Unintended Consequences: Changing Statutory Demand Notice Response Times During #Covid19
On the face of it, changing the response times of statutory demands may seem like the right thing to do for struggling businesses. It is though a double-edged sword.
On one hand struggling businesses will have more time to pay off debts, on the other hand the businesses they owe money to will have employees and suppliers that won’t be paid. All the government has done, is they have shifted the suffering of one patient onto the other.
The fact is that if a business is served with a statutory demand with a response time of 21 days. It allows the creditor to quickly start liquidation proceedings and sell assets to collect funds it is owed. If however as the government has planned to have that window of time expanded to 6 months, it may only further deteriorate the value of any remaining assets or worse yet allow for phoenixing etc to occur.
The counter argument to this, is that allowing businesses to have 6 months, provides them with time to rehabilitate themselves. This is on the presumption the general economy will heal itself within that time. It also assumes the creditor has the ability to be financially liquid for that extended period of time until payment is made.
It is during this time that we will see an increase in private lending and unsecured cash flow lenders. However taking the pill today with its side effects, doesn’t necessarily resolve the disease for tomorrow.
The reality is, most businesses can’t wait 6 months to be paid, especially in this current climate. Because of this, more and more businesses will start moving towards cash on delivery where possible (forgive the old language, payment on delivery). There are also other options of enforcement such as receivership which we at present don’t see being affected by the temporary changes.
This decision can worsen the issues depending on the exposure on the other side and the balance sheet strength. If the business is already struggling pre-Covid 19 there is no chance of rehab anyway. For them it’s a matter of time. However, we can expect to see an uptick of VA/DOCA (Deed of Company Arrangement) appointments – essentially a deal with creditors to avoid liquidation. Meetings will be required between your lawyers and liquidation accountants / pre insolvency specialists.
The changes the government plans to put through, will only lead to a tightening of credit and in our opinion will only exacerbate the possible credit crunch that we are potentially facing as a function of time and panic.
Please seek independent legal and financial advice, these are general opinions only.