Worried about your creditors?

April 14, 2020

Finance Minister, Grant Robertson has made a plea to businesses “to continue to pay their bills to one another. It is very important that businesses that are in a position to do so, continue to pay other businesses, particularly larger business paying smaller businesses. This ensures money continues to flow around the economy and ensure that businesses can remain solvent”.

If you are struggling to prioritise your debts, our advice is to have a strategy in place. Make sure it’s clear how you will manage your debtors, you need to decide what is most important to your business in this unprecedented and difficult time. A good plan or system will ensure you have cash flowing into your business and you are spending what precious time you have targeting, or following up the right debtors, or those who can afford to pay.

Debtors pay creditors, so take stock of the potential creditors that may be looking to you for payment. Which ones can be paid later or are large enough to allow gradual payment? Good, honest communication is imperative with your creditors, every business is in some way affected by COVID-19, so make sure you are upfront with your creditors and don’t get caught up in over-promising what you can’t deliver.   

You also need to think about what other creditors you might have. Have you made credit applications for goods you’ve bought in the past? Have all those trade accounts been paid? At the hardware store? At the local cafe? What about loans that you’ve taken out? Do you lease any of your business assets? Do you have anything on hire purchase?

Where you have agreed to security for the amounts you owe, it is likely that your creditors will have registered that security on the Personal Property Securities Register (PPSR). The PPSR is essentially a “noticeboard” where people can register a legal claim to personal property (essentially anything except land, buildings and ships greater than 24 metres in length) for which they are owed money. An effective security can mean that if you stop paying what you owe the creditor, they may be able to legally repossess the item (after Alert Level 4 is lifted).

Even though the government recently announced new business relief measures, which will allow a ‘safe harbour’ to businesses that are struggling, Grant Robertson has warned that “the changes must not be seen as a workaround for obligations to creditors and the responsibility of directors to act in good faith”. It is still crucial to take stock of your creditors, especially those with securities registered against you.

If you are not aware of the securities held against you or your company, we can provide you with a report setting out who your secured creditors are and what assets they hold a security over. Where you believe you don’t owe anything to a particular creditor, we can request they release these securities. With the risk of repossession of assets, it may also help you to prioritise your debts, not in terms of how much you owe, but by the value of an asset to your business, or in light of any enforcement action creditors may still be able to take, despite the new rules.

It was emphasised by the Minister that “these changes will not mean that directors are free to disregard the consequences of their actions for the next six months. Other protections in the Companies Act, such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place”. It remains important to address the debts that you are struggling to pay. Knowing exactly who your creditors are and, with our assistance, understanding the options they may still have despite the new relief measures, can allow you to address your obligations up front.

It is also an important time to consider what Personal Guarantees or Indemnities you may have signed in respect of company or trust debts. Unfortunately, there is no register for this, so you will need to have good records, or be thinking about what you may have guaranteed when applying for credit or taking out loans. Those creditors may start calling on you personally if they know your business will not be able to pay.

In such uncertain times, we don’t know yet how creditors may act, but they may look to hold you responsible at a higher level, especially if they also cannot afford to wait six months for their debts to be covered. The flow on effect could be huge. If you don’t pay your creditors, they can’t pay theirs.  If they believe they may also become insolvent to the point where they have to cease trading altogether, they may look to take action against their debtors sooner than they would have before.

Being armed with the right information at the first sign of trouble, may just help you to negotiate your way out of any potential threats that do come from creditors in the next few weeks or months.

If you are worried about any of your creditors, please do not hesitate to get in contact with us to discuss further. We are committed to assisting you however we can.

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