Collecting in Australia
• Thepaymentbehaviorofdomesticcompaniesisgoodcomparedtointernationalstandards.However,delays areregisteringadeterioratingtrendandaverageDSOnowstandsat50days.
• Thecourtsystemiscomplicatedbythecountry‘sfederalstructureandprovidesnofast-trackproceedingsforthesettlementofundisputableclaims.Thecourtsareotherwiseefficient,butdelaysandcoststendtobe significantandenforcingforeignjudgmentsmayprovedifficult.
• Insolvencyproceedingsarecomplexandexpensive,withchancesofrecoveryverylow.
Collection complexity
Complexity relating to
Notable High Very High Severe
Payments
Court proceedings
Insolvency proceedings
Notable Severe
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CollectionProfileAustralia
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ContentsGeneral Information........................................................................................................................................3
Availabilityoffinancialinformation................................................................................................................3Maincorporatestructures...............................................................................................................................3Regulatoryenvironment..................................................................................................................................3
Getting Paid........................................................................................................................................................4
DaysSalesOutstanding(DSO).......................................................................................................................4Latepaymentinterest.......................................................................................................................................4Debtcollectioncosts.........................................................................................................................................4Ownershipprotection......................................................................................................................................4Payments.............................................................................................................................................................4
Collecting Overdues........................................................................................................................................5
Amicableaction................................................................................................................................................. 5Legalaction......................................................................................................................................................... 5Alternativestolegalaction.............................................................................................................................. 7
Handling Insolvent Debtors.......................................................................................................................... 7
Insolvencyproceedings................................................................................................................................... 7
Days Sales Outstanding (DSO): ThereisadeterioratingtrendinpaymentswithaverageDSOat50days.
General information
Availability of financial informationRelevantfinancialinformationondomesticcompaniesisdifficulttoobtainforseveralreasons.Firstly,onlystockexchangelistedcompanieshaveanobligationtopublishtheirfinancials,thereforeonly2%to3%ofAustraliancompaniespublishorpubliclyfileannualorsemi-annualrecords.Secondly,corporationsoftenrelyontruststructures,whicharenotlegalentitiesintheirownrightbutaimtolimitvisibilityandaccountability.ThevastmajorityofAustraliantraders’portfoliofurthermoreconsistsofsmalltomid-sizecompanies,wherefinancialsareconfidentialandcanonlybeobtainedbyouranalystsviadirectapproachorthroughcreditreportingagencies.EulerHermesallocateseachcompanyagradereflectingitsfinancialhealthandhowitconductsbusiness.Gradesrepresentacoreofourknowledgeandanalyses,andhelpclientsidentifyandavoidrisk.Dataiscontinuouslymonitoredtoofferthemostup-to-dateinformationtosupportmanagementdecisions.
Main corporate structuresLiabilityforbusinessdebtsisdeterminedbylegalstructures,whicharedescribedasfollows:• Proprietorshipiscommonlyrelieduponforsmallscaleoperations
sinceitisbasedonthepersonalqualitiesofthesoleproprietorwhoownsthebusinessassets.Asaresult,theproprietorisfullyliableforthebusiness’activitiesanddebts.
• Partnershipsallowupto20partnerstoconductbusinesstogetherThepartnersestablishtheirliabilitiesandrightsinaspecific‘partnershipagreement’butdonotcreateaseparatelegalentity.UnlessaLimitedPartnershipissetup,thepartners’liabilityisjointandunlimited,evenifonepartnergeneratesbusinessdebtswithouttheotherpartners’knowledgeorconsent.
• ProprietaryLimitedCompaniesareverypopularstructureswhichmaybesetupbyonetofiftyshareholders.Thereisnominimumcapitalrequirement,andtheshareholdersareliableontheircontribution.Companiesprovideanotherformalizedlegalstructureinwhichthesharesaretradableandriskislimitedtocapitalcontributions.
• Trustsareparticularstructuresinwhichoperationsareregulatedbyanagreement(deed)andinwhichatrustee(i)holdstheassetsofthetrustand(ii)runsthebusinessforthebenefitofbeneficiaries.Trustsarecomplexstructureswhichoftenaimatminimizingtax,butthecourtshaveintimebecomeconcernedabouttheirmethodsandbeneficiariesareincreasinglybeingheldpersonallyliablefortheentity’sdebts.
• ForeignbusinessesmayalsosettleinAustraliathroughaRepresentativeOffice(whichcannotgenerateincome)orthroughaBranch(whichisindependentandentitledtoconductbusinessactivities).
• JointVenturesdifferfrompartnershipsinsofarastheparties(whetherindividualorcorporateentities)regrouptheirresourcesandskills
inordertodevelopacommonprojectandgenerateacommonincomewithoutnecessarilyincorporatingaseparateentity.
Regulatory environmentThecourtsysteminAustraliacanbecomplexsincethecountryhasafederalgovernmentstructureanditiscomposedoftwointernalterritories(theNorthernTerritoryandtheAustralianCapitalTerritory)andsixsovereignstateswithreservepowers.Eachhasitsownlegalsystemandlaws,whichsometimesaddscomplexitydespiteongoingharmonizationeffortstakingplace.Therearenospecifictribunalsforcommercialmatters,buttherearecertainspecializeddivisionswithinexistingcourts(i.e.theCommercialList,theAdmiraltyDivision,etc.).Therefore,dependingonthequantumoftheclaimandthecauseofaction,largecommercialdisputesareusuallybroughttotheFederalCourtofAustralia(theFCAsitsinallcapitalcities)ortotheSupremeCourtinoneoranotherterritory.Asageneralrule,though,LocalCourtsorMagistratesCourts(namesmayvaryfromonestatetoanother)arecapabletodecideonclaimsuptoAUD40,000inSouthAustralia,AUD100,000inVictoriaandNewSouthWales,orAUD150,000inQueensland.DistrictCourtsareabletodecideonclaimsuptoAUD750,000,whereasSupremeCourtswouldbesuitableforclaimsinexcessofAUD750,000.
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Getting Paid
Days Sales Outstanding (DSO)Paymentbehaviorofdomesticcompaniesremainsgoodcomparedtointernationalstandards,withpaymentsinAustralianormallytakingplacewithin30daysonaverage(measuredfromtheendofthemonthinwhichgoodsaredeliveredorservicesaresupplied).However,thereisadeterioratingtrendinpaymentswithaverageDSOat50daysfor2016.
Late payment interestGovernmentagenciesarerequiredtopaysmallbusinesseswithin30daysofreceiptofacorrectlyrenderedinvoice,otherwisepenaltyinterestsmayapply(asdeterminedundersection22oftheTaxationAdministrationAct1996).Inbusiness-to-businessrelations,however,latepaymentmattersarenotregulatedandmustbedealtwithbythepartiesdirectly.
Debt collection costsCollectioncostsareusuallynotchargeabletothedebtorunlessthecontractoutlinespreciselywhichcostsmaybeconsidered.Often,thecostsarenotrecuperatedasthepartiesprefersettlingclaimsamicably,buttheynonethelessconstituteefficientnegotiationtools.
Ownership protectionRetentionofTitle(RoT)contractualprovisions(alsoknownasRomalpaclauses)ensurethatabuyershallonlyacquireownershipofgoodsoncepaymenthasbeenreceivedinfull.Thesearrangementsmaybetriggeredduringandoutsideofinsolvencyproceedingsalike,butthereisanincreasinglysignificantformalismattachedtotheseclauses,whichmustthereforebeconsideredwiththegreatestcare.Inparticular,thePersonalPropertySecurityAct2009(Cth)(PPSA)whichcameintoforceinJanuary2012hascreatedastrictobligationforsuppliersofgoodstoregistertheirsecurityinterestsfortheguaranteetobecomeeffective.Indeed,onlytheRoTarrangementsregisteredwiththePersonal
PropertySecurityRegisterprotectthesupplier’sproperty(calleda‘purchasemoneysecurityinterest,’orPMSI)bygivingthecreditor‘superpriority’overothercreditors’debts.Superpriority,inaddition,requiresthatregistrationiscompletedbeforethegoodsaredelivered(PPSAs.62),andonlyappliesforgoodswhichhaveremainedunpaidfor.RetentionofTitleprovisionsincludedincontractsenteredintopriortoJanuary2012losttheireffectunlessregisteredby30January2014.
PaymentsThemostcommonpaymentmethodsareasfollows:ThemajorityoftransactionsinAustraliaaredoneonopenaccount,whichmeansthatthegoodsareshippedanddeliveredbeforepaymentisdue.EFTelectronicfundstransferandswiftbanktransfersareotherwiseamongthemostpopularpaymentmeansworldwideastheyarefast,secured,andsupportedbyanincreasinglydevelopedbankingnetworkdomesticallyandinternationally.Forexporttransactions,transfersmaybeinsuredbyanExportCreditInsurancepolicy,whichhelpsminimizetheriskofsuddenorunexpectedcustomerinsolvency.EulerHermes’worldwidenetworkofriskofficesmonitorsthefinancialwell-beingofcustomersandgrantsthemaspecificcreditlimituptowhichclientsmaytradeandclaimshouldsomethinggowrong.Alternatively,StandbyLettersofCredit(abankguaranteesthedebtor’screditqualityandrepaymentabilities)constitutereliableguaranteeswhichcanbeinterpretedasasignofgoodfaithsincetheycanbetriggeredasa‘paymentoflastresort’iftheclientfailstofulfilacontractualcommitment.Also,ConfirmedDocumentaryLettersofCredit(adebtorguaranteesthatacertainamountofmoneyismadeavailabletoabeneficiarythroughabankoncecertaintermsspecificallyagreedbythepartieshavebeenmet)maybeconsideredasitcanbeobtainedeasilyfromlocalbanks(maybecostly).ChecksarehardlyusedinAustralia,exceptperhapsbysoletraders.Generallyspeaking,bankguaranteescanbeobtainedfairlyrapidlyeventhoughtheymaybeexpensivedependingontheissuinginstitution.
Late payment interest: Inbusiness-to-businessrelations,latepaymentmattersarenotregulatedandmustbedealtwithbythepartiesdirectly.
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Collecting overdues
Amicable actionAmicablesettlementopportunitiesshouldalwaysbeseenasthemostefficientalternativetoformallitigationproceedingssinceAustralianlawdoesnotprovideforfasttracklegalproceedings.Inpractice,theAustralianauthoritieshavesetupvariouspre-legalactionmechanisms(undertheCivilDisputeResolutionActof2011)toencouragethepartiestonegotiateandsettlecommercialdisputespriortocommencingacourttrial.Beforestartinglegalproceedingsagainstadebtor,assessmentofassetsisimportantasitallowsverificationastowhetherthecompanyisstillactiveandwhetherrecoverychancesareatbest.Inaddition,itisessentialtobeawareofthedebtor’ssolvencystatus:ifinsolvencyproceedingshavebeeninitiated,itindeedbecomesimpossibletoenforceadebt(seebelow).ForundisputeddebtaboveAUD2,000,creditorsmayalternativelysendthedebtorarequest(StatutoryDemand)topaywithin21daysandthreatentofileapetitionforliquidationifthetimelimitisnotrespected(undersection459EoftheCorporationsAct2001).
Legal action
Ordinary proceedingsIftheamicablephasefails,orifthedebtorquestionstheclaim,theoptionofstartinglegalproceedingsremains,althoughittendstobelengthyandcostlywhentheclaimisdefended.Ordinaryproceedingswouldtypicallytakeplaceasfollows:althoughthereisnomandatoryobligationtorequestpaymentinwritingbeforetakinglegalaction,aDemandLetterrecallingtheprincipalandinterestdueisadvisable.Inordertocommenceformalproceedings,aStatementofClaimmustbeservedtothedebtor,whomustthenabidebythedecisionorfileadefensewithin30days(delaysmaybegranteddependingongeographicalfactors).Failureofthedebtortocomplywiththerulesentitlesthecreditortoapplyforadefaultjudgment.Otherwise,thecourtwouldorganizehearingsanddefineatimelinefortheproceedings(discoveryphaseallowinglawyerstoquestiontheparties,mediationphase).Remediesorderedbythecourtmaytaketheformofcompensatorydamages,specificperformanceorders,restrictiveinjunctionsorrestitutionorders.Punitivedamagesareavailableintortcasesbutremainunheardofindebtlitigationproceedings.Itisalsoworthaddingthatcommencingthelawsuitbeforethecompetentcourtinthedebtor’splaceofregistrationusuallyhelpspreventproceduraldelaysduetolackofjurisdictionarguments.ClassAction(lawsuitinvolvingagroup)proceedingsarealsoincreasinglycommoninAustralia.
Necessary documentsCopiesofunpaidinvoices,laststatementofaccount,copyofsupplycontract,copyofcreditapplication,proofofdeliveryifnecessary(AWBBOLforexport).
Time limitationsDebt-relatedclaimsmustbebroughttocourtwithinsixyears,startingfromtheoriginalduedate.Beyondthistimelimitation,legalactionwillnotbegrantedalthoughcertainfactors(formallyacknowledgingdebts,forinstance)mayincertaincircumstancesinterrupttheprescribedperiod.IntheNorthernTerritory,theprescribedperiodisreducedtothreeyears.
Precautionary measuresPrecautionarymeasuresintheformofpreliminaryinjunctionsmaybeawardedtopreservethestatusquopendingafinalandenforceablejudgment.Mandatoryandprohibitoryinjunctionswouldrespectivelycompelorpreventapartytodosomething,butalthoughtheyarecommoninIntellectualPropertyorTradePracticescases,theyremainrareindebtlitigation.Eachrequiresthattheapplicantdemonstrates,amongotherpoints,thatmeredamageswouldbeinsufficienttocompensatepotentiallossesintheabsenceofaninjunction.Searchorders(AntonPillarorders),issuedifcriticalevidenceislikelytobeconcealedordestroyedbythedefendant,areextremelyrarelyawarded.Stayorderspreventapartyfromcommencingorcontinuingproceedingsonatemporarybasis,whileanti-suitinjunctionsrestrainapartyfromcommencingorcontinuingproceedingsinaforeignjurisdiction.Alternatively,interimattachmentorders(alsoknownasfreezingorders)helppreserveassetswhichoughttobeusedtosatisfyafinaljudgmentbutwhichareatriskofbeingdissipatedinordertofrustrateenforcement.Applicationismadeexparte(i.e.withoutthedebtorbeingpresent),thereforethecreditormustdiscloseallrelevantfactssupportingtherequest.Itisimportanttonote,however,thatafreezingorderdoesnotcreateanypreferentialrightinfavoroftheclaimantovertheseizedassetsshouldthelegalactionleadtoliquidationproceedings.Inaddition,ifthecreditorisdefeated,theymaybeliableforthelossanddamagesufferedbythedebtorasaresultofthefreezingorder.Courtsmaythereforeordercreditorstoprovidesecurityoncostsinordertoprotectdebtorsfromirresponsibleaction.
Collection @ Euler HermesItisalwaysadvisedtoattemptcollectionpriortoanylegalactioninordertomaximizechancesofsuccessfulrecoveryandavoidlegalcostsanddelays.Ourkeyprincipleistocollectincloseproximitytothedebtor,usingaseriesofletters,emailsandphonecallsinthelocaldebtorlanguage.OurWorldCollectionNetworkofEulerHermesofficesandexternalprovidersareexpertsinprofessionaltradedebtcollectionandnegotiation,ensuringpositiveoutcomeswhileretainingimportantclientrelationships.EulerHermescanhandlethecompletecollectionsprocessfromamicable,pre-legalactionthroughtojudgmentandenforcement.
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Lodging an appealAppealisusuallyavailablewhenajudgmentistaintedbyanerroroflaworfactthoughproceduresmayvaryfromonecourttoanother.AppealsagainstjudgmentsrenderedinfirstinstancebyFederalCourtsarereviewedinternallybyaFullCourt(threejudges).AppealsagainstjudgmentsrenderedinfirstinstancebytheStates’SupremeCourts,bycontrast,arereviewedintheAppealDivisionofthesameCourts(inSouthAustraliaorTasmania,appealsfromfirstinstancejudgmentsintheSupremeCourtareconsideredbyaFullCourtoftheSupremeCourt).Finally,decisionsrenderedinsecondinstancebyAppellatejurisdictionsmaybebroughttotheHighCourt(usuallycompetentonconstitutionalmatters)providedthatspecialleavehasbeengranted.Thetimelimitsforbringinganappealdifferfromonejurisdictiontoanother,butleaveforappealcanusuallyberequestedwithin45daystothreemonthsfollowingthenotificationofthedecisiontotheparties.Overall,thiscourtstructuretendstomakeappealprocedurescomplexandexpensive.
Enforcing court decisionsAjudgmentisenforceableassoonasitbecomesfinal(i.e.whenappealsarenotavailableanymore).ThejudgmentcreditorhasuptotwelveyearstoseekenforcementofalocaljudgmentthroughExaminationNotices,GarnisheeOrdersorWritsofExecution.ExaminationOrdersareusefultoolsastheymayforcethedebtortoprovideinformationontheirfinancialsituationandassets,andthushelpuschoosearecoverystrategy.TheOrdermustberequestedfromthecourtafterjudgmenthasbeenentered.ThecourtmayalsoissueaGarnisheeOrderallowingthecreditortorecoveritsdebtdirectlyfromthedebtor’sbankaccount(orsalary)aswellasfromthedebtor’sdebtors,untiltheprincipalandinterestarepaidoff.Inpractice,however,theprocedureisbestusedafterexaminingthebooksandrecordsofthecompanyincourt(ExaminationOrder).ThecourtmayfinallygrantaWritofExecutionfortheLevyofProperty,whichordersasherifftoseizeandsellthedebtors’propertytothebenefitofthecreditor.Thesheriff’scostsincludefixedfees(lessthanAUD100)aswellasapercentageontheproceeds.Thesheriff’sinterventionoftenpushesthedebtortoachieveanarrangement(instalments)toavoidseizure,butthedebtormightalternativelyprefertofileanapplicationtosetthejudgmentaside.Suchcostsareusuallyaddedtothedebtor’spayabledebt.Debtsmayalsoberecoveredthroughinsolvencyproceedings.AcertificateofjudgmentmayindeedbeannexedtoaCreditorsStatutoryDemandrequiringthedebtortopaysecureorcompoundthedebtwithin21days.Failuretodosowouldconstituteprimafacieproofofinsolvencyandwouldgivegroundstoawindingupapplication.
How long could legal action take?Straightforwardclaimswouldnormallybesettledwithintwotofourmonths,butdisputedclaimsmaylastmorethanayear.Enforcementproceedings,inaddition,couldtakesixtoninemonthswherethe
debtor’sassetsaredifficulttoidentify.Internationallitigationwillalwaystakelongerandcostmorethandomesticlitigation–thedifferencewoulddependonnumerousfactorswhichcouldonlybemeaningfullyquantifiedonacasebycasebasis.
How much could this cost?Proceduralcostsmaydifferfromonestate’slegislationtoanother,butthecourtsenjoybroaddiscretioninorderingcosts.Asageneralrule,theunsuccessfulpartyisrequestedtopaythereasonablelegalcostsofthesuccessfulparty,butinpractice,approximately60%to70%ofthecostsareeffectivelychargedtothem,unlessthecourtscalculatecostssoastograntindemnitytothewinningparty(whichmaythenrecover100%ofitscosts).Efforts(whetherpositiveornegative)madeduringthepre-legalamicablenegotiationsareusuallytakenintoconsiderationwhenawardingcosts.Aspreviouslymentioned,thelawdoesnotauthorizeaddingautomaticcollectioncostsandinterestsunlessthematterhasbeenagreedcontractually.However,thelawallowsthecreditortoaddafixedamounttotheclaimwhilefilingitscasewithacourt,inordertorecuperatelegalfeesuponobtaininganenforceablefinaldecision.Inpractice,costsareusuallyleftasideaspayingthedebtiswhatmattersmost.Courtfeesareregulatedand‘scalecosts’aresetbyeachstateorterritorygovernment.Thesearepublishedontherelevantcourtwebsite.Havingalawyermayconstituteagoodwaytominimizeproceduralcosts.Conditionalarrangementswherebyattorneysarenotpaidupfrontbutratherreceiveafixedsumuponsuccess(i.e.‘no-win-no-fee’)arecommoninvariouslitigationproceedings,butnotinrelationtodebtrecoverycases.Contingentfeeswherebythelegalprofessionalsareentitledtoreceivingapercentageonthefinalawardmaybeprohibitedbylawdependingonthejurisdiction.Thisprohibitiondoesnotnormallyapplytolitigation-fundingcompanies.
Litigation @ Euler HermesShouldlegalactionbenecessary,EulerHermescanprovidesupportthroughoutthelegalprocessfromjudgmenttoenforcementviaourWorldCollectionNetworkofEulerHermesofficesandexternalproviders.Legalactioncanoftenbecomplicatedandexpensive,soyouwillbeinformedofallcostspriortoanyactionandadvisedonwhichrouteisbesttotake.
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Alternatives to legal action
Alternative Dispute Resolution methods (ADR)ADRmechanismsarepopularinAustraliabutremainunusedindebtlitigationthusfar.Nonethelessandaspreviouslynoted,thepartieshaveanobligationtonegotiateinordertosettletheirdisputepriortobringingformallegalaction.Inaddition,mediationandarbitrationmayberelieduponbythepartiesonavoluntarybasis,oruponcourtinvitationaimingatsolvingcommercialdisputesthroughinformalprocedures.Inmediationproceedings,amediatorisappointed(bythepartiesorbyacourt)tohelpthepartiesreachanacceptablecompromise,butithasnoauthoritytodecidefortheparties.Anyagreementbetweenthepartiesandvalidatedbythemediatorisbinding.Inarbitrationproceedings,bycontrast,thearbitratorisappointedbythepartiesandgivenauthoritytosolvethedisputeontheirbehalf.Therefore,thearbitralawardisfinal,binding,andenforceablethroughdomesticcourts.Arbitrationstandardsforinternationaldisputescoincidewiththe2006versionoftheUNCITRALModelLawonInternationalCommercialArbitration.Arbitratorsmaygrantinterimrelief.
Foreign forumsAsaresultofthedifficultytoobtaintimelydecisionsfromdomesticcourtswhentheclaimisdisputed,aforeignforum(i.e.underaforeignlaworbeforeaforeigncourt)mayintheorybeconsidered.Indeed,Australiancourtsusuallyrespectforeignjurisdictionprovisionsasagreedbythepartiestoacontractunlesspublicpolicyreasonspreventfromapplyingthelawofthechosenforum(orif,asinrelationtoconsumerprotectionmatters,thelegislatorhasimposedtheexclusiveapplicationofAustralianlaw).Itisessential,however,thattheagreementischaracterizedbyaninternationalconnection(forexample,onepartyhaselecteddomicileinanothercountry,ortheplaceofexecutionislocatedabroad),andthatajurisdictionclauseisdraftedtothiseffect.
Enforcing foreign awardsEnforcingforeignawardsinAustraliamaybeatimeconsumingexerciseandusingdomesticcourtsmaysometimesremainfasterthanobtaininganawardabroadandenforcingitthroughanexequaturprocedure.Currently,theenforcementofforeignjudgmentsinAustraliaisgovernedbybothstatutoryregimes(theForeignJudgmentsAct1991andtheForeignJudgmentsRegulations1992)andCommonLawprinciples.ForeignawardsmustfirstberegisteredofficiallywithanAustralianCourtandberecognizedasadomesticandenforceablejudgment(exequaturproceedings).Theforeignawardmustbeafinalandconclusivemoneyjudgment.Ofcourse,theawardmustbeenforceableinthecountryoftheissuingcourtbutitmusthaveremainedunenforced.Furthermore,recognitionnormallydependsonwhetherareciprocalrecognitionandenforcementagreementexistsbetweenAustraliaandtheissuingcountry.Therefore,unlesstheissuing
countryislistedinthe1992Regulations,judgmentfromitscourtswillnotbeenforceableinAustralia.AustraliaisasignatorytotheNewYorkConventionontheRecognitionandEnforcementofForeignArbitralAwardsof1958.Therefore,domesticcourtsalsooughttorecognizeandenforcedecisionsrenderedthroughinternationalarbitrationproceedings.
Handling insolvent debtors
InsolvencyinAustraliaismerelyacashflowmatterandSection95AoftheCorporationsAct2001(Cth)statesthatacompanyremainssolventif(andonlyif)thecompanyisabletopayallitsdebtswhentheybecomedue.Insolvencyproceedingsareexpensiveandcomplex,soareusuallyusedasalastresort.However,theNationalPersonalInsolvencyIndex(apublicregisterinelectronicformat)providesalistofinsolventcompanies.Therefore,thethreatofinitiatinginsolvencyproceedings(throughastatutorydemandletter)mayconstituteaneffectivemeansofpressurewhilecollectingunpaiddebt.Inpractice,insolvencyproceedingstendtofollowafinaljudgmentorresultfromthedebtor’sfailuretocomplywithastatutorydemandwithin21days(inwhichcaseproceedingsoccurbeforetheFederalCourt).Section459PoftheCorporationsActprovidesfordifferentproceedings.
Insolvency proceedings
Out-of-Court proceedingsInformalout-of-courtproceedingsmaybeconductedbutallcreditorswouldneedtoagreeandexecuteadeedsothatonlyonecreditorcouldoverturnsuchanarrangement.UnlikeaDeedofCompany
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Arrangement(DoCA),thecreditorswouldhavenoprotectionagainstunfairpreferenceclaimsbyanylaterliquidator.
Restructuring the debtReceivershipproceedingsconstituteafirstsettlementpossibility.Areceiverisnominateduponenforcementofageneralsecurityagreement(debenture)andtakesoverthecompanymanagementuntilthedebtisrepaidorrecovered.Iftheprocessfails,aliquidationproceduremaybeinitiated.Acourt-sanctionedSchemeofArrangementbetweencreditorsandthecompanymayalsobereached.Itbecomeseffectiveoncearequiredmajorityofcreditors(atleast50%innumberand75%invalueofcreditorsineachclass)hasapprovedtheschemeandthecourthasvalidatedtheagreement.Thosecreditorsthatdidnotvoteinfavorofthearrangementarenonethelessbound,whichmayhavesignificantconsequencesconsideringthatthelawprovidesnolimitationastohowmuchofthedebtissusceptibletobeingwritten-off.VoluntaryAdministrationisthemostcommonprocedureasitaimstomaximizeacompany’schancestocontinueitsactivities.Theproceduresuspendsthedirector’scontrolinfavorofaregisteredadministrator(appointedbythecompanyitself).Creditorsandotherpartiesaregenerallypreventedfromenforcingtheirrightsduringthemoratoriumphase,butitisverycommonforcommercialcontractstoallowapartytoterminatethecontractiftheotherundergoessomeinsolvencyprocedures.DoCAmayeventuallyformalizeanagreedcompromisewhichthenbindsallunsecuredcreditors,includingthosethatdidnotvoteinfavor.
Winding up proceedingsLiquidationmayberequestedbythepartiesandleadstonominatingaliquidatorinchargeofcontrollingthecompany,keepingthecreditorsinformed,anddistributinganyassets.Thecompanyisthenderegistered.Onceappointed,theliquidatormustcontactpotentialcreditorsandcommunicateaclaimsubmissiondate(throughnewspapersforinstance).Theliquidatormaythenadmitorrejectaclaim,andwouldoftenaskforfurtherevidencejustifyingthecreditor’sright.
Priority rulesPriorityrulesnormallyapplywhiledistributingtheproceedstothecreditors.Securedcreditorsholdingasecurityinterest(asdefinedinSection12ofthePersonalPropertySecuritiesAct2009)aregivenpriorityagainstunsecuredcreditorsinliquidationproceedings.Expensesflowingfromtheinsolvencyproceedings,forinstance,constituteprioritydebts.Employeesareaspecialclassofcreditorswhichhasadegreeofpriorityoversecuredandunsecuredcreditors.Taxdebtsareconsideredunsecuredandwouldonlybepaidforifsufficientfundsremain.Thepetitioningcreditor’slegalcosts(relatedtotheinsolvencyproceedings)maybeconsideredapriorityandrefundedtothecreditorpriortosharingdividends.
Cancellation of suspect transactions (clawback)Inaddition,theliquidatormaycancelvarioustypesoftransactionsconcludedduring‘suspectperiods’priortotheproceedings.Forinstance,transactionsaimingatavoidingcreditorswithintenyearspriortotheproceedings,unreasonabledecisionstakenbythedirectorswithinfouryearspriortotheproceedings,transactionsfavoringonecreditorovertheothers(unfairpreferences)concludedwithinsixmonthspriortotheproceedings,unfairloans,fraudulenttransactionsetc.wouldbeconsideredproblematic.Incriminatedtransactionswouldthenbevoidandthecreditorwouldberequestedtorefundtheamountsatstake(aclaimwouldbelodgedagainstthecreditor).
How long could insolvency proceedings take?Itisdifficulttoprovidetimeframesforreorganization-basedproceedings,however,liquidationtendstobeeffectiveandfairlyquick(fromsixto18monthsonaverage).
Necessary documentsCopiesofunpaidinvoices,laststatementofaccount,copyofsupplycontract,copyofcreditapplication,proofofdeliveryifnecessary(AWBBOLforexport).
Insolvency @ Euler HermesEulerHermesworkscloselywithdebtors,creditorsandlawyerstoprovidesupportduringinsolvencyandrestructuringprocesses.Withmanyoptionsavailablewhenitcomestoinsolvencyaction,wecanofferadviceonwhichoptionismostsuitable.
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EulerHermes,acompanyofAllianz,leaderincreditinsurancesolutionshelpingcompaniesgrowtheirbusinesssafelyathomeandabroad,providesglobalcommercialdebtcollectionserviceswithtrueend-to-endcapability.EulerHermesoffersbothdomesticand international tradedebtcollectionservicesworldwide.Throughournetwork,weuseourexperience and knowledge of local markets to ensure a professional service for our clients from pre-legal actionthroughtolegalproceedings.
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