Would you know what to do if a business stopped paying your invoices or became insolvent?
What you may not know is that in these situations you are considered to be an unsecured creditor and there are some important government regulations you should be aware of to try and protect yourself from losing money or assets.
What is a creditor?
You are a creditor if a business owes you money. Usually this is because you have provided goods or services, or made loans to the company.
There are generally two categories of creditors: unsecured and secured.
An unsecured creditor is an individual or business that provides goods or services without obtaining specified assets as collateral. This poses a higher risk to the creditor because they will have nothing to fall back on should their customer defaults on payment.
A secured creditor is generally a bank or other asset-based lender that has a security interest in the assets of a company.
Signs customers can’t pay
Make sure you are ahead of the game by looking out for signs that your customer may be struggling to pay you. They may:
- start to default on payments when usually they pay on time
- claim they cannot pay you because they are waiting to be paid by one of their clients
- claim they didn’t receive your invoice or that it wasn’t submitted correctly
- not be paying other people contracted to them
- say they will pay you by a certain date, then don’t
- stop replying to phone calls, text messages or emails
- suddenly change senior managers or directors
- start using a factoring company to pay invoices
- have their credit score changed (you can track this through a organisation such as CreditorWatch)
- start moving company assets such as plant into another business
- have default notices against them in court.
If you spot these warning signs, it may be good idea to reassess whether to continue to supply them. If you have contractual obligations it’s important to seek legal and business advice before taking any action.
What is insolvency
A company may become insolvent if it is unable to pay its debts when they are due. In some cases it may continue to trade under the supervision of an appointed administrator (known as voluntary administration) as it tries to pay its debts. In other cases they may cease trading immediately and go into liquidation. Liquidation is the process of selling all its assets before the business closes completely. If it isn’t possible to save the company or its business, the process of administration aims to manage company’s affairs in a way that results in a better return to creditors than they would have received if it had been placed straight into liquidation.
Suppliers and contractors are generally considered unsecured creditors, however they can retain an interest in their personal property if it is registered on the Personal Properties Security Register (PPSR).
You need to be aware that a ‘retention of title’ clause in your contract (indicating that title remains with you until goods are paid for in full), does not protect you on its own. Being registered on the PPSR can put you first in line to get your goods or money back, rather at the back of the queue should your customer not pay or go broke.
It’s important to note that retentions on construction contracts can also be secured under PPSR. Visit the construction section on the PPSR website for more information or view their short guide Hey Tradies…don’t get ripped off.
Before a company goes into liquidation
Once a company that owes you money goes into liquidation it’s important to note that as an unsecured creditor, regardless of the size of your business or size of your debt, you are provided with the same protections under the Corporations Law. The liquidators will generally prioritise the interest of unsecured creditors last, after secured creditors and employees.
In order to be included in the process of winding-up (or liquidating) the company, as soon as it enters administration (or liquidation) it is important to take the proactive steps detailed in our managing a supplier's insolvency checklist.
More information
The Australian Securities and Investments Commission (ASIC) has information on insolvency for creditors. You can also search ASIC’s published notices to find out if a company has become insolvent.
If you would like assistance on any of these topics, call us on 133 140 to speak to one of our experienced business advisers.
