Dealing with financially distressed customers and suppliers

When you are dealing with corporate borrowers or key suppliers,  you need to be aware of the warning signs to avoid being drawn into complications arising from their insolvency.

Whilst it may be thought that lenders would get the first warning of a borrower's inability to pay debts as they fall due, your systems may not identify cash flow problems when they first occur. Or you may feel that the borrower's balance sheet (if it is accurate) outweighs temporary cash flow problems.

If a key supplier (eg a software service) gets into financial difficulty, it could affect your services to customers and ultimately your right to use a licence and access key personnel or even to appoint a replacement supplier.

Refinancing or restructuring your relationship could be reviewed critically at a later time if the company is insolvent. You could end up in a worse position.

You need to determine whether the party is experiencing  just a shortage of working capital or is actually insolvent.

Is your refinancing or restructuring plan really a preference for your benefit or a proper workout for the company's benefit? An uncommercial transaction could be set aside under section 588FB of the Corporations Act.

Insolvency is a factual test under section 95A of the Corporations Act which can be complicated as the recent Bell Group decision showed.

If you are not sure how to handle a potential or actual insolvency of a customer or supplier , get legal advice.

This glossary of insolvency terms from ASIC may be helpful.

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