Can payments be collected back from creditors?

The definitive answer to this question is yes. Liquidators can take payments back from creditors. But only in certain circumstances, and only with proof that the creditor received a preferential payment.

If a company becomes insolvent all of their assets are liquidated. Payments are then distributed proportionally amongst creditors as per the ranking of creditors in the liquidation (read more on this below).

This means that if you’ve received payment at a time that the liquidator can prove the company was insolvent (usually around six months before liquidation), they can ask for the return of that payment.

Preference payments in liquidation are not uncommon. There’s lots of legal jargon out there on where, when, how and why a liquidator can claim back a payment – but we’ve distilled some of that information for you below.

When can a liquidator claw back payments from creditors?

If a creditor receives a payment in the six months before a debtor is considered insolvent (in the relation back period), the payment may be collected back.

To do this liquidators need to successfully prove that a creditor received unfair preference in the payment. Under the Corporations Act 2001, the liquidator has to establish that:

  • The transaction occurred between the company being liquidated and the creditor

  • The transaction took place within six months prior to insolvency proceedings beginning

  • The company made the payment while it was insolvent or became insolvent because of the payment

  • With that said, if a liquidator requests repayment, the creditor can refuse to pay it. In this scenario the liquidator would need to proceed with legal action to negotiate payment from the creditor.

    Usually in these situations an agreeable compromise is reached outside court between the creditor and liquidator. Debt collectors can help chase preferential payments and negotiate settlements.

    The ranking of creditors in liquidation.

    When a company is liquidated, a hierarchy of creditors is established in order to distribute the payments (otherwise known as dividends). It is as follows:

    1. Priority Creditors

    This group is mostly made up of employees of the company that is being liquidated – they will be paid money they are owed first.

    2. Secured Creditors

    A secured creditor has a ‘charge’ or ‘security’ over a debt – usually a bank or other lender that retains control of a business asset – for example a bank, which has outstanding mortgage payments on the business premises. In liquidation these creditors are paid next.

    If a creditor files the application to liquidate a company, the costs to do so are secured and paid as a priority, ahead of other payments.

    3. Unsecured creditors

    An unsecured creditor is anyone who does not have a charge or security over the company’s assets – and frequently includes suppliers, customers and contractors. This group will be paid only if there is money left over following payments to the Secured and Priority Creditors.

    Normally payments in insolvency proceedings are distributed as dividends, which means that those with the largest debts outstanding will receive the biggest payment.

    How to stop your payment being collected back by a liquidator.

    If you receive a notice from a liquidator requesting repayment, you have the right to defend the claim.

    There is a comprehensive list of defences here, but we’ve broken a few of them down for you below.

    The running account

    If you have a running account with your creditor (ie. a relationship that involves regular payments), you can move to reduce the amount that is considered a preference payment. Rather than the liquidator looking at the value of payments made to the creditor, they will look at the decreased value of the debt instead.

    Being unaware of insolvency

    If the creditor was unaware that the company was insolvent when the payment was made, this can be a full defence to a reclaimed payment. The creditor must show that under the circumstances it was reasonable to assume that the company wasn’t in financial trouble.

    How to prevent payments being collected back by a liquidator.

    Prevention is really the best remedy in these circumstances. If a liquidator seeks to reclaim a payment then things can get messy.

    Proof of Debt

    If you are in this situation it’s important to lodge your relevant proof of debt forms as soon as possible.

    That way, you are still recognised as a party with a genuine debt and are thus in the queue to receive a dividend from liquidation if it’s available (regardless of whether the liquidator is successful in reclaiming a preferential payment).

    Manage Your Debts

    But undoubtedly the best way to stop this from happening is to make sure you stay on top of debts owed to you. If you’re unsure about any aspect of the debt collection process, engaging a thorough debt collection service is your best bet.

    There are a number of factors which play into whether your debt is recoverable. Take our 1 minute quiz to estimate how likely it is that it can be recovered. Click the image below to get started.

    Why Profcoll?

    If you need debt collected, enlist the help of the debt collection experts! If you have bad debt in your business, then that’s cash that should be returned to your cashflow. Don’t let bad debt hang, call the experts to help recover your cashflow. Profcoll has over 20 years experience in the industry, with expert account managers to handle individual clients, so you’ll have you’ll be taken care of. At Profcoll, we don’t get paid until you do. So, if you fail to recover your debt, our service is free of charge. So, inquire today for your free assessment and we’ll get to work recovering that pesky debt. With thousands of Australian businesses in debt, the need for a trusted debt collection is bigger than ever. We employ modern methods with a dase of good-old-fashioned professional to bring your income home.

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