by Paul Gidley27.03.17

Readers may recall Shaw Gidley predicting in our November 2015 newsletter that the ATO’s hard-nosed approach to debt collection may eventually result in their significant aged payable problem being passed onto the SME Sector as businesses look elsewhere, including non-payment of supplier accounts, to obtain free finance.

Anecdotal evidence suggests that it may in fact be happening which is, and should be, of major concern for the private sector.

A review of Shaw Gidley’s last 20 liquidation appointments has identified an increase in the value and number of ordinary unsecured trade creditors (suppliers) which are in the vast majority Small to Medium Enterprises, falling foul of the failed company.

At the same time, the quantum of the debt owing to the ATO in the insolvent entities balance sheet has been declining and in some instances the ATO was only a minor creditor, bucking the trend of previous historical results.

There is also further anecdotal evidence that as the ATO becomes more sophisticated and systematic in its debt collection policy, the insolvent debtor is entering into more payment arrangements, previously the domain of the ATO, with SME service providers and suppliers in the private sector. Accordingly, we are witnessing an increased level of preferential payments being made to the private sector.

In summary, what was once a major issue for the Commissioner of Taxation, a significant aged payable, is now to come context being shouldered by the private sector.

So what does this mean for your clients? In summary, your clients need to be extremely diligent with credit and debtor policies.

Credit and debtor policies are a core function of any business and responsible for maintaining liquidity and therefore the solvency of the business. Like any other core function of business, in order to remain relevant one must compete with the market leaders in this regard, or fall behind and fail.

It’s arguable that the ATO is currently leading the market with its credit and debt policies.

It is strongly recommended that your clients revisit their credit and debit policies to ensure that they are implementing best practice in this regard. If your clients are not providing goods and services to customers and utilising the following fundamentals of good debt and credit management, then a review should take place immediately:

  1. Goods and services supplied on a contractual basis;
  2. Proper due diligence is done on all new customers;
  3. Debt and credit policy utilises Personal Property Securities Register;
  4. Supplier contracts include personal guarantees, unregistered mortgages and caveatable clauses;
  5. A relationship with a suitably qualified solicitor in debt recovery;
  6. A relationship with a reputable mercantile agent;
  7. Regular review of aged payables and receivables by company owners;
  8. Regular correspondence with customers regarding debt and credit policies; and
  9. Timely responses and recovery action when debtors become extremely aged.

Cash flow in the business sector is a scarce commodity and everyone is competing to recover cash on a timely basis. Unfortunately, as a general rule, the inflows do not correspond to outflows in the cash flow cycle. Those that are not diligent in their collection procedures will eventually experience excessive aging of debtors, followed by creditors. If you are not competing for cash flow through effective debtor and credit policies then someone else’s insolvency issue may ultimately become yours.

So, what should your clients do if they receive a demand for an unfair preference from a liquidator of a customer that has been placed into liquidation?

It’s reassuring to know that there are defences against unfair preference claims. A client is able to dispute they’ve received an unfair preference by demonstrating the following:

  • They receive the benefit of the payment in good faith
  • They had no reasonable grounds to suspect the company was insolvent when they received the payment
  • A reasonable person in their circumstances wouldn’t have had grounds to suspect the company was insolvent

Although the above are defences to unfair preference claims, when considering client’s debtor and credit policies it is more prudent to avoid the possibility of receiving an unfair preference claim than defending it. Here are some recommended options your clients could adopt to avoid receiving such a claim:

  • Obtain payment upfront. Obtaining the payment upfront nullifies the argument that you are a creditor of the company.
  • Obtain appropriate security. Unfair preference claim recoveries can only be made from an unsecured creditor.
  • Obtain cash on delivery.

Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.