Acme Furniture Assemblers (Acme) had a lucrative contract with a manufacturer of premium flat-packed furniture, Larceny Pty Ltd (Larceny). Acme was contracted
to install shop displays for Larceny in the showrooms of national furniture retailers, and complete after sales service work for the company. After
several years of a successful business relationship, payment terms deteriorated. Acme raised the issue with Larceny, but was reluctant to push the
issue due to the long term relationship, and the fact that the work for Larceny comprised nearly half of Acme’s business. When Administrators were
appointed to Larceny, despite a few recent lump sum payments, Acme was owed payment for over three months’ work, for which it had taken no security.

The above case study is fictitious, however it is strikingly similar to many examples we have come across. In the event that a liquidator was appointed
to Larceny, the voidable transaction provisions of the Corporations Act 2001 may result in Acme being required to pay back lump sum payments received
from Larceny in the 6 months prior to the appointment of administrators.

In order to demonstrate the lump sum payments received by Acme are voidable a liquidator would be required to show that Larceny and Acme were parties to
the transaction, and that as a result of the transaction Acme received more than it would have received from Larceny if it were to prove for its debt
in the winding up of that company and payments were made to Acme 6 months prior to the appointment of Administrators to Larceny.

It would be open to Acme to argue a number of defences to the liquidator’s claim, however whether Acme won or lost the argument, it would still be worse
off as a result of the failure of Larceny. After writing off three months’ bad debts, Acme would need to pay lawyers to protect payments that had been
received from Larceny.

If C.O.D. is the optimal business arrangement, pre-payment is the gold standard. However, as businesses often elect to offer payment terms that are more
favourable to their customers than C.O.D., there are several strategies that might be adopted. In Acme’s case, it should have enforced shorter payment
terms from Larceny. If Larceny was unable to agree (or meet) such terms, credit terms should only be offered in circumstances where adequate security
is offered by the debtor registrable on the Personal Property Securities Register.

In addition to proactive strategies businesses should take a proactive approach to credit management, continuously monitor debtors, monitor accounts receivable
for each customer and enforce payment terms. Finally, effective risk management sometimes requires a business cut off supply to a customer in circumstances
where there is a history of non-payment, and the risk of the customer’s insolvency is greater than the benefit of the ongoing business relationship.
It is worth remembering that it is not uncommon for the insolvency of one company can lead to solvency issues among its creditors.

Aitken Partners specialises in dispute resolution and insolvency (personal and commercial). Speak to one of the Aitken Partners team if you would like
to discuss protecting your business against the threat of insolvency, creating and registering a security interest, or if you require further advice
on defending an unfair preference claim.

You can call the AFA Member dedicated ‘legal help desk’ for all IR/HR and legal issues at 1300 AFA LAW (1300 232 529).

Written by Nahum Ayliffe