You’ve sent your bad debt to a collection agency, but the debtor has only empty, broken promises to offer. Or does not respond at all.
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You may find that the debtor:
- disputes your claim for payment without a proper basis; or
- seeks to impose a counterclaim or setoff based on dubious allegations of faulty goods or defective work; or
- complains that he can’t pay you until he has been paid; or worse
- has on-sold goods you supplied, received payment and spent your money on other things without paying you.
You may be aware of other suppliers who also haven’t been paid. You’re angry and frustrated. The relationship is destroyed.
While most business owners are honest, hard-working people who want to pay their bills, sadly, there are some who care little for the distress caused to trade suppliers when goods and services provided on credit are not paid for.
Adding insult to injury, the pursuit of your debt through the courts is expensive. Often the potential for recovery is small, and legal action is seen as throwing good money after bad. In a court winding up application the legal fees, court filing fees and process servers can often total $10,000 to $15,000, even where the matter is not defended. Achieving justice at great cost through a court-ordered winding up of the debtor may be a Pyrrhic victory.
A Way Forward
In our experience, many unpaid creditors are willing to invest a small amount towards the costs of seeking a winding up order against the non-paying corporate debtor, but balk at outlaying the full cost where there is little likelihood of recovery. The unpaid creditor who files a winding up application is called the ‘petitioning creditor’, and the Corporations Act provides priority for repayment of the petitioning creditor’s taxed costs (the costs assessed as reasonable by the Court’s taxing master, not the actual amount incurred, which invariably will be greater). For this to occur, broadly speaking the liquidator needs to make recoveries sufficient for the payment of those costs. Only asset realisation expenses have priority for payment ahead of the petitioning creditor’s taxed costs out of assets realised by the Liquidator.
Through our referral partners in the legal, debt collection and litigation funding industries (all independent professionals) in many cases a way forward can be tailored which takes much of the pain away. In approved matters and subject to certain terms and conditions (discussed and explained to you prior to commencement) the legal work for filing a winding up application can be performed on a speculative basis. Those fees (possibly with an uplift) will only become payable if sufficient recoveries are made from the winding up.
In most cases there are out-of-pocket expenses that must be paid up front, including search fees for initial due diligence, the Court filing fee and process service charges. Typically those costs could be in the vicinity of $2,000, but can be reduced by sharing with other creditors of the debtor, if known, who are willing to engage with and support the process. Whilst the out-of-pocket costs of initial due diligence (variable, but about $200) will always need to be paid up front, subject to the outcome of that process, our referral partners may also agree to fund the out-of-pocket expenses of the Court process as well as the legal fees.
Frequently Asked
Questions
What happens when a business becomes insolvent?
When a business can’t pay its debts as they fall due and there’s no early resolution in sight, it is considered insolvent. At this point, directors have legal obligations to act responsibly and avoid making the situation worse. Professional advice helps you understand the options—such as restructuring or liquidation.
Can I still trade while insolvent?
No. Trading while insolvent is against the law and can expose directors to personal liability. That’s why it’s so important to act early—there are often options to restructure or negotiate with creditors before it reaches that point.
Will I automatically lose my business if it becomes insolvent?
Not necessarily. In many cases, a restructuring process can allow the business to continue trading under a formal plan with creditors. The right advice can make the difference between recovery and closure.
What are my obligations as a director in insolvency?
Directors must act in the best interests of the company and its creditors once insolvency is suspected. This means avoiding new debts the business can’t repay and seeking advice quickly to stay compliant with their duties.
Is restructuring a realistic option?
Yes. The Small Business Restructuring process and other formal tools are designed to give viable businesses a chance to survive. Even outside formal processes, creditors will sometimes work with directors who are proactive and transparent.
Will I be personally liable for company debts?
Directors are generally protected by limited liability, but there are exceptions. Personal guarantees, unpaid tax obligations which prompt the issue of Director Penalty Notices by the ATO, or trading while insolvent can expose you to personal risk. Early action reduces these risks.
How long does an insolvency process take?
It varies. Some restructures can be implemented in weeks, while liquidations may take months or longer. Acting early helps keep the process efficient and reduces disruption and costs.
When should I seek help?
As soon as you suspect trouble. Early advice gives you more choices and better outcomes. Waiting too long can limit your options and increase personal risks.
