How could liquidation affect you?

 

 

The recent closure of electronics retailer, Dick Smith, leading to around $400 million of debt being owed, poses many questions about how to protect yourself as a creditor and what to do next if you are unfortunate enough to be in this situation.

When you are owed money from a business there are often many warning signs that can alert you to the possibility that the business may be in trouble. Payments to you may become slow and erratic, phone calls go unanswered (particularly if the business uses caller ID), vehicles and other assets of the business may not be maintained as well as they have before, staff turnover of the business may increase and levels of advertising and sponsorship decrease as costs are reduced. 

If alarm bells start to ring then you should ask questions to gain more knowledge around the companies trading and decide if you should continue to trade with the company. 

There may be an option for the company to continue under voluntary administration. This occurs when companies have a large amount of debt but have the potential to trade profitably. It is a process where an administrator takes over running the company and tries to reach an agreement with creditors – including Inland Revenue – to reach an agreement over the debt so the company can continue. If this does not work out, the company may fall into liquidation.

If a company is in liquidation, you must understand the process in order to act appropriately. 

 

Once appointed, liquidators take custody and control of all the companies’ assets. They will sell all assets and recover all debtor receipts outstanding and then allocate funds in order of priority to secured creditors, preferential creditors and then unsecured creditors.

 

Creditors can have registered charge over the debt owed on goods supplied e.g. hire purchase agreements. These creditors get funds direct from the sale of the assets.

Creditors can also register charges over any stock they have supplied or funds from this stock. This enables them to request unsold stock to be returned or, if the stock has just been sold and not paid for, they can also recover the funds owed on the stock sold.

Banks always ensure they have a general security agreement (GSA) that they register over the remainder of the assets, this enables them to recover any of the remaining funds against their security.

 

The second level of priority payment goes to employees for wages and holiday pay and anything outstanding to IRD (excluding income tax and penalties), customs, lay-by customers and liquidation costs.

 

These creditors are last to be paid and the least likely to see any money.  Most of these creditors find their businesses severely affected by any large unpaid debt.  

 

Within five days of the liquidators being appointed a “first report” is sent to all known creditors and filed on the company office website under the liquidated company. This report will list all the assets and liabilities of the company, detailing how much the shortfall of funds may be and how much debt the company has, broken down into the 3 creditor priority levels.  This will give you a fair indication of what is available. Generally this report is a first look at what is available.

The liquidation process can take anywhere from three months to several years depending on the complexity of the liquidation. The liquidators should have a good idea after three-six months if there will be anything available for unsecured creditors and will do interim payments if there are sufficient funds. The liquidators will also file reports with the company’s office every 6 months until the liquidation is completed.

 

The liquidators will send out, along with the first report, a Creditors Claim Form, which you must complete in order to be included as a creditor. They will then match this to what the company says they owe and add you to a list of creditors for future payments if any. 

 

The liquidation process takes time, and the liquidators can’t tell you when, or even if, you will get paid until the full process has been completed. Their job is to maximise the return for all creditors, secured and unsecured. However, be prepared to only receive partial payment as in most cases there are insufficient funds to pay all creditors.

 

There are several options available to protect yourself including registering a security interest on the Personal Property Securities Register (PPSR), ensuring you have strict credit terms, offering different payment options, and/or insisting on a credit rating when setting up accounts. 

Many credit application forms have Romalpa clause/Retention of title clauses in them, which allow you to rank over other unsecured creditors but are of little benefit unless registered on the PPSR. Likewise, relying on just personal guarantees will not safeguard you from losing funds, as the directors of the company may not own anything personally either.

 

If you need clarity around what to do then it is important to seek expert advice.