Q: A client who owes us money going back some time now is going under. In fact, he’s planning to liquidate the company straight away, burning some other creditors, but says he doesn’t plan to do this with us. Instead, he’s asked us to write off the debt to the company, invoice him personally and work out a payment plan.
From where I’m sitting, this seems like a good option – and certainly better than waiting in line for a fraction of what we’re owed. Are there any downsides?
A: On the face of it, the benefits to you are pretty obvious: your client will be personally liable for the debt rather than having limited liability, so you can chase the full amount. However, there are a few complicating factors that you should bear in mind.
First of all, you need to consider the likelihood of this person sticking to the payment plan: he is, after all, quite happy to burn his creditors on this. Liquidating the company forces a sale of assets and resolution of outstanding debts, even if the people don’t get everything they’re owed. However, you’re depending in his willingness – and ability – to pay you back otherwise. If this guy is determined to avoid paying, you’ll be chasing him through the court system, which is a long and frustrating process.
Aside from this, he may get into a spot of bother if a disgruntled creditor gets wind of his scheme – particularly if he’s using it to jump the legally well-defined order in which an insolvent company pays its debts.
Under company law, secured creditors who have a legal charge over assets owned by a company get paid first, followed by those who hold a fixed and floating charge. Next, you’ve got the preferential creditors (otherwise known as employees), then the Revenue Commissioners. The unsecured creditors (garden variety suppliers) are next.
If your erstwhile client is effectively trying to let an unsecured creditor that he likes jump the queue, ahead of the Revenue Commissioners or an employee, things could get sticky. That said, it is a relatively uncharted area of company law, so I’m loathe to make predictions about the consequences he could face.
In my view, he needs professional advice, because it looks like he’s trying to keep people happy at the expense of following proper procedures. Doing the wrong thing in an insolvency situation can have grave repercussions for a person’s career down the line. On balance, you’re probably better off doing things by the book.