GST.

I think we have a good defense if it comes to it but I'll sleep a lot better thinking that worst case it's the thick end of $20k and not close to $100k. If it was successfully clawed back I guess the GST competent would be offset back to us along with the company tax, so out of pocket would be closer to $12.5k.

Cheers.