In the ever-evolving landscape of business, liquidation is a reality that many companies may face. For creditors, the period leading up to and following a debtor company’s liquidation can be fraught with uncertainty and potential financial loss. Understanding the legal framework and strategies to mitigate risks is paramount for any creditor caught in the whirlwind of a client’s liquidation.
We often get asked under what circumstances can a liquidator recover legitimate payments of a creditor invoice. That is, when a creditor provides goods or services and then gets paid, then the liquidator seeks to claw back the payment of the invoice.
Here we answer:
Liquidation marks the end of a business’s journey, involving the dismantling of its corporate structure and the distribution of assets to claimants. It’s a process that can unearth complex legal and financial challenges, especially for creditors who have recently transacted with the now-insolvent company. The key issue at hand is the liquidator’s authority to demand the repayment of monies from creditors under certain conditions. This power is rooted in the desire to ensure equitable distribution among all creditors but can lead to significant implications for those who thought their accounts were settled.
A liquidator’s power to reclaim payments made to creditors within two years before the liquidation is a critical concern. This authority stems from the aim to reverse transactions that unfairly benefit certain creditors over others, especially if these payments were made at a time when the debtor was insolvent.
The repayment claim becomes valid under specific circumstances:
Understanding these conditions is crucial for creditors to navigate their rights and obligations during liquidation.
Fortunately, there are measures that creditors can take to protect themselves:
A pivotal aspect in defending against repayment claims is the creditor’s awareness of the debtor company’s financial status. Knowledge or suspicion of insolvency significantly affects the ability to resist repayment demands. Therefore, maintaining diligent financial oversight and seeking legal advice when transacting with companies showing signs of financial distress is advisable.
One innovative approach to circumventing liquidator’s claims involves ensuring payments are not recognised as transactions of the company. Legal precedents suggest that payments made through alternative arrangements, such as deeds of settlement, might protect creditors from repayment demands, although this strategy requires careful legal navigation and may not be applicable in all scenarios.
The landscape of liquidation presents a complex maze of legal and financial challenges for creditors. The essence of navigating these challenges lies in strategic preparation and informed decision-making. Prioritizing cash transactions, understanding your legal defences, and employing strategic financial planning are essential steps in safeguarding your interests. While liquidation can be daunting, armed with knowledge and strategic foresight, creditors can navigate these treacherous waters with confidence.
If you would like to discuss a possibility of future claims or perhaps a current claim being made by a liquidator, book a free legal consultation here.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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