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With the added pressure from an economic recession and a worldwide pandemic, businesses are making adjustments to survive. Unfortunately, this means that your trustworthy supplier may now be unable to fulfil your orders. If your supplier has gone out of business, but you have already made payment, you might be wondering what you can do to recover the money you have spent. This article will explain the steps you can take to enforce your rights and recover a debt from a supplier that is insolvent.

What Does Insolvency Mean?

When a company is insolvent, they cannot afford to pay their outstanding debts when they are due. Here, the company would typically enter into liquidation.

You can get confirmation that your supplier is insolvent by searching for their company on ASIC’s insolvency register. Liquidation of a company means that a liquidator takes control of the business. This liquidator takes the decision-making power away from the directors. 

What is the Liquidator’s Role?

In the course of winding up the company, the liquidator will inspect their 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. This is if they find that the directors have breached their duties to the company.

For instance, some common situations where liquidators will commence proceedings against directors include where the:

  • company has engaged in insolvent trading or 
  • directors have affected transactions for their benefit (and not the company’s).

The purpose of the liquidator commencing these types of proceedings against the directors is to maximise the number of assets available for distribution amongst the company’s creditors, by trying to recover any money that is owing to the company.

However, sometimes there will not be enough money to repay the debts of all the unsecured creditors. Here, the liquidator will pay the creditors an amount which corresponds to the value of their debt as a percentage of the total unsecured debts.

A liquidator may choose not to take action against the company directors. They could choose this for several reasons, including a lack of funds or low prospects of success. 

How Do I Recover the Money I Paid, if the Company Is in Liquidation?

Do You Have a Claim Against the Directors?

If you have a claim against a company that is in liquidation, you might want to consider if you can pursue this claim against one of the directors of that company. 

If the liquidator decides not to pursue the company directors for whatever reason, then six months after the court ordered the company into liquidation, there are ways that you can pursue the directors of the company. That being said, there are limitations for what you can pursue the directors for. Your claim against the directors must be restricted to their failure to prevent their company from incurring debt while insolvent or by becoming insolvent because of the debt they incurred.

Written Notice to the Liquidator

If you have a claim against the directors, the first step is to give the liquidator written notice of your intention to begin proceedings. Once you have provided written notice to the liquidator, they have three months to provide a written statement which:

  • gives consent to the proposed proceedings or gives reasons why the liquidator thinks you should not commence proceedings; and
  • if the liquidator consents, they will also provide permission from the court for you to commence proceedings.

If the liquidator either does not respond or refuses to provide consent, you will need to apply to the court for permission directly. The court will need to consider any reasons the liquidator has for their refusal to provide consent.

Commencing Proceedings

Once you have progressed to commencing proceedings, to succeed in your claim against your supplier, you will need to prove that

  1. the directors have failed to comply with insolvent trading provisions contained in the Act;
  2. you have suffered loss or damage because of the company’s debt to you;
  3. the debt was either completely or partly unsecured when you suffered the loss or damage; and
  4. the company is in the process of liquidation.

To prove this, you require expert evidence from a suitably qualified accountant or financial controller. This person must have access to the books and records of the company. You have six years from the commencement of liquidation to bring the proceedings against the director for insolvent trading. 

If you are successful, the court will order the directors of the company to repay the debt that the company incurred plus your legal costs for the proceedings.

Key Takeaways

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 liquidation or commence an action against a company director at a later stage. If you need help pursuing a debt against a company, get in touch with LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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