What happens if my supplier goes out of business…?

If you find out a supplier has gone out of business, yet you’ve paid for goods and services, it’s a significant blow. A potentially valued supplier is no longer trading, which is upsetting for everyone. You haven’t received what was promised. And the likelihood of receiving those goods or services, or getting your money back, is now in question.

A company is considered to have gone out of business when it is liquidated (can no longer pay its debts and is wound up) or deregistered (by the Directors or by ASIC for compliance reasons). Once a company completes the liquidation process it will be deregistered. At this stage the company no longer exists and must cease trading.

What to do if a supplier is in liquidation

Liquidators are responsible for winding up a company, selling its assets and paying its debts. They will pay secured creditors first. Unfortunately your debt, which is most likely unsecured, won’t be a high priority. If there is not enough money left over once assets are sold, you may not receive your money back or you may only receive a proportion of your money back.

One option open to you is to take legal action to pursue the directors for failing to prevent the company from incurring debt while insolvent. You must prove that they did so knowingly. If you are successful the directors will be ordered to repay the debt plus legal costs. You need to obtain the liquidator’s consent to take this action.

What to do if a supplier is deregistered

Because a deregistered company no longer exists, you will need to apply to take action to have ASIC reinstate the company. This is a last resort and you need to show you have tried all other options such as taking action against the company’s insurance company. There is also no assurance that once the company is reinstated that it will be able to repay its debt to you.

Unfortunately, given the current economic conditions, we may find that suppliers going out of business will become a more common occurrence. Your best recourse is to be prepared from the outset. Make sure your contract defines your rights in the event of a default by a supplier and do your due diligence into the supplier before you agree to purchase goods or services from them.

Rolf Howard, Managing Partner, Owen Hodge Lawyers

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