Commercial creditors – How to prepare for a rise in insolvency – Insolvency/Bankruptcy

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The pandemic has significantly impacted the way a commercial creditor will interact with its customers, especially when it comes to demanding payment from them. In many cases, a loan officer will do their job well by working with clients who have experienced financial difficulties and collecting payments, including in installments over time.

Conversely, until recently, collection activity at the ATO had been virtually non-existent since the onset of the pandemic in 2020. Around early April 2022, the ATO wrote to over 50,000 administrators giving them 21 days notice to pay their tax debts, failing which a Director Penalty Notices (DPN) may be issued. This was considered a “warning letter” from the ATO.

The ATO has also recently made key changes to the DPN scheme, including the removal of a payment arrangement option under Article 255-15 in Annex 1 to the Tax Administration Act 1953 (Cth), which means that company directors would be personally liable for the tax debts of the company after receiving the DPN. A director with a DPN will only have the following options:

  • pay the entire debt;

  • appoint a small business restructuring specialist;

  • appoint a liquidator; Where

  • appoint a director of the company.

The removal of the payment arrangement option will inevitably mean that more directors who receive DPNs will place their companies in some form of external administration. It can also lead to an increase in personal insolvencies of directors.

Following this, we could see an increase in the amount of privileged claims issued by insolvency practitioners to creditors, seeking to recover payments made within 6 months of the day of the relationship (as defined in section 91 of the Companies Act 2001).

In accordance with section 588FA of the Corporations Act, a liquidator can only recover a preferential payment if it relates to an “unsecured debt”. In addition, there are various other defenses available to a creditor with respect to a lien claim, including that the creditor received the disputed payments in good faith and without suspicion of the company’s insolvency.

In the current climate, and with increased ATO activity, now would be an opportune time for creditors to review
both their business terms and internal collection practices to ensure they are better equipped to deal with any increase in insolvencies and requests for preferential claims. This includes:

  • A review of all contract supply terms such as charge clauses, mortgage clauses, retention of title clauses and security clauses under the Personal Property Security Act 2009(Cth);

  • A review of all quote and/or supply terms and conditions;

  • Obtain other forms of security, for example, the immediate deposit of reserves where possible, obtaining mortgages or bank guarantees;

  • A review of the credit process and procedure at the time of opening an account (or otherwise at the time of “granting credit”), including conducting credit searches for creditworthiness and property searches. In this regard, a credit application must include the appropriate confidentiality clause(s) to allow for various credit searches.

  • The conclusion of formal acts or agreements with debtors on favorable terms, including the introduction of clauses with particular protections (for example, appropriate release clauses and payment cancellation clauses which aim to protect a creditor in the event of insolvency).

  • Examine the terms of payment under which installment agreements are made between the creditor and the debtor. For larger debts, these terms may be best documented in a formal deed/agreement as noted above.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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