At LegalVision, our clients often ask us for assistance to recover money from a company that has gone out of business. The story usually goes something like this:
- Our client’s company provides goods or services to the debtor company along with an invoice for payment;
- The debtor company did not make payment immediately and asked for more time pay or raised an issue with the quality of the goods or services provided;
- The matter is put into the ‘too hard’ basket and left for a while;
- Someone in the business comes across the outstanding invoice and attempts to make contact with the debtor company only to find out that it’s no longer in business;
- They call a lawyer.
We explore what you can do to recover an outstanding debt as well as preventative measures that can stop this from happening again.
When Has a Company ‘Gone Out of Business’?
When we say that a company has gone out of business, legally speaking we only mean one of two things:
- The company is being wound up (i.e. liquidated); or
- The directors have voluntarily deregistered the company, or ASIC has mandated its deregistration.
Companies can go into liquidation for several reasons. It may be that a court takes the view that it is ‘just and equitable’ for the company to be wound up due to either:
- internal disharmony that is preventing it from functioning properly; or
- the company is insolvent.
Deregistration, on the other hand, generally occurs in one of three ways:
- the directors apply to ASIC to deregister the company (which can only occur under specific circumstances and not when there are outstanding debts); or
- ASIC deregisters the company for compliance reasons, meaning that either the company has failed to pay registration fees or lodge necessary documents; or
- ASIC deregisters the company 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, as upon deregistration the company no longer exists. Upon deregistration, a company’s assets vest with ASIC.
How Do I Recover the Debt if the Company is in Liquidation?
When a company is in liquidation, a liquidator is appointed to administer the winding-up process. What this means is that the liquidator must ascertain the assets and liabilities of the company, and then distribute any surplus to the company’s creditors according to their priorities established by the Corporations Act 2001 (Cth) (‘the Act’).
If your debt is unsecured (i.e. not specifically enforceable against property belonging to the company in liquidation), then your debt 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, only according to the proportion of your debt relative to the surplus funds.
For example, imagine you are owed $200 where the total unsecured debts of the company are $1000. The proportion of your debt equals 20%. If the surplus funds available for distribution are only $500, then you can only obtain 20% of this $500 (i.e. you can only receive $100).
The other role of the liquidator is to inspect the books and records of the company to see whether there have been breaches of the Act. If the liquidator finds that the directors have allowed the company to trade while insolvent or have entered into uncommercial or self-interested transactions, then it may commence court action against the directors. The purpose of these court orders is to require the directors (or third parties) to compensate the company. If successful, these court orders may increase the pool of assets available for distribution to creditors (like you).
However, it is also possible that the liquidator finds that a company has traded while insolvent, but nonetheless does not proceed with legal action against its directors. The reason may be due to a lack of funds to conduct the litigation or because of uncertainty as to the chances of success.
If this happens, a creditor can then seek the liquidator’s consent to commence an action against the directors. If the liquidator does not consent, an application may be made to a court to obtain the court’s permission, which can override the liquidator’s objection. However, you must commence proceedings against the directors within six years from the commencement of liquidation of the debtor company.
What Can I Do if the Debtor Company Has Already Been Deregistered?
As mentioned earlier, a deregistered debtor company is dead to the world. Therefore, it will be necessary to apply for a court order requiring ASIC to reinstate the company to seek a remedy against it. Upon reinstatement, any property that vested in ASIC goes back to the company.
To obtain an order to reinstate the company, you will need to show that:
- the deregistration (in this case, the inability to recover a debt) has ‘aggrieved’ you or your company; and
- it is ‘just’ for ASIC to reinstate the company.
However, it will be necessary to have exhausted all other options before applying to the court. Hence, you should explore whether you can bring an action against the company’s insurer instead.
It is also important to consider what action you will take against the company upon its reinstatement. Will you be able to recover anything? Will the company have the assets to repay you?
It may be the case that you wish to reinstate the company to have a liquidator look into its affairs. In a case where an insolvent company has allowed itself to become deregistered by ASIC, it will likely have avoided going through the winding-up process. By having a liquidator appointed, you can find out whether the directors mismanaged the company and whether you will be able to recover your debt. If successful, you may be able to bring an action against the company’s directors for insolvent trading.
What Are Some Preventative Measures to Stop Damage to My Business?
Your client agreement or terms and conditions should include a clause permitting you to take security over property belonging to the debtor company if they default in their payment.
Additionally, when supplying goods or services to a company, it is prudent to obtain a personal guarantee (and indemnity) from the company’s directors. These will enable you to pursue those individuals if payment from the company is not forthcoming.
The upshot is that safeguarding your business from suffering losses is something that you must consider when you first agree to provide the goods or services. Your agreements with the customer should define your rights in the event of a default in payment to you.
Where you do not take proper care at the contract stage, then you may have to wait for the outcome of a liquidation or commence an action against a company director later.
For further information on pursuing debts against companies that have gone out of business, please contact our specialist insolvency lawyers on 1300 544 755 or fill out the form.