Creditor relationships that provide warning signs for insolvent trading

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creditor relationships

By Liyan Tay and Robert Colussi

Liyan Tay

Maintaining good relationships with your suppliers and financiers is paramount to the success of your company.  A strong relationship with your suppliers can help you to have an understanding when your company is experiencing short-term financial difficulties which may result in them providing an extension of credit or extending payment timeframes to allow you some breathing room.

That being said, there is a fine line between short-term financial issues and a larger financial problem with potential consequences to you personally if left unattended.  There are a number of financial and non-financial signs that your company may be experiencing that may need further attention.

Warning Signs

In looking at your suppliers there are some easy warning signs that your company may be experiencing solvency issues:

  • suppliers requesting special arrangements with you to reduce significant accumulated debts (e.g. payment arrangements);
  • follow-ups or reminders from your financiers or suppliers (e.g. overdue invoices that have not been paid or final demands);
  • suppliers suspending further trading with you until outstanding bills are paid;
  • suppliers insisting on payment for goods upon delivery (COD);
  • letters from debt collectors or solicitors demanding payment for outstanding debts; or
  • rejection of credit applications or applications for bank overdrafts due to poor credit rating.

This is not an exhaustive list however generally speaking if you start noticing that suppliers or their representatives are calling you more often to chase for payment of outstanding invoices or you are struggling to meet with due dates on invoices it could be a sign of bigger issues for the company, namely the possibility that the company may be trading whilst insolvent.

Obligations

As a director you have a statutory obligation to prevent your company from trading whilst insolvent, that is, the company is unable to pay all of its debts as and when they become due and payable.  There are serious consequences involved if a director of a company is found to have been trading whilst insolvent including civil or criminal penalties that could be brought against you and your personal assets.

In addition, the Australian Securities and Investments Commission (“ASIC”), a liquidator or a creditor could bring proceedings against you personally for a compensation order for the damage suffered as a result of the breach of that duty.

What to do

As noted above having and maintaining good relationships with your suppliers can allow your company the breathing space it needs during times of financial difficulty to pool the necessary resources it needs to come out unburdened.

There are a number of things a director can do during this time to give the company the best possible chance of recovering such as:

  • raising the issues with the company’s accountant and preparing a strategy to set the company on the right course;
  • consider informal arrangement with suppliers;
  • speaking to an External Administrator regarding formal arrangements or raise other possibilities;
  • placing the company into voluntary administration to allow time for a proposal to be made to the creditors of the company for repayment of the debts outstanding (known as a deed of company arrangement); or
  • discussing with your bank or alternatives regarding refinancing options.

Along with establishing and maintaining good relationships with your creditors the most important thing a director of a struggling company can do is seek advice and assistance as early as possible so that proper strategies can be put in place before it is too late.

Want to know more?

If you would like to know more about creditor relationships, please contact Insolvency & Reconstruction Associate Director Liyan Tay for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

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