When a debtor starts missing payments, most creditors wait. That is usually a mistake. By the time many creditors seek legal advice, the debtor's financial position has deteriorated further, competing claims may have emerged, and the most effective recovery options have narrowed considerably.
When a debtor starts displaying warning signs of financial distress, creditors tend to adopt a wait-and-see approach. That instinct is understandable, particularly where the relationship is longstanding or where the creditor hopes to support a temporarily struggling business. It is also often costly.
The warning signs
Financial distress rarely announces itself through a formal notice.
More often, it reveals itself through a pattern of conduct:
- payments become irregular or increasingly late;
- payment promises are repeatedly broken;
- requests for extensions become more frequent;
- invoices are disputed for the first time after years of undisputed trading;
- communication becomes sporadic or evasive;
- key personnel unexpectedly leave the business;
- suppliers begin demanding payment upfront; or
- rumours emerge of funding difficulties, restructuring efforts or creditor pressure.
None of these indicators necessarily establish insolvency. Businesses can and do experience temporary liquidity constraints. The difficulty for creditors is that by the time insolvency becomes obvious, many of the practical opportunities for recovery may already have diminished.
Creditors should also remain alert to more concerning conduct, such as sudden asset disposals, unexplained changes in operations, transfers of business activity to related entities, or significant changes in management behaviour. While such conduct is not necessarily improper, it can indicate that the financial position is more serious than outward appearances suggest.
Start with the facts
Before taking any formal step, creditors should establish precisely where they stand.
That requires a careful review of the underlying legal relationship and supporting documentation, including:
- contracts and purchase orders;
- invoices and statements of account;
- acknowledgements of debt;
- suretyships;
- guarantees;
- security agreements;
- cessions; and
- retention-of-title provisions.
Equally important is preserving the documentary record. Emails, WhatsApp messages, payment undertakings and account reconciliations often become critical evidence when disputes later arise.
Good records create leverage. Poor records often create problems.
The distinction between secured and unsecured claims also becomes critical once insolvency proceedings commence. Creditors should identify, at the earliest opportunity, whether they hold enforceable security and what practical value those rights may have in a distressed scenario.
Business rescue changes the position
Creditors are often surprised by how quickly their position can change once a company enters business rescue.
The commencement of business rescue generally triggers a statutory moratorium on legal proceedings against the company and its property. Although the moratorium is not absolute, it restricts ordinary enforcement steps and requires creditors to engage with the statutory regime rather than proceeding in the usual way.
The underlying claim is not extinguished. But the practical effect is significant: the creditor may be required to engage with the business rescue practitioner; participate in creditor voting processes; and navigate the statutory priority regime applicable to creditor claims.
Whether a creditor ultimately supports or opposes a rescue plan, early engagement is usually preferable to reacting once the process has already begun.
Know your options
Not every distressed business can be rescued.
Some companies are dealing with short-term liquidity pressure and may recover through restructuring, refinancing or improved trading conditions. In those circumstances, a negotiated commercial solution may preserve both value and a valuable business relationship.
Others are experiencing a more fundamental deterioration in their financial position and are unlikely to recover without formal intervention.
Depending on the circumstances and prior to the debtor entering business rescue, creditors may have several options available:
- instituting court proceedings and obtaining judgment;
- executing against assets before value is lost;
- enforcing security rights under applicable agreements;
- pursuing claims against sureties and guarantors; and/or
- applying for liquidation or sequestration where applicable and appropriate;
The right strategy will always depend on the specific facts, the nature of the debt, the debtor's financial position and the creditor's commercial objectives.
There is no universal solution.
What is universal, however, is that informed and timely decision-making generally places creditors in a stronger position than prolonged inaction.
Why delay is costly
Many creditors believe patience carries negligible risk. In practice, the opposite is often true.
The longer financial distress continues unresolved, the greater the likelihood that assets will diminish, competing claims will arise and formal insolvency processes will intervene.
The creditor who acts promptly may still have options. The creditor who waits for certainty often discovers that certainty arrived too late.
In this area, the most valuable advice is usually the simplest: understand your position early, preserve your evidence, and act before your options narrow further.
