Managing your balance sheet coming out of the pandemic - Q&A

Government measures brought in over the pandemic – ranging from direct financial support to enforced forbearance by creditors (with restrictions on winding up petitions, for instance) - will have had the effect of skewing the cash cycle of many businesses for some time to come, let alone the impact of the pandemic on businesses themselves. As we transition out of this phase we answer some common questions as to managing creditors and creditors, and key considerations for managers.

How can we maximise our cash collections?

It is important to ensure your credit control function is as effective as possible. Our top ten tips for invoice recovery can be found here. If you have any concerns about debtors being slow to pay, the earlier the issue for non-payment is addressed the more likely it is to be resolved.

A business customer is late paying an invoice, can we charge interest on the amount?

You can claim interest and debt recovery costs if another business is late paying for goods and/or services. If a payment date is not agreed, payment is deemed to be overdue 30 days after the later of the invoice being received or the goods and/or services being provided. The applicable interest rate will be as set out in the contract, or if there is no contractual rate then 8% p.a. over the Bank of England base rate. You can also charge a fixed sum for the cost of recovering late payments, on a statutory scale linked to the size of the debt. More information on the Government’s website here.

Our business is doing well but I’m concerned that if customers can’t pay us what they owe, we could quickly be in difficulty

Insolvency can cause a ripple effect in a supply chain, particularly if a business is heavily reliant on a small number of customers. Make sure your credit control policies are being followed and you are speaking to the problem customers regularly. Take advice on your recovery options at an early stage – often a business in difficulty will only pay what it regards as priority debts or those creditors who are taking prompt action. Ashfords’ Debt Recovery team can assist with your options.

What if our business needs to use credit from its suppliers?

Some suppliers may be willing to supply on enhanced credit terms but consider this carefully. Stick within any limits and make payments on time to avoid being cut off from further supplies or recovery action, and step back to consider the business’ financial health in general and whether a wider or longer term issue needs to be addressed. Some credit accounts will require a personal guarantee from directors, who may want to take independent advice before signing up.

Creditors are starting to get aggressive and are threatening to send in the bailiffs. What should we do?

Only HMRC or judgment creditors can instruct High Court Enforcement Officers (HCEOs). HCEOs can visit premises for unpaid debts after giving at least 7 days’ notice and can generally only attend between 6am and 9pm. They cannot take leased goods or goods subject to hire purchase agreements. Take advice if you have been threatened with demands for payment or a visit from HCEOs - more on our article here.

What if a creditor serves a demand for payment or threatens a winding up petition?

Winding up petitions can currently (until March 2022) only be presented if the debt is more than £10,000, does not relate to commercial rent arrears, and the business has received 21 days’ notice – see our article here. The 21 day notice is intended to provide an opportunity for debtor and creditor to negotiate acceptable payment proposals and/or for the debtor’s directors to take advice on the business’ options. The presentation of winding up petitions can affect a business’ credit rating, its banking covenants, and could lead to the freezing of its bank accounts and ultimately compulsory liquidation. Don’t simply ignore this sort of threat.

The business gave an intercompany guarantee in respect of the debts of another company in its group that is now struggling to recover. What issues arise if the guarantee is called upon?

It is important for directors to consider the contingent debts – those debts which may or not fall due, depending on other events – of each business within the group and the likelihood of these becoming payable in their assessment of the company’s liquidity, especially if there are areas of a group that are more successful than others. Early discussions with creditors is generally encouraged in order to reach a resolution. Depending on the scale of the potential exposure, refinancing or restructuring may be an option, which you can consider with our Restructuring & Insolvency team.

Can directors continue to take a low salary and top this up with dividends if they have concerns about the company’s cash flow position?

Dividends can only be paid from profits available for the purpose, by reference to the last filed accounts or appropriate interim accounts (See our article here) Directors should only authorise dividends where the proper process has been followed, and be very mindful of their duties to the company’s creditors whenever there are concerns about solvency, which may inform how they can be remunerated. Directors are encouraged to take professional advice but in any event any decisions (and the reasons for them) should be carefully recorded . More information in our article here. 

Our business has received a winding up order but it can pay its debts, what can I do?

If you have received a winding up order but the business is able to pay its debts you can apply to rescind (cancel) it by filling in Form IAA and sending it to the court detailed on the winding up order. You must apply to within 5 working days of when the order was made, and prompt legal advice is beneficial. More information on the process and fees can be found here.

For more information, please contact a member of our Restructuring & Insolvency team.