It is not a good idea to hold off taking action to redress an insolvency. It is all very well that, if worst comes to worst, the business can place a company into administration or a sole trader or partnership under Part X of the Bankruptcy Act but delay brings with it a set of new problems.
In the case of a company, we all know that in the event of liquidation the directors can be faced with claims against them personally if it is found that they have traded on and incurred credit whilst the company is insolvent. What isn’t so evident is the commercial and another impact of so doing.
To act early and to approach creditors [all of them] with a proposal in an honest and open way will more often than not pave the way for an informal arrangement with those creditors, for time to pay and even at a discount.
In most cases your client will be able to pay in due course, but requires time to do so. In other cases, they may require a discount. If they have not been led up the garden path, you would be amazed how receptive creditors can be to such proposals. They are always easier to handle and are more comfortable if they know that your client has approached and is supported by all or, at least, a majority of the others. Why. ? Because otherwise each will never know if, whilst they are waiting for their payment, if one of the other creditors is moving to wind the company up or bankrupt the proprietor. I.E. they will want to know that the problem itself is being controlled.
Acting early may avoid the necessity for a formal and very expensive administration under the Corporations Law or the Bankruptcy Act. But then sometimes the objective of reaching an informal arrangement is not achieved and formal arrangements do become necessary.
The problem faced by many businesses’s coming out of a financially difficult period is that it will have difficulty obtaining what would otherwise be normal trading terms with suppliers and others with whom they deal. The net effect of this is that without that time to pay the business will require an injection of capital to compensate and this is often difficult if not impossible for the business man or woman who has invested their all in the business.
This is less likely to be a problem if the creditors and suppliers feel that they have been treated fairly and openly.
One must understand the psychology of the creditor if one is to understand how to deal with them effectively. Not knowing causes the anxiety.
Our responsibility then is to identify the insolvency and advise prompt action