Trade Creditors - How to Prepare for an Insolvency Uptick
Trade Creditors - How to Prepare for an Insolvency Uptick

The pandemic has significantly impacted the way in which a trade creditor will interact with its customers, particularly when it comes to demanding payment from them. In many cases, a credit officer will do his or her job well by working with those customers who have been experiencing financial difficulty and collecting payment, including by way of instalments over time.

Conversely, up until recently, the ATO’s collection activity has been almost non-existent since the pandemic began in 2020. Around early April 2022, the ATO wrote to over 50,000 directors giving them 21 days’ notice to pay their tax liabilities, failing which a Director Penalty Notices (DPN) may be issued. This has been seen as a ‘warning letter’ on the part of the ATO.

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

  • pay the debt in full;
  • appoint a Small Business Restructuring Practitioner;
  • appoint a Liquidator; or
  • appoint an Administrator to the company.

The removal of the payment arrangement option will inevitably mean that more directors who receive DPNs will put their companies into some form of external administration. This may also result in increased personal insolvencies for directors.

Following this, we may see an increase in the amount of preference claims being issued by insolvency practitioners to creditors, seeking to claw back payments made within 6 months of the relation-back day (as defined under section 91 of the Corporations Act 2001).

Pursuant to section 588FA of the Corporations Act, a liquidator is only able to recover a preferential payment if it is in relation to an ‘unsecured debt’. Further, there are various other defences available to a creditor in relation to a preference claim including that the creditor has received the impugned payments in good faith and without suspicion of the company’s insolvency.

In the current climate, and with the increase in ATO activity, it would be an opportune time for creditors to review both their trading terms and conditions and internal collections practices to ensure they are best equipped to deal with any uptick in insolvencies and preference claim demands.  This includes:

  • A review of any contract supply terms such as charging clauses, mortgage clauses, retention of title clauses and security interest clauses under the Personal Property Securities Act 2009 (Cth);
  • A review of any accompanying terms and conditions of quotation and/or supply;
  • Obtaining other forms of security, for example, the immediate lodgement of caveats wherever possible, obtaining mortgages or bank guarantees;
  • A review of credit process and procedure at the time of opening an account (or otherwise at the time of ‘giving credit’), including the undertaking of credit searches for credit worthiness purposes and property searches. In this regard, a Credit Application should have the appropriate privacy clause/s to enable various credit searches to be undertaken.
  • Entering into deeds or formal agreements with debtors on favourable terms, including the introduction of clauses with particular protections (for example, appropriate release clauses and ‘void payment’ clauses which aim to protect a creditor on the happening of an insolvency event).
  • Reviewing the payment terms upon which instalment arrangements are entered into between the creditor and the debtor. For larger debts, such terms may be better documented into a Deed / formal agreement, as indicated above.

If you have a query relating to any of the information in this article, or you would like to speak with somebody in Holman Webb's Commercial Recovery & Insolvency Group with regard to a matter of your own, please don't hesitate to get in touch today.

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