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Insolvency Risks

We have found over the past few months many of our clients are contacting us to discuss insolvency. This comes as no surprise, given the rate at which insolvencies are being reported. For example, an article recently published in the Sydney Morning Herald referred to statistics that identified 363 companies from within the building industry have collapsed since 1 January 2012.

What is insolvency?

A person or company is solvent if it is able to pay its debts as and when they become due and payable – and is insolvent if they cannot.

This is not as simple a definition as it may seem, and the question of whether or not a person or company is insolvent will be dependent on the particular circumstances of every case.

The effect of insolvency.

Insolvency has a significant effect on a person or company’s creditors. The insolvent person or company loses control of their financial affairs to a qualified and independent third-party (usually called a trustee, administrator or liquidator), who then manages their financial affairs with the aim of collecting as much money as possible to distribute to creditors.

The problem is that there are usually little funds available for collection, and more often than not the total debt owed is quite large (they are insolvent, after all). There is also an order in which some debts must be paid (for example, the trustee/liquidator/administrator is usually entitled to payment of their fees before anyone else) which means that by the time those ‘priority’ debts are paid there are little (if any) funds left to be distributed to the remaining creditors.

In a nutshell, more often than not a creditor will be left with little or no payment of their debt at the end of the insolvency process.

Unfortunately, insolvency for most creditors is akin to drawing blood from a stone.

What can you do?

We typically advise our clients to take steps to protect themselves before a debtor goes into liquidation. Some helpful tips include:

1. Check debtor’s records –Searches can reveal jaded financial histories or in some cases, the beginning of the insolvency process. Watkins Tapsell can provide comprehensive searches of this nature, if you require.

2. Retention of title – If you are selling goods to a customer you should consider including terms in your agreement that allow you to recover unpaid goods if the customer becomes insolvent. Watkins Tapsell can assist you in preparing and implementing such terms.

3. Consider who should be appointed as a trustee/liquidator/administrator– In limited circumstances, a creditor may have some sway in who is appointed to administer the affairs of the insolvent person or company. It is in your interests to ensure a competent and impartial appointment. Watkins Tapsell can assist with recommendations and advice when considering who should be appointed.

Contact us if you would like further information on insolvency, or require assistance with insolvency. We may be able to help you identify a risk before it becomes costly, and avoid the need to try and draw blood from that stone.

For further information contact the Commercial Litigation Team.