Insolvencies: How To Get Paid First

If you haven’t registered a security interest, you’re an unsecured creditor. This means you will rank after secured creditors and be a low priority for the insolvency practitioner. As an unsecured creditor, you will have to compete with other unsecured creditors for any funds leftover after the secured and priority creditors are paid.

So, if you want to get paid first, it’s definitely in your best interests to be a secured creditor. But what about the other secured creditors? Won’t you all be battling it out for the same piece of pie? 

The good news is that there are ways to achieve priority over other creditor’s claims. A Purchase Money Security Interest (PMSI), for example, is a particular category of security interest that may have super-priority over other types of security interests. Having a valid PMSI registration, which has super-priority, means you go straight to the top of the secured creditor list for that collateral. The rules for achieving a top-ranking are complex and depend on your unique circumstance, so be sure to seek expert advice.

A crucial strategy for boosting your chances of recovering your debts is to understand how to negotiate with the insolvency practitioner. As a former liquidator and founding partner of a national insolvency firm, Andrew McLellan, Equifax PPSR expert, understands how insolvency practitioners work. Here he provides his best tips.

Tip #1: Within 48 to 72 hours of the insolvency practitioner’s appointment, visit the premises of your customer/trader.

The first task of the insolvency practitioner is to prepare a list of trade debtors and conduct a stocktake of all the assets on hand the day of their appointment to the failed business. It usually takes around 48 to 72 hours to complete these lists, and that’s when you want to be arriving at the premises. 

The usual rule of thumb for an insolvency practitioner is that a fast sale is a good sale. The stock that was there on day one of their appointment, your own included, may soon be gone. This is particularly the case if the practitioner is trading the business. 

Tip #2: Don’t wait for the insolvency practitioner to contact you

You are the best person to identify your stock and the amount owed, so don’t wait for the insolvency practitioner to get in contact with you. 

Often an insolvency practitioner gets as little as 24-hours’ notice before being appointed, so has minimal time to get to know the nuances of the business. Staff conducting the stocktake may also have difficulty accurately describing what it is they are listing. With this in mind, it’s crucial to be proactive about contacting the practitioner, stating your claim and visiting the premises. Don’t wait for them to eventually contact you with a guess as to which is your stock.

Tip #3: Include a clause in your trading terms about entering the premises to pick up unpaid stock

Your terms of trade are essential for several reasons, specifically that they create a security agreement, which enables you to register on the PPSR. You can add even further value to your terms of trade by including a clause giving you the right to enter your customer’s premises to collect your unpaid stock. 

Insolvency practitioners are usually open to allowing secured creditors access to the premises, but having this clause in your trading terms serves as a backup if you run into difficulty.

Tip #4: Don’t leave the premises until you have evidence of your claim

It’s rare for an insolvency practitioner to trade for longer than four to six weeks. After that time, the business will either be sold or closed, and the company’s records boxed and warehoused. It’s challenging to access these records at a later date if you end up in a dispute and need evidence to support your claim.

Don’t rely on the insolvency practitioner to do all the work of listing, matching your claim to invoices and then calculating the amount owed. Take responsibility for doing this yourself by checking outstanding invoices, reviewing company records and asking company staff to identify which customers typically buy your goods. As there will probably be some stock movements, compare the stock record with the sales register to determine where your stock may have gone.

It’s difficult to calculate how much of your unpaid stock is in trade debtors if your stock is being used in a manufacturing process and combined with other material. But even in this situation, your best estimate is better than none. When you walk out of the premises, you should have the evidence you need to issue legal proceedings at a later date if required.

Tip #5: Agree on your claim with the insolvency practitioner before you supply any additional stock

It’s great news if the insolvency practitioner is trading the business, as this indicates stock on hand may be paid for, and they may even require more stock. If asked to supply additional stock, it’s vital to agree with the practitioner on the amount owed to you, and that you will receive payment. Ensure this is confirmed in writing before you supply any more stock.

Tip #6: Exercise your rights as a secured creditor

During the negotiation with the insolvency practitioner, don’t let legal jargon or strong language intimidate you. Remain confident of your legal rights and remind them of their obligation to view you as a secured creditor.

Contact the PPSR experts at EDX from Equifax for help with insolvency negotiations or registering on the PPSR without error.

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