2 April 2020

Corona crisis: may you, as a director, pay your creditors selectively?

By Christiaan Mensink

It is inevitable that companies will run into payment problems as a result of the current corona crisis.

If income largely disappears, there is not enough cash in hand to pay all the bills. Aid is available, such as short-time working, deferral of tax payments, and deferral of loan repayments by banks. However, there are still more than enough costs to be paid. As a director of a company, which debts do you pay and which do you leave unpaid? And can an unpaid creditor hold the director personally liable for unpaid debts?

Two different situations

Two different situations can be distinguished:

  1. There are temporary liquidity shortages, but with a temporary deferral of payment, reorganisation or other measures, bankruptcy is unlikely.
  2. Bankruptcy is unavoidable.

Selective payment if a company will not go bankrupt

As long as it is still realistic to expect that the company will not go bankrupt and will eventually be able to pay all its debts, selective payment of creditors is permitted. After all, no debts will remain unpaid in the end. No one will be harmed.

The question is always: how realistic is the estimate that the company will not go bankrupt? If there are doubts about this, it is advisable to record the considerations made in writing in order to be able to account for it afterwards, should things go wrong.

So make a liquidity forecast, write down when money is expected to come in and what costs will be saved. In the meantime, unnecessary debts can be paid later, while crucial debts from essential suppliers can be paid earlier. Suppliers that are required to keep the company operational will then actually have priority.

Selective payment when bankruptcy is unavoidable

Even if bankruptcy is unavoidable, the company may still pay creditors – but be careful with that. If bankruptcy is unavoidable, the equality of creditors should not be breached, unless there is a good reason for this. This justification, for instance, can be found in preventing capital destruction or keeping the company operational. Think of IT suppliers, suppliers of raw materials, employees, paying consultants to keep the company in business, and so on.

Here too, the advice is to record the choices made in writing. For example in the form of a payment schedule.

What is not permitted is only paying affiliated (group) companies or persons, or making payments in which the director has a personal interest. An example of this would be quickly paying off a credit that the director had personally guaranteed, before filing for bankruptcy.

Unlawful conduct of the director

The director’s actions may therefore be unlawful if, in the circumstances, they are negligent towards unpaid creditors and the director can be seriously blamed for this personally. This may be the case if the director should have understood that the selective payments would result in the other creditors remaining unpaid and the company being unable to recover their claim. Unwillingness to pay is a good (unallowed) example of this.

We are ready for you

Do you have any questions about this topic or about how to deal with your company’s stakeholders in difficult times? Every situation is different and requires good analysis and a good strategy. Our corporate lawyers are happy to help you with this.

Christiaan Mensink

Christiaan Mensink

Lawyer / partner

Christiaan Mensink is a specialised and experienced litigator.

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