Administrations / Liquidations a real example.

Frances Aitken

Introduction

 

An External Administrator is usually appointed as a first step before Liquidation. This means someone from outside the business is appointed to try and save the business, sell the business or to wind it down to pay

its debts.  Insolvency practitioners, voluntary administrators, liquidators, and receivers are all types of external administrators and some of the terms you may hear or see when a company is declared insolvent.

 

In Australia a liquidation of a company is described as the process of selling off assets and using the proceeds to pay off creditors and shareholders. If a company is trading insolvent, it means they are unable to pay debts as they fall due. Liquidations are triggered when a company is trading insolvent and is suspected or voluntary seeks advice on its inability to pay its debts.

 

The following document describes a recent case of an Administration / Liquidation by a customer and the events that occurred, it demonstrates team’s working together. The importance of how you start and finish with a customer really matters! It also shows why Sales Teams working with Accounts Receivable departments is key to success when something goes wrong.

 

Onboarding a customer

 

It’s exciting when we convince a customer to purchase our products, but we ask them to do a few things for us to gain a credit account and it matters how they do that.

The potential customer is asked to fill in several forms:

 

• Credit Application: This gives us contact information confirms registration numbers (ABN and ACN’s), provides an expected credit limit (sales forecast), and provides them with our terms of trade. These forms need to be signed off correctly and dated. If there is more than one director two directors for a company are required to sign off. In the event of debt not being paid you need to prove that the customer knew their obligations under a credit agreement.
• Deed of Guarantee: This makes sure that the Director takes responsibility in the event of non- payment. It can mean the difference of collecting all debt or partial payment or losing out on payment all together. We ask a director to sign off a deed of guarantee as a prerequisite to accounts. All PTY LTD accounts (private companies), Trusts and sole traders must sign a guarantee. It’s one way you can ensure that you will be paid. If you choose to trade with someone who does not sign a guarantee, then you must review your appetite for this risk.
• Delivery Forms: This is how you can fool proof deliveries. It’s your potential customer confirming their details for delivery.

A/R / Credit departments do take several steps to make sure we are successful from the start. Your AR team should:

• Check all received forms.
• Check a current credit report, evaluating potential to pay debts.
• Check trade references.
• Check Directors information.
• Review limits and trading terms with Sales and supply / check relevant transport requirements to open an account.
• In the case of Goods being sold, create a PMSI registration (Purchase Money Security Interest Registration) against the customer to cover sold goods and packaging or a PPSR registration depending on policy. (We will cover this in the below example).
• Seek approvals, Set up Master data in systems.
• A/R / Sales can then send a welcome email, starting the journey into a new relationship for trading.

Why is this important? What happens in the instance of a liquidation and how can we all work together to ensure the best outcomes possible?

 

The following is an actual example of a liquidation that occurred in 2024; to cover privacy we will call the creditor Company A.

 

Company A, Sales, Customer Service and A/R teams worked together to action what could potentially have been a loss of funds to the company, and they did it so well we can all learn from it.

 

The Customer Experience

 

A Pty Ltd company (Company B the debtor), privately owned and started in 2017 showing no signs of any payment issues, applied for a credit account with Company A, in September 2021.

 

What did Company A do right?

 

• The Sales representative onboarded the customer and provided all forms for completion.
• The customer signed terms and a guarantee correctly.
• A PMSI Registration was completed before goods were sold.
• Delivery details were confirmed with Transport and Customer Service team were advised details for ordering.
• All credit checks were completed, and the account was approved and opened.
• Company B were welcomed on board and Company A started a great relationship selling their products to Company B.

Trade continued for 3 years with no significant issues. Sales representatives made sure they were present and communicative with the business. Payments were made on a 7-day account without any issues.

In early 2024, the sales representative received a phone call from a staff member from the company confidentially advising that the company was not doing well and was likely to close in 24hrs.

 

What happened Next?

 

When a Sales team member receives a call like this it’s a bit scary, and the sales representative in this case had no idea where to start or what to do with this information. They picked up the phone and despite not having to deal with this situation before they called the A/R Manager to discuss.

 

• The current debt for Company B was $41,000.00.
• They were only 4 days overdue.
• There were no signs on credit reports of any financial stress.

 The A/R Manager advised the Sales representative the following:

 

• Do not tell anybody about this call. (If you admit you know early this can jeopardise outcomes in these situations and privacy can be questioned).
• Asked if there were any deliveries in progress? (Any goods that cross the driveway of the premises of Company B, would be caught up in an external administration) and increase the debt exposure to Company A.
• Advised the Sales representative that they would confirm with Customer Service about goods in transit and come back to them.
• Finally advised they had done the right thing in contacting A/R first.

The A/R Manager then placed the account on hold, requested the A/R officer to act normal and contact the customers’ Accounts Payable team to chase payment for the overdue invoices. This showed a normal pattern of behaviour. They also checked the credit report to monitor change and made sure GMs in Company A were informed.

 

Additionally, Company A took the following steps:

• The Customer Service Leader checked current deliveries and found $8,000.00 worth of goods were on its way to this customer.
• Customer service stopped Transport from delivering and the Sales representative searched for an alternative delivery destination for the product to go to.
• The Sales Representative, co-ordinated with the Customer Service team to redirect the product to a different customer.
• Both the Sales and the Customer Service Departments were advised if any enquiry came through, it should be treated as an overdue customer and if asked by the redirected customer, the delivery was from a cancelled the order. All calls regarding this delivery were advised to be directed to A/R; this is to limit communications until further information could be obtained.

Once the redirection was complete this reduced the debt to $33, 000.00 and then its time to wait to receive a response or see a communication regarding closures. This fast action reduced exposure and was executed with minimal fuss. The Sales Representative was advised to make no comment to others even if they brought this up, rather to say, “I’m not sure our accounts team handle these situations”.

 

Two days later Company A received an alert that the company was indeed Under External Administration. This then became public information, and some of Company A’s customers will notice / be informed by their own Accounts Receivable departments. When this occurs it’s time for A/R to take over and work towards an outcome that doesn’t involve losing money. Sometimes this can be unavoidable, however how you onboard this customer makes some difference.

 

A correctly signed Credit Application – this means the customer accepted terms of trade and effectively we are officially a creditor. – Company A had this in place

 

A Deed of Guarantee – Most Sales teams dislike this paperwork, Directors will sometimes refuse to sign them, however in these cases they become so important and can mean the difference in making the director responsible for the companies’ debt or absolve them from responsibility if we don’t have one. In this case Company A also had this in place.

 

A PMSI Registration – Purchase Money Security Interest Registration, this is done by the A/R department on onboarding and must be registered correctly (registered before any goods are sold) or it means nothing. At Company A, they registered an Interest on the Government’s Personal Properties Security Register (PPSR). The registration covers Goods and packaging until paid for. If a debt is not paid and the goods have been on sold by the customer, then it covers the proceeds of that sale to value of the outstanding Invoices.

Sounds great but if the registration is made incorrectly without the precise details, then it becomes invalid. If the customers, customer has already on sold the goods to another company and the proceeds have been collected by the customer and used to pay debtors, then you may not secure funds back.

 

A PPSR registration covers a possibility to retrieve goods back (such as equipment etc.)

 

In this case Company A had a valid registration. These registrations can make us a secured creditor, until they are discharged. A secured creditor are often banks and financial institutions. Then they are followed by PPSR registrations (in this case a PMSI). Only the company who registered the PMSI can discharge a PMSI.

An unsecured creditor is all other creditor’s owed funds outside of these circumstances.

 

 The External Administrator

 

An External Administrators role is to investigate the customers’ ability to pay off debts and become viable or wind the company up. They are working for the Company and Director. Although they create a report on the company’s viability and list unpaid creditors/ debtors & ask Creditors for proof of debt, they will try their best to not payout anything unless security is registered / or secured debtors can prove they have not been paid.

 

They will continue to collect funds from Debtors to assist with decisions and outcome which could be trading again or eventuate into a Liquidation.

 

In this case A/R filled in the proof of debt forms and sent copies of credit applications, guarantees, PMSI registrations, invoices, and statements to the External administrator for consideration.

 

The Sales Representative did not discuss this process with other customers except to say it was unfortunate and yes, we knew.  This is the correct way to handle this situation. How we treat a customer in these situations is watched and empathy and discretion go a long way. They made a single call, as directed by A/R to the Director and left a message saying they hoped they were ok.

 

At this stage the Sales Representatives Role in this situation is complete, but their assistance in providing this foundation is imperative.

 

What happened next?

 

• A/R issued a letter of Demand to the Director of Company B for the full balance of outstandings ($33,000.00).
• The Administrator contacted Company A and advised that there was no product or packaging on the premises and that Company A should discharge the PMSI registration so they could continue to work through their appointment.
• It’s important to note that the Administrators will try to close as many PPSR / PMSI registrations as they can, their aim is to get the company affected out of as much debt as possible. If a PMSI is discharged, then they are no longer required to pay out on this debt and the debt becomes part of the final dividend process (final proceeds (if any) shared amongst all creditors).
• Bankruptcy (a legal process where you are declared unable to pay your debt) only applies to a consumer, so this term is not applicable to company debt.
• Company A said NO to discharging the PMSI, its ok to say No sometimes.
• This is important as a PMSI registration covers proceeds, two of the invoices were less than a week old.
• Company A asked the administrator for a report on the proceeds from their product sales and proof that they had been on sold and paid for. They also reminded the Administrator this was there right as covered by the PPSR Register.
• Two weeks later Company A had a report of proceeds, and the Administrator paid $18,000.00 back to Company A for a correctly registered PMSI.
• $15,000.00 was left, this is where the Guarantee comes into play.

 

 

Commercial Debt V’s Consumer Debt

When a company defaults on payment, if they have a Guarantee, it can make a difference. Any debt not able to be recovered becomes the responsibility of the Guarantor and is moved from Commercial debt laws (Company debt) to Consumer Debt Laws (personal debt). In this case Company A had a Guarantee.

If they try to Collect this debt from the Director, while an administration has not been finalised, they can come across the following issues:

 

• Preferential payment – This is where a repayment can become voidable if proven that payment was made to one creditor in favour of another. One way to avoid this is to have the Guarantor pay directly via a third party (such as a collections company) from a bank account not directly linked to them such as a family member or spouse.
• The Director could become bankrupt, and the guarantee would be null and void.

If Company A transferred the remainder of the debt without notice into a consumer debt situation without informing the guarantor, then it may be unsettling for the Director and could come with resistance, and Company A wanted them to pay!!

 

In this case at Company A:

 

• The A/R Manager made a personal call to the Director, asked how they were and explained that the collection of the guarantee would occur via a third party. It was explained that a letter of demand is a normal step in this process and funds from the liquidator had been deducted from the original debt. It was also explained that if liquidation occurred (likely in this case), then any dividends or proceeds would be deducted from the debt or refunded. Finally, the Director was informed of the third-party collection and wished well for the remainder of the Administration.

• The Director of Company B went into a payment arrangement and committed to pay the total balance of the debt, within 10 weeks. This arrangement finalised, and all remaining debt was paid by the Director including the collection companies’ charges for management of this guarantee. No loss of funds for Company A & no cost to Company A.

 

The Director of Company B also provided feedback on his treatment by Company A.

 

• They were very pleased with the empathy shown by the Sales representative and A/R Manager of Company A, they felt disappointed but not attacked.
• They advised that in these situations, anger can be the most common reaction and Company A cast no judgment towards them and showed genuine empathy.
• They also advised that they had no hesitation in paying out on the guarantee due to professionalism shown & thanked Company A for their conduct during this difficult time.

It not a nice situation to go through, if Company A receive any dividends from the finalisation of the liquidation, they will be refunded to the Director who paid the total amounts owed. This is why AR need help from Sales, need to work together with the customer service and logistics team and need to maintain privacy and professionalism always. Its why they ask for paperwork to be filled in correctly and take time to open an account correctly.

 

Working together they get the best results. They will not always be as good as this example, but onboarding correctly and having paperwork signed, including guarantees really makes a difference. Sales and customer Service working together with A/R made this a good news story. How they make a customer feel during difficult times is important. Sometimes we need the lawyers to take over, in this case Company A needed teamwork.

 

A sale is not a sale until its paid for, however an insolvency is not fun either.

How we treat each other keeping a level-headed approach, getting the right advice can make a difference.

AR departments need to empower themselves in the knowledge that there is advice, you can question an administrator or liquidator and maybe you can even reach a great result like Company A.