Watch out for insolvent debtors

If you suspect a company you are trading with may be insolvent, it is important you be wary of receiving any payments from that company. If a company is insolvent, any payment you receive could be reversed by the Liquidator as a “preference” at a later stage.

It can be difficult to find out if a company is insolvent.

There is no single factor that demonstrates insolvency. You need to consider the whole of the debtor’s financial position and all of the circumstances involved in the transaction.

ASIC (The Australian Securities & Investments Commission) has released a helpful information sheet (Sheet 45) which outlines some of the indicators that can help people identify a debtor’s financial circumstances.

These indicators include:

1. Have they failed to make payments in the past?
2. Was there an explanation from the Debtor why they made a late payment?
3. Statutory Demands have been issued
4. There’s been a reduction in products purchased by the Debtor
5. The debtor has requested changes in the Terms of Trade
6. Do you as the Credit Manager/Creditor have an explanation for their failure to pay?
7. Have any cheques or payments by direct debit been rejected or dishonoured?

In the case Morris v Danoz Directions Pty Ltd (in liq) (No 2) (2010) FCA 836, the court found that ASIC Information Sheet 45 contains “common sense indicators of insolvency”.
It is strongly recommends that Creditors use Information Sheet 45 as part of their daily routine in dealing with customers.

It is simply sensible business practice to check up on customers who may be in financial difficulty.

If you suspect you are trading with an insolvent company, please contact Streeterlaw immediately to arrange for a Case Appraisal Conference. We will discuss and advise you on:

1. Your liability to ‘repay’ preferential payments
2. Your rights, duties and obligations; and
3. How to deal with debtors effectively.

Contact Streeterlaw for further information on (02) 8197 0105 or by email at advice@streeterlaw.com.au

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

Call us on 02 8197 0105 to book an appointment with Mark Streeter!