Don't be shocked if your debtor appoints an Administrator

Have you ever been ‘surprised’ to receive a letter regarding one of your clients who owe you money advising that an Insolvency Practitioner has been appointed an Administrator of the company?

This notice may have you scurrying for a copy of the original credit application to check to see if you obtained a director’s personal guarantee. However be careful about rushing off to commence proceedings for enforcement of the debt while the company is in Administration. Section 440D of the Corporations Act 2001 has the effect of staying the commencement and continuance of litigation against a company that is in Administration. The Stay lasts for the duration of the Administration.

If you already have a judgment debt, section 440F prevents enforcement for the duration of the administration. Section 440J also prevents you from commencing proceedings against directors under personal guarantees for the period of the administration period, without leave of the Court.  

Just because an Administrator has been appointed over the Company does not mean that you will not be paid. You may have a secured interest over goods supplied if your terms of trade have an effective ‘retention of title’ clause. Alternatively, there may be a dividend paid to unsecured creditors as part of a proposed deed of company arrangement or in a liquidation.

Comment from Mark Streeter Sydney Lawyer

Your ability to obtain personal and directors guarantees is a component part of the initial negotiations of the terms of supply. It may also be a function of your bargaining position and your willingness to assume commercial risk. Many customers start off on small orders but then the scale, frequency and amount of the orders increase.  Accordingly having certain credit limits (below which a personal guarantee may not be required) should be periodically reviewed to see whether or not the trading history of the customer has, by their conduct, crept them into a new level where the credit risk policy of your organisation requires the additional protections of a personal guarantee.

Use the “lessons learnt” to improve your starting procedures. The introduction of the Personal Property Security legislation in 2010 will provide another opportunity for you to review your terms of contract and require new signups by existing customers. This may provide you an opportunity to regularize your terms of trade and to “update” your documentation, data and business intelligence on your customers and key employees within those organisations.

What's your experience with Debt Recovery? Is it improving?

As a Sydney lawyer dealing with debt recovery and debt collection it was interesting to read the Sydney Morning Herald article business pay up more quickly. This article commented on the statistics from Dun & Bradstreet’s trade payments analysis which showed a fall in the payment terms for Australian businesses in the third quarter or 2009. This means companies are paying their bills sooner than they were previously.

Surely businesses have learned lessons from the global financial crisis and taken a more serious look at their engagements with their customers. Even if they were not directly touched by the financial meltdown, businesses had good cause to look at their debtors and assess their risk and exposure in the event their customers failed to pay what was owed.

As a lawyer helping Australian businesses in the ‘sharp end’ of credit control we have observed some changes. There is an increased focus on checking existing or potential customer’s credit worthiness. It appears to us that businesses are also spending extra attention on:
* ensuring that there is clear documentation that evidences payment terms
* tighter internal protocols that require orders be completed in writing by an authorized officer of the customer

A clear and common understanding of the terms of trade facilitates a more prosperous relationship for both customer and suppliers.  Uncertainty or misunderstanding can lead to dissatisfaction, objections and queries of accounts and consequential delays in payment.

Comment from Mark Streeter Sydney Lawyer

If you have clients not paying your invoices on time you should consider legal action. Often just bringing a legal firm into the situation can speed up the payment process.

Higher minimum debt for Bankrupt will reduce Bankrupcty Notices

The Attorney General’s Department has recently released an exposure draft of proposed amendments to the Bankruptcy Act on 25 August 2009.

There are a number of technical “restructuring” type changes proposed to be made to the Bankruptcy Act which include a restructure of the organisation of the “Districts” for Bankruptcy, a streamlined process for remuneration of trustees and increase in penalties for non-complying individuals.

One of the changes is a proposed increase of the minimum debt amount a creditor may issue a bankruptcy notice from $2,000.00 up to $10,000.00.

Comment from Mark Streeter Sydney Lawyer

Bankruptcy Notices are often used as an enforcement mechanism by debt collection and debt recovery firms.  Many more Bankruptcy Notices are issued than proceedings actually commenced (or sequestration orders made).

In the financial year 2008/2009 there were 1,953 sequestration (Bankruptcy) orders made across Australia.  1,551 were for an amount greater than $10,000.00 . This means 402 of these orders would not have been made under the new proposed minimum of $10,000.00 (approx 20%) of the current orders made.

A full copy of the legislation amendment draft can be downloaded from this link to Attorney General’s Department