Our clients commonly ask us for help dealing with companies that have gone bust. The story usually goes something like this:
- Your business pays for the goods.
- The supplier doesn’t deliver or provide the goods.
- Someone in your business attempts to make contact with the supplier only to find out that it has gone out of business.
- You call a lawyer.
In this article, we look at what steps you can take to enforce your rights and recover a debt from a supplier that’s no longer trading.
What Does “Go Out of Business” Mean?
When we say a company has gone out of business, legally speaking we mean one of two things:
- The company is being wound up (i.e. liquidated); or
- The company has been deregistered (either voluntarily or by ASIC).
A company typically enters into liquidation when it cannot pay its debts when they fall due. Deregistration, on the other hand, can occur in one of three ways:
- The directors apply to ASIC to deregister the company (this can only occur under specific circumstances and not when there are outstanding debts); or
- ASIC deregisters the company for compliance reasons (i.e. the company failed to pay the registration fees or lodge necessary documents); or
- The company is deregistered following the conclusion of the liquidation process.
In the eyes of the law, companies are legal personalities that can enter into contracts and own property. Deregistration is the equivalent of death for a company – upon deregistration, the company no longer exists and its assets vest with ASIC.
How Can I Enforce My Rights if the Company is in Liquidation?
When a company enters into liquidation, the liquidator takes control to wind up (i.e. dissolve) the company and sell its assets. You are asking the liquidator to honour a contract where you already paid for goods or services.
In certain circumstances, a liquidator may require the court’s permission not to uphold the contract. For instance, if you suffer a loss that is ‘grossly disproportionate’ to what the liquidator would suffer if they upheld the contract, then a court may make a decision in your favour. However, if you are unsuccessful, you need to lodge a proof of debt with the liquidators to return the money you paid for the goods.
As your debt is likely unsecured (i.e. not enforceable against specific property belonging to the company in liquidation), it will be low on the list of priorities. You can only receive money if there is a surplus of assets over liabilities, and even then, according to the proportion of your debt relative to the surplus funds.
So, for example, a company owes you $200. The total amount of unsecured debts is $1000, and the surplus funds available for distribution is $500. Your debt is then 20% of the total debts, and you will only obtain $100 (20% of $500).
What is the Liquidator’s Role?
In the course of winding up the company, the liquidator will inspect its records to determine whether the directors have complied with the Corporations Act 2001 (Cth) (the Act) while managing the company. A liquidator can commence court proceedings against the directors if she or he finds they have breached their duties to the company, for instance:
- a director has engaged in insolvent trading, or
- a director has entered into a transaction for their own benefit and not the company.
The purpose of these proceedings is to maximise the pool of assets available for distribution amongst the company’s credits by recovering any money owing to the company.
A liquidator may choose not to take action against the company directors for several reasons including a lack of funds or low prospects of success. Whatever the case, you can ask for the liquidator’s consent to commence an action against a director for any loss caused by allowing the company to trade while insolvent. This is a decision you should not make lightly so speak with a disputes lawyer before commencing proceedings.
What Should I Do If the Company is Deregistered?
If the debtor company is deregistered, it no longer exists. For this reason, you will need to apply to a court for an order requiring ASIC to reinstate the company. Property that vested in ASIC then goes back to the company.
To obtain an order to reinstate the company, you will need to show the company’s deregistration aggrieved you or your business. In this case, you cannot recover goods or compensation from the company. You will need to show that you have exhausted all other options before applying to the court (e.g. can you bring an action against the company’s insurer instead?)
It’s also important to consider what action you should take against the company upon its reinstatement. Will the company have assets to repay your debt?
It may be the case that you want to reinstate the company to have the liquidator look into its affairs. Appointing a liquidator can help determine whether the directors mismanaged the company and/or whether you can recover your debt. This may also found an action against the company’s directors for insolvent trading.
Safeguarding your business from suppliers going out of business is something that you should consider when you first agree to purchase the goods. Your agreement with the seller will define your rights in the event of a default in supply to your business.
If proper care is not taken at the contract stage, then you may have to wait for the outcome of a liquidation or commence an action against a company director at a later stage.
If you have any questions or need help pursuing a debt against a company, get in touch with our specialist debt recovery lawyers on 1300 544 755.
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