A settlement warranty about solvency needs more than reassuring words
Assess factual support and practical limits of a proposed debtor solvency warranty without claiming immunity from recovery.
Corporate Recovery Partners
01 / 06
A comforting clause is still a claim
The debtor offers to state in the settlement deed that it is solvent. You may welcome the assurance, but the wording does not independently establish the company's financial position. Ask your lawyer what the clause means, what information supports it and what practical remedy it could provide if the statement later proves inaccurate.
Imagine a supplier negotiating a reduced payment from a struggling customer. A director says the company is fine, while the draft contains a warranty given only by the company. Give the lawyer the exact words and proposed signatories. Do not assume a director signing for a company has personally promised to meet every obligation in the deed.
ASIC explains that a liquidator can seek to recover certain transactions, including unfair preferences. A settlement warranty does not itself establish that a payment is outside those rules. Ask for advice on the actual transaction and circumstances. The relevant assessment should not be replaced by a sentence asserting that the parties intend the payment to be safe.
Preserve the debtor's explanation, financial information supplied and your ordinary payment correspondence. If the explanation conflicts with missed payments or other information, raise the discrepancy with your adviser. Do not ask the debtor to remove an awkward fact merely to make a warranty easier to sign. Your decision should reflect the information genuinely available at the time.
A contractual promise may have limited commercial value if the party giving it cannot satisfy a later claim. Discuss the proposed wording, potential enforcement cost and any other arrangements with the lawyer. Avoid treating a possible future claim as cash in hand. The settlement's payment terms still need careful consideration on their own merits.
Record the advice and the business reasons for the settlement without rewriting earlier correspondence. Keep the final signed version and its supporting information together. In the supplier's example, the useful outcome is understanding the warranty's role and limits. It is not obtaining reassuring language and assuming that any later insolvency review has been prevented.
