Bob Dylan’s words ring true in challenging times

Bob Dylan’s famous line, “The times they are a-changin” has hardly been truer for small business in New Zealand than now.

For the first time since the pandemic started, businesses are operating in an environment where there is a reduction of easily accessible cash for their customers. Interest rates are rising, inflation is high.

In this environment businesses need to pay careful attention to their debtors and creditors and the risk that they pose.

Customers of most businesses are not paying their accounts as quickly as they were a year ago. As well as the usual focus on communicating with debtors to ensure payment is made, businesses should review their contracts with their customers.

It is recommended that terms of trade be updated to ensure they allow for effective recovery of debt and security if appropriate. Receiving a personal guarantee from your customers or taking a charge over goods sold as part of their terms of trade may be critical to whether or not your business receives payment.

Be conscious under the Fair Trading Act that contracts with non-business customers must not include any unfair contract terms as defined in the Fair Trading Act. From August 2022, these obligations also apply to some business to business. Unfair terms include limiting your liability entirely or having the unilateral ability to terminate the contract, vary prices or impose penalties.

On the other side of the ledger, our own suppliers also need to be paid. If our debtors are slow paying can we pay our creditors?

The Companies Act sets out a range of duties of directors. A primary obligation of company directors is to not carry on your business in a manner likely to create a substantial serious loss to the company’s creditors.

Continuing to trade when you are unable to pay your creditors could pose a serious risk to your company and to you as a director. Directors will be personally liable for losses in circumstances where they trade recklessly.

Directors can also be personally liable for misrepresentations under the Fair Trading Act in circumstances of insolvency. A recent case called Dempsey Wood Civil Limited v Gapes highlighted this.

When Gapes’ company went into liquidation and Dempsey wasn’t paid, Mr Gapes was required by the court to pay $100,000 for the breach of his director’s duties under the Companies Act and a further $280,000 for breaching the Fair Trading Act because he represented that his company could pay for ongoing work.

At no time since the GFC has it been more important for directors to be conscious of their obligations and to consider asset protection mechanisms for themselves.

As Dylan said the “Times they are a changin”.