Unpaid debt can mean big things for business cashflow, can weaken the foundations of even the most stable business and tear down longstanding relationships you’ve worked so hard to forge. Regardless of whether an unpaid debt is within or outside of a debtor’s control, it can have devastating outcomes for a creditor if it is not addressed swiftly. When a business has progressed into administration or liquidation, you must formally register yourself as a creditor to ensure you are on the receiving end of outstanding debt once the company’s assets have been dissolved. Having a savvy lawyer in place to support the process will ensure you are a visible priority and will increase your chances of recovering outstanding debt.
Creditor Debt Recovery
Owed money by a business that’s going under?
Prove your debt
Whether you’re a secured or unsecured creditor of a company, you must submit a proof of debt to ensure you are acknowledged as a beneficiary. Our insolvency team advise creditors and assist them in protecting their interests during the Voluntary Administration process, Deeds of Company Arrangement and the Liquidation process.
Spotlight on the Law
What You Need to Know
Here’s a few key things you need to know to get your started on the road to recovering your unpaid debt:
There is a pecking order when it comes to creditor pay out post liquidation.
When a company enters insolvency and assets are realised, there is a defined pecking order for creditors, with secured and preferential creditors sitting at the top of the food chain.
What is a secured creditor?
Generally speaking a secured creditor is an asset-based lender that holds security over some sort of business asset owned by the company to which it is lending, such as a mortgage or a charge. In this case the asset can be sold off to provide repayment to the secured creditor should the company fall into financial distress.
What is a preferential or priority creditor?
In an insolvency situation a preferential or priority creditor is held in higher regard than those that are unsecured. Generally they are employees of the company who are entitled to wages or superannuation amounts that would be paid first before ordinary unsecured creditors.
What is an unsecured creditor?
An unsecured creditor is ranked after secured and preferential or priority creditors and are commonly suppliers, customers and contractors. Unsecured creditors are among the last to be paid, often receiving little out of the insolvency process.
As a creditor you can vote to appoint an alternative liquidator or administrator.
Creditors have more rights than you think when it comes to the voluntary administration and liquidation process. In fact, at critical points in the process a creditor is invited to be a part of the process and vote at certain stages and contribute to the outcome.
Voting Opportunity 1: First Meeting of Creditors
Within eight business days of an administrator’s appointment, unless the court allows an extension of time, the voluntary administrator must hold a meeting of creditors. At this point the creditors are invited to vote at the meeting to replace the administrator, and/or to create a committee of inspection.
Voting Opportunity 2: Second Meeting of Creditors
Within 25 business days of being appointed the voluntary administrator will hold the second meeting of creditors, unless the court allows an extension of time. At this point the creditors are invited to vote on the return of the company to the control of the directors, can accept a deed of company arrangement or put the company into liquidation.
Where the company assets are insufficient to pay creditors, you will be paid a dividend or percentage of the amount owing.
At the end of the liquidation process, funds left over will be paid out in order of priority, starting with secured and priority creditors. Each category will always be paid in full before the next category receives payment. Unfortunately in a case where there are insufficient funds to pay a category in full, funds will be split and paid out as an equal percentage to creditors that fall within the category.
Generally the distribution of funds to unsecured creditors is as follows:
- Liquidation costs and expenses
- Outstanding employee wages, super and other employee entitlements
- Unsecured creditors
Payments made by the debtor company to creditors during the six months prior to liquidation could be voidable transactions.
During the liquidation process a liquidator will look at all transactions made in the past six months and determine if there has been any unfair preferences made to creditors. In the case that one creditor has been paid with preference to others they may seek to recover (claw back) payments made or to void a transaction.
To establish unfair preference a liquidator must show:
- A transaction between debtor and one of its unsecured creditors
- The creditor who received payment obtained more than what they would have received in the liquidation process
- The debtor company was insolvent trading at the time of creditor payment
- A transaction was made within six months of the company’s insolvency