Paid by Instalments

Paid by Instalments

We recently acted for a client that had agreed to accept payment of an outstanding account by instalments. The debtor company subsequently went into liquidation and the liquidator demanded that our client return the money that it had received.

Payments made to you by a company within six months before it is wound up may be considered by the court to be unfair preference payments (payments that give you more than you would be entitled to if you had to prove the debt in the winding up of the debtor company) or avoidable transactions.

The liquidator argued that our client must have suspected the company was insolvent because it had asked to pay by instalments and so our client should deliver to the liquidator payments received in the six months before the insolvency application.

The law says that to be able to resist the liquidator’s claim, you have to demonstrate you had no reasonable grounds to suspect the company was or would become insolvent (which means unable to to pay debts as and when they become due) and that a reasonable person in the same circumstances would also have no grounds to suspect the company was or would become insolvent.

This might involve simply asking the customer to explain why it cannot pay immediately and to confirm that is solvent, despite its short term cash flow problem. A director of the company might be asked to provide a letter to that effect. Or maybe the customer can provide financial statements of the company that show that its financial position will improve and that the debt will be able to be paid in full in the future.

If there is a history of broken promises then these steps probably wont help you. But if the request to pay by instalments in unusual, then a director’s letter or financial statements are likely to enable you to defend a claim from a liquidator if the company later goes into liquidation.

Readers should not act or rely on this information without first seeking out professional advice concerning their particular circumstances