Guidance on Cash Management

Our team: Nadia Osborne, Ben Drew

The Fladgate Insolvency and Restructuring team have been advising clients with the understandable desire to conserve cash. If not handled correctly, your efforts to negotiate terms with suppliers and staff could in fact increase the liabilities of the business, restrict the company’s ability to oppose a winding up petition and leave you personally exposed for unpaid debts.

What is the goal?

In challenging times for your business you might wish to defer the payment of debt and/or achieve a compromise on the amount due.

Is this ok?

This is ok provided you can reach agreement with your creditors/suppliers. But you will need to make statements and perhaps provide information to creditors/suppliers to persuade them to do a deal with you. Consider carefully what message you are giving.

What are the pitfalls?

The main pitfalls of negotiating debt deferral or compromise (with creditors and suppliers) are as follows:

1. Making statements that constitute evidence of insolvency – eg “Sorry I can’t pay you”. If the business does later become insolvent this may come back to haunt you. It will be used as evidence that you knew/accepted your company was “cash flow insolvent” but you continued trading anyway. You could be personally liable for wrongful trading aka “trading whilst insolvent”.

2. Making false statements – eg “we don’t have the cash to pay you in full” (where this is not correct). If someone is induced to enter an agreement with you on the basis of a statement like this, the agreement may be voidable and you may be liable for damages.

3. Preferring creditors. If you are short of cash you can pay creditors/suppliers who are providing goods or services on an ongoing basis and who are critical to the business. You cannot choose to pay some debts and not others because certain creditors have applied more pressure or because you have a better relationship with some of them. This is unlawful and could make you personally liable to restore money to the business.

How to handle discussion with creditors, suppliers:

1. Have conversations promptly – don’t put off difficult conversations.

2. Be clear, be open and be honest.

3. Don’t volunteer information about your financial position. For some deals you may have no choice but to provide accounts. Make sure they are accurate.

4. If you are telling people you cannot pay, you are admitting insolvency. This may be unavoidable. But then consider your duties and your next steps if no deal is achieved.

5. If you cannot pay your debts as they fall due (and deals are not achievable to re-schedule the debt) you are “cash flow insolvent”. You need to cease trading and take professional advice immediately. This does not mean you are going into liquidation. You may achieve more time without personal exposure if you enlist professionals to assist you with negotiations and planning.

The ultimate message is this – if the continued solvency of a company looks doubtful, the focus of its directors must switch from promoting the company’s success to acting in the best interests of creditors as a whole. It is at this juncture that the potential for personal exposure is triggered.

If you would like to talk to someone about your business challenges or enlist our assistance please contact Bree Taylor, Ben Drew or Nadia Osborne.

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