The Law is an ass: Liquidators are given unrealistically- preferential treatment

If you are a business person, you need to read this. And you need to seek changes to the Corporations Act. Speak to you local member. 

You – trying to do business

So you are a business (a creditor) owed money by another business (a debtor)  either as a ‘ sum certain’ or  under a continuing ‘come and go’ trading facility. 

You accept payments from the debtor and extend further credit the debtor, in the normal course of trading, in good faith.

Then, 6 months later,  the debtor becomes insolvent and a liquidator is appointed to its business.

Liquidators froth on this stuff!

The liquidator demands that you repay all amounts paid to you in the last six months because they are ‘preferential payments’ made to you, not received by you in good faith, and received at the expense of other creditors. 

Further, the liquidator will say that any amounts owed to you by the debtor cannot be set off against what you have to repay him, because you extended further credit to the debtor, when you were ‘deemed’ to know that the business was insolvent.

So how are you ‘deemed to know’ that you should have formed the view that the debtor was or might become  insolvent and, therefore, not take the payments from him or extend further credit to him?

The ‘crazy test’ that makes the liquidators and their solicitors massive fees 

The liquidator will instruct his solicitors to inform you that case law says that the standard of proof that you did not know that you should have deemed the debtor to be insolvent is based on you proving to them that “a reasonable person in a your position as creditor would not have suspected that the debtor was, or might be, insolvent at the time it made the payments to you, or you extended further credit to the debtor.”

Further, the liquidator’s solicitors say that the case law says that a ‘suspicion’ is “merely “a positive feeling of actual misapprehension  or mistrust, amounting to a slight opinion, but without sufficient evidence.” Excuse me!?

The ‘crazy test’ that ignores the fundamentals of the economy

Now, us real people in the real world, all know that, perhaps, 50.0% of businesses who are creditors have a daily “positive feeling of misapprehension or mistrust, amounting to slight opinion, but without sufficient evidence”, that their debtors to whom they supply goods and services are, or might become insolvent, at the time of each dealing with them. 

Ours is a highly competitive, deregulated world economy, as we all know. This was not the type of economy that existed when the case law had its genesis in England, which controlled the half of the World, as a monopoly power.

So what the crazy, outdated case law is saying in this ‘crazy test’ is that each creditor should embed unaffordable, day-to-day, high integrity, sophisticated credit monitoring systems of each debtor to whom they supply goods and services, so that they, the creditor, can never have a “feeling of misapprehension or mistrust, amounting to slight opinion” that a debtor will or might be insolvent at the time that the creditor makes payments to the debtor, or extends further payments to the debtor, in good faith. 

Half of the businesses in our economy would go broke trying to do this, with massive losses in employment and, therefore, ridiculously, it is not reasonable of the courts to expect that creditors will put in place such systems, to satisfy the “reasonable person” test.

I will leave it to you, the reader, to decide if the crusty old case law is so much of an ass, that it should be changed to bring it into the real world and allow creditors to economically provide debtors with goods and services, in good faith, without being sued by liquidators and their solicitors ,making heaps in fees, by  sheltering under the provisions of archaic case law, as is the case here.

Jim Wilson, Principal and Director of Legal Practice, Wilson Haynes, solicitors and business advisers

Mr Wilson has been admitted as a solicitor for 44 years and for half of that time has been MD; CFO: GM; and Operations Manager of listed and unlisted public companies.