Liquidators and Trustees in Bankruptcy - Claw-Back
Sometimes service providers feel that they should not get involved to assist financially troubled clients obtain work-out or insolvency advice in fear that if their client goes into liquidation or bankruptcy that the WIP and/or fees/costs paid may be lost or "clawed back" by a liquidator because of an unfair preference claim.
Such a claim, provides that if the service provider receives more for a payment made before the liquidation/bankruptcy ("winding-up") then what the service provider would have received under a creditor's claim under the winding-up then it is an unfair preference and the service provider must pay back the money received to the liquidator. Normally, the liquidator can look to recover payments made up to 6 months prior to the winding-up.
A way of getting around this is by registration and perfection of security before the client goes broke (if a company, this should also be done within 20 business days from the security agreement).
Another way is by inserting a retainer addendum clause which details the work to be done and getting paid for such work before you commence payment. If you do this then such WIP, costs and fees will not be considered to be subject to claw-back provisions. If you are ever doing work for a distressed client, you should contact us to draft such an addendum.
In the current economic environment, service providers must be vigilant in relation to their credit control. This not only includes getting paid in advance but making sure steps are adopted to ensure that such paid fees and WIP are not "clawed-back" by a liquidator.
The processes detailed in this and previous articles can be simple to apply and can be tailored to meet your needs. If you need assistance to draft or amend your CSA to accommodate a retainer addendum, guarantee or charging provision then please contact our office.