If you’re in business supplying goods or services to customers, it’s vital you understand Preference Payments, the implications of the Personal Properties Security Act and how the PPSR (when correctly applied) can help.
Why? Because The Act applies to all businesses, including yours, and the risks are growing. And because the implications if you do nothing are serious (in extreme cases taking critical cash flow and causing your own business fail).
So people are asking questions and it is important to know the answers before you get a letter in the mail from the liquidator! We posed the questions to Insolve members Bill Cotter and Stephen James, and Bruce Pasetti of thesolvers.com.au. Read on to find out how to take action to help protect your business.
What is a Preference Payment?
It’s a payment (or payments) made by an insolvent company to an unsecured creditor thereby causing disadvantage to the remaining unpaid creditors. Effectively that payment means others miss out on a ‘fair’ share. Bruce Pasetti explains that a payment qualifies if:
- a reasonable person in the creditor’s shoes should have suspected insolvency.
- it was made within 6 months of the company liquidating, or 4-10 years prior to the liquidation if the payment was made to a ‘related party’.
Note that a related party refers not only to the director’s family, but can mean other businesses in the same group of companies who have received money.
Bruce says this in not news, “it has been part of the law since 1524!” Stephen James adds that, “a preference claim can only be pursued by a liquidator, so for the payment recipient to be at risk, the payer company has to be in liquidation”.
Bill Cotter refers to media reports about a growing argument for changing the law. “It seems odd,” he says, “to punish firms that have clawed back money they’re owed simply because they have good credit and collection policies.” For the time being, however, says Bill, “the rules above remain part of the insolvency landscape”.
What are Priority Creditors?
A Secured (or Priority) Creditor is one that has a security on the item – registered with the PPSR. It allows the creditor to sell the property to satisfy their debt.
Section 556 of the Corporations Act lists the order in which a liquidator must pay out money. Secured Creditors and employees are considered preferred (priority) creditors.
What is a Voidable Transaction? How would it differ from Preference Payments?
Stephen James explains that a voidable transaction is industry jargon for a number of recovery tools available to a liquidator under Part 5.7B of the Corporations Act. These tools are variations on a theme – they all aim to deal with payments made to creditors by an insolvent company that disadvantage other creditors.
Stephen lists recovery actions as including: unfair preferences, uncommercial transactions, unfair loans and unreasonable director related transactions.
What should I do if I get a letter saying I have received a Preference Payment?
Consult a lawyer who specialises in the laws of insolvency to develop a strategy for you – Bruce Pasetti is one such lawyer. Make sure you agree a fixed fee. You can then make informed decisions.
How to avoid Preference Payments
Secured Creditors are not impacted by Preference Claims. Get your terms and conditions tightened up and be in the practice of registering on the PPSR before giving credit or accepting payment on terms.
But be aware, it’s vital to get your PPSR registration absolutely accurate and correct. You must invest time in it, or alternatively engage a specialist. An incorrect registration is useless if defeated by the liquidator, because your entire investment is very likely to be lost.
Stephen’s advice is to be aware that a liquidator’s attention is drawn to transactions where pressure for payment has been applied and/or there are lengthy communication exchanges relating to the outstanding debt.
To minimise the risk of exposure to Preference Payments claims by a liquidator, business owners should consider the following when chasing outstanding debts:
1. Follow a standard debt collection process previously communicated to the customer.
2. Keep written communication to a minimum.
3. Enter instalment arrangements early
4. Don’t accept round figure payments from debtors. Instead have specific invoice amounts paid.
It is important to note that cash is king in any business and none of these suggestions should deter a business owner from pursuing overdue debts.
How can creditors fight a preference claim?
Bruce and Stephen recommend taking early advice. Says Stephen, ‘if you have taken early advice you will know whether you should stand and fight, or fold. Dealing early is usually best’.
How far back in time can the liquidator look to recover a preferential payment?
Six months for regular creditors, says Stephen. For related parties Bruce says it can be up to 10 years.