What to do When You’re Contacted by a Liquidator About One of Your Clients
If one of your small business clients is insolvent and has entered into liquidation, it won’t be long before the company liquidator contacts you.
While a phone call explaining what they need from you would be nice, liquidators aren’t generally known for their niceties.
Instead, the first contact is typically a standard liquidator’s letter mentioning relevant sections of the Corporations Act and a shopping list of things you need to comply with. They may also mention various consequences of non-compliance.
This can come off as quite aggressive – even a little intimidating – as you’re left wondering about the possible consequences of not complying. However, don’t let this put you on the back foot.
Here we explain things from the perspective of a company liquidator and offer some tips for dealing with them.
The Company Liquidator’s Load
Company liquidators often have limited information and possibly no cash when appointed.
If your client’s business has approached them voluntarily (voluntary liquidation), they may have received some records and information upfront. However, if a court has appointed the liquidator, they are starting from scratch.
This is a difficult situation. The liquidator is trying to get any information they can to identify company assets and liabilities and investigate the company’s affairs to recover money for creditors, who are naturally unhappy at not being paid their debt.
Often directors can be difficult to contact, which is why they come to you, the accountant.
How to Respond to a Liquidator’s Letter
The best course of action to a liquidator’s letter is to respond to it. A straightforward response will generally be sufficient to bring the matter to a close.
The liquidator will know you’re not being paid and so generally wouldn’t expect you to do a bunch of unpaid work. If you’re uncertain, you could call the liquidator to discuss. Otherwise, the following will suffice:
- Provide access to the company’s accounting software, and transfer the subscription if you hold it. You don’t need to incur expenses if the liquidator hasn’t agreed to reimburse you.
- Advise the status of your work for the company
- Provide any recent signed financials and tax returns you hold
- Advise whether you hold company funds on trust
- Advise the liquidator if the company owes you money
Be reassured that you won’t go to jail if your response is incorrect.
However, if you don’t respond to a liquidator’s request for books and records, they may refer you to ASIC for assistance. ASIC generally assist liquidators where directors don’t comply with their duties, but on occasion, professional advisers require a nudge.
In serious circumstances, generally, where a liquidator considers some form of director misconduct has occurred, they may require you to provide records and other documents you hold and attend court to give information. This is very rare.
How to Provide The Right Records
In the list of items you need to comply with, the liquidator will typically ask you to provide all the company's books and records.
While you’re asked to provide all records, this isn’t enforced unless they subpoena you into a public examination, which is highly unlikely. Just make sure you’re providing enough that the liquidator doesn’t keep having to come back for more.
Generally, a company’s records include anything provided to you or that you issued to the company. This includes:
- Bank statements
- Documents (tax returns, financials)
- Financial agreement
- Engagement letters
These are generally only relevant to a liquidator if they relate to the past two to three years. But they may ask for a longer period if there are relevant matters to their investigations.
Company records don’t include your internal documents, such as working papers. They may include email communications, but they are generally not required. The liquidator may also have other avenues to obtain company emails.
You don’t need to bring the accounts up to date, including your client’s tax affairs, unless you’re being paid. While it is, of course, preferable to keep company records up to date, it’s understood that funds might not be available. If they are available, they’ll be used to meet the liquidator’s costs.
How to Deal With Your Unpaid Fees
If your client still owes you money, you may be tempted to withhold supplying the company’s books and records to the liquidator. However, this is unadvisable.
Under Section 530B of the Corporations Act, you’re required to deliver the company’s books and records to the liquidator, and you’re not entitled to claim a lien against them.
That said, if the liquidator asks you to do additional work beyond simply complying with their request, you may certainly ask to be paid for those services before providing them.
On occasion, the company liquidator may be able to claw back fees the client has paid you.
This is because creditors who receive payments within six months of a company entering liquidation may be required to refund payment under an unfair preference claim.
In these cases, the liquidator will need to show that the company was insolvent at the time of making the payments and you had grounds to expect it was insolvent.
As the company’s accountant, there’s an expectation that you would be aware of a company’s financial position. However, there are various factors liquidators consider in such matters, including the amount of the potential claim, the expected costs to pursue the claim to court and the evidence available to establish the claim.
Generally speaking, accounting fees aren’t significant enough to warrant the liquidator making a claim for payments your client makes to your fees before liquidation. However, where the client is a larger business and you’re doing significant work for the client, you may be at risk of having fees clawed back if the company enters liquidation.
What is the best thing to do? Don’t become a creditor or invoice periodically for smaller amounts as you carry out works. If you’re paid up-front for work you intend to perform, it’s generally accepted that you didn’t become a creditor.
Where you do ongoing work for a client and are paid regularly, a running balance defence may be available such that the maximum amount of a claim against you could be the payment of just your last invoice.
Befriend a Liquidator Before Hearing From One
Want to avoid first hearing about a client liquidation from the liquidator?
Forming a relationship with a liquidator like us will avoid surprises. It’s important to be able to engage with your clients to deal with financial difficulties that arise. It’s better for them, and it’s better for you, improving the chance of their business survival and you retaining them as a client.
Get in touch with us today on 1800 861 247 to see how forming a relationship with us can benefit you and your client.
