Creditor Pressure During Lockdown

What happens when your creditors start pressing for payment in the midst of the ongoing lockdown? Head of Insolvency, Steven Jansch, provides a guide.

The COVID pandemic lockdowns have fundamentally changed the way we do business. However, questions of solvency still involve the same principles; Are assets greater than liabilities, and can you pay debts as they fall due?  But what happens when your creditors start pressing for payment?  Here is a quick guide on how to approach dealing with that problem.

Stage 1 – Communicate

The first thing to bear in mind is that everybody is under pressure just now.  Businesses still need to trade, incurring debts and paying creditors what they can, as well recovering money that is owed to them from their own creditors.  Do not treat lockdown as a short-term protective measure – the businesses that will thrive in the future will be the ones that have preserved and nurtured their supply chain relationships as well as their customer services.  Communication is key.  Be clear. If you do owe one of your suppliers money, explain why that has not been paid, when that is going to be paid, and provide only realistic promises of payment.  If things change, whether in a good way or a bad way, let the supplier know before they have to revisit the issue with you.  Nobody wants to have a gap in their cash income, particularly during lockdown!

Stage 2 – Dealing with Threats

If matters escalate and you receive a letter threatening legal action, do not ignore it!  Again communication is key.  The letter should set out what is owed, why you owe that, and what will happen next if you don’t reply within a specified period of time.  Make sure you respond.  Set out any dispute that you have with the amount claimed to be due, or any issue with the suggestion that the amount demanded is now due, and if you need time to pay that amount then make proposals that are realistic and will be achieved.  A huge amount of damage will be done if promises of payment are broken, and that could jeopardise the future of your business.

Stage 3 – The Threat of Insolvency

If you have not been able to pay what is owed, or alternatively reach an agreement with your supplier for time in which to make payment, then they may serve a statutory demand or Insolvency Act demand letter on you.  This is a key legal document – do not ignore it!  Whilst the current legislation prevents a creditor from relying on a statutory demand for the purposes of a winding up petition if it was served between March 2020 and March 2021, that temporary protection will come to an end.  Whilst current indications are that the Government will extend that period (again), that does not address the underlying issue of whether your business is or will be viable in the future.  Remember, whilst there is a lot of talk in the press about director duties for wrongful trading having been temporarily suspended, initially from March to September 2020 and now again from November 2020 to April 2021, directors still have various other duties which include a duty to act in the interests of the company’s creditors if insolvency becomes a possibility.

Managing the Risks

The only way to properly manage a director’s risk of personal liability right now is to get cashflow statements prepared, to continually update and review them, and get professional advice as soon as any potential problems arise.  The temporary legislative protections allow a director to continue to trade, but as those measures will come to an end if there is simply no hope of the business surviving in the longer term the director will only be storing up problems for themselves for the future.  Discussion of the so-called “Zombie Company” phenomenon has slowly been creeping back into the financial press lately, and rightly so given what is said above.  The insolvency regime in the UK allows a director to protect their company with a company voluntary arrangement, a light touch or a full appointment administration.  Ultimately a director can seek to protect their own position by placing the company into liquidation if it is no longer viable.  However, directors also need to have good communication with those who owe their company money.  Ultimately, they need to know what happens if their major customer cannot pay and enters into some form of insolvency.  Whilst most will not want to have to think about that possibility, it is hard to see how a director can be complying with their duties if they avoid considering the worst case scenarios.

Communication is crucial – communicate with those you owe money to, and those who owe you money, and get good advice early.  Getting the right professional advice when there are options available can make the difference between saving a business and preserving a director’s personal assets.  Directors of zombie companies will have to deal with today’s problems eventually, and zombie companies could cause your business significant problems.

We are always happy to discuss any of the matters above with you and with your clients on a confidential basis.  Feel free to contact our head of insolvency.

If you would like further information on the topic discussed in this article, please contact Steven Jansch by email: sjansch@gilsongray.co.uk or by phone: 0131 516 5361 / 07841 920 100. You can also view Steven’s profile by clicking here.

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.