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Minimising exposure to refunds of voidable preferences

When assessing the methods of minimising exposure to refunds of voidable preferences, we at Stephen Wawn & Associates choose to go that extra length in considering a wide framework of the elements of voidable transactions, together with the defences available and knowledge of the reasoning behind the judgements in the various cases considered over the years.

We highly recommend seeking advice before addressing any suggestions, commencing any processes to prevent loss, and responding to persistent liquidators.

As professional litigators with considerable professional experience in insolvency, we cannot emphasise enough the importance of seeking genuine advice.

Here are a few more tips that we urge all our present and prospective clients to adopt in minimising exposure:

Good credit management practices

To ensure that good credit management practice is adopted within your organisation.

All aspects of credit management practices and procedures should be reviewed and, where applicable, improved and enhanced. Monitoring and addressing faulty procedures, assessing applications and credit histories, setting limits, recovery policies and processes.

The idea of instilling good practice will ensure that the clients are monitored consistently and regularly to ensure compliance with the terms of credit while also facilitating the recovery of debt earlier rather than later, thus reducing the loss from bad debt and subsequent avoidance.

Obtaining personal guarantees

Wherever possible, it is highly recommended to obtain personal guarantees from directors of companies before granting credit. Many organisations currently include personal guarantees within their credit application forms, but not often is the completion of the guarantee insisted upon or checked properly. Therefore, it is vital that the guarantees are witnesses, that the witnesses can be identified, and that the guarantors are aware of the consequences of the guarantee.

If a debtor offers personal guarantees while operating a business as a sole proprietor or in partnership, there is no extra protection. We highly recommend that when taking guarantees, one should consider taking securities from the guarantor. This may be in the form of mortgage security or caveats over real property. The earlier the security is taken, the less likely it will fall within any relation-back period for subsequent avoidance.

Guarantor loophole

Where the creditor receives funds, the guarantor or surety is relieved of any further obligations under the guarantee. In the circumstances where there is a valid guarantee, if the creditor is forced to refund money received as a preference unless the terms of the guarantee are specifically worded to provide for that contingency, the guarantor may be protected from having to repay the creditor, the guarantee having been extinguished upon initial payment of the debt. We urge all our clients that it is for this reason that it is always useful to review the form of guarantee used by the creditor company to protect against those contingencies.

3rd party payments

There are also circumstances where to protect the creditor from liability for preferences could mean to insist that the debt be paid by the surety rather than by the debtor. If it can be shown that the debtor was not a party to the payment, then the transaction may not be recoverable by a liquidator. This approach will require changes to the terms of the surety enabling the creditor to place initial demand for outstanding debt upon surety rather than on the debtor company. Although not always possible, this method effectively changes the status from guarantor to indemnifier.

Retention of title

In recent times, the retention of title is becoming a far more popular form of protection for creditors and this could also be a viable strategy. However, this is not applicable in all instances and sometimes is incapable of enforcement, particularly in scenarios where goods are mixed with other goods, incorporated within other products, cannot be clearly identified as belonging to the seller, or merely items in which title cannot be retained, such as the provision of services.

Early interventions

We urge all our clients to uphold a strict and consistent routine of monitoring and establishing procedures to ensure that credit limits are adhered to, repayment terms are met by the due date and follow up procedures are instigated. Implementing strict debt collection procedures will help ensure that the defences of good faith and (in the case of bankruptcy) the ordinary course of business are available to the creditor.

We also recommend the earlier and more frequent collection of any debt. This will reduce the likelihood that the debtor will become bankrupt or go into liquidation within six months. Hence, the time constraints will minimise the existence of preference payments.

Cash-On-Delivery (COD)/post-dated cheques

In those circumstances where you become aware that the debtor is under financial stress, but you still would like to continue a business trading relationship, we highly recommend that you implement, within your normal procedures, a system whereby payments from then on would be made on a COD basis, or through a series of post-dated cheques which are to be provided, for presentation upon, or shortly after provision of the goods or services. Such continued support can keep the debtor going for longer and may assist in recovering the business to survive. Moreover, if liquidation or bankruptcy is the outcome, continued support may place any funds received for old debt beyond the relation back period for recovery.

Security

In situations where the account is likely to be of significant weight, we would also recommend that you consider obtaining security over the debtor’s business assets in the case of a company and business and personal assets in the case of a sole trader or partnership. If the bank also has security, it might become difficult; however, if your supply is considered vital to the survival of the business, then it may be possible to obtain letters of priority.

 Deeds of Company Arrangement/Part X

If you are in a position whereby the funds you have received may be recoverable as preferences, then you may wish to consider supporting any proposals under Part X of the Bankruptcy Act (Cth) 1996 or Deeds of Company Arrangement. As a creditor, you should carefully consider the possible recoveries from voidable transactions, the anticipated costs of such recoveries, its own costs and overall returns under the various options.

If you are concerned about transfers or transactions being clawed back during administration or liquidation,  contact our insolvency lawyers today for a no-obligation discussion.

Stephen is the founder and principal of Stephen Wawn & Associates. Stephen has been providing advice and representation to clients in diverse areas of law for over 40 years.

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DISCLAIMER

No part of these notes can be regarded as legal advice. Although all care has been taken in preparing all notes, readers must not alter their position or refrain from doing so in reliance on any of these notes. Stephen Wawn & Associates do not accept or undertake any duty of care to readers relating to any of these notes. All inquiries should be directed to Stephen Wawn & Associates.

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