Customer insolvency: checklist for businesses

The Insolvency Service says that corporate insolvencies are at a four-year high and that in 2017 nearly 100,000 individuals were declared bankrupt. For businesses left out of pocket when a customer fails, the consequences can be devastating. One only needs to look at the trail of devastation caused by the recent collapse of Maplins, Carillion and Toys R Us to see this.

In this article our commercial dispute resolution team, provides a checklist for businesses faced with a customer struggling to pay their debts.

Impact on ongoing contracts

Most supplier contracts will contain a provision that provides for the automatic termination of ongoing contracts where formal insolvency occurs, such as where a bankruptcy or winding up order is made. Where such a provision exists steps should be taken to suspend future supplies of goods and services and to withdraw credit facilities.

To shield you from the effect of further customer insolvencies, talk to your solicitor about the possibility of creating additional contractual protection by inserting a term into your standard contract which allows you to halt supplies before insolvency occurs in circumstances where you have good reason to suspect that a customer is on the brink of collapse.

Your solicitor can also advise you on whether you can include a reservation of title clause in your contract to ensure that any goods you supply remain your property until they have been paid for in full and which allows you to take goods back in the event payment is not made.

Landlords need to be mindful that insolvencies tend to peak in the days before business rents fall due, which is typically on one of the four quarter days, namely Christmas day, 25 March, 24 June and 29 September. If you believe that a tenant may be in difficulty talk to your solicitor in advance of the next rent date to see whether there is anything that can be done to shore up your position.

Public records

Bankruptcy and winding up petitions must be advertised in the London Gazette for those who live in England and Wales and for companies incorporated here. There are equivalent publication requirements in Edinburgh and Belfast. Where concerns about the financial stability of a customer exist it is important that the Gazette publication list is regularly monitored.

It is also worth knowing that a company which is thinking about entering administration is required to file a Notice of Intention to Appoint an Administrator at Companies House. Consideration should therefore be given to signing up to the free ‘follow this company’ option on the Companies House website to ensure that if such a notice is filed you are quickly advised of this.

Creditor’s meeting

An insolvent individual or company is obliged to convene a meeting of creditors at which the extent of their financial problems will be discussed. In advance of the meeting you should be provided with a statement outlining financial matters, along with a form which you will need to complete to confirm the sums owed to you. If you are unable to attend the meeting you can complete a proxy form to nominate someone else to represent your interests and to vote on any proposals made for dealing with the debt.

Where, in an attempt to avoid formal insolvency, a business is proposing to enter a company voluntary arrangement or an individual is proposing to enter an individual voluntary arrangement, you need to think carefully about whether the proposals being put forward are likely to result in you recovering more money than if the company or individual were forced into bankruptcy or a winding up scenario. This will require specialist advice.

For a company voluntary arrangement or individual voluntary arrangement to get the go ahead, it will need the backing of creditors who together are owed at least 75 per cent of the total amount outstanding.

Priority of debts

In any insolvency situation it is important to appreciate that when it comes to settling debts the person dealing with the insolvency will usually get paid first, followed by secured creditors and then finally those with unsecured debts.

It is extremely unlikely that an unsecured creditor will receive everything they are owed which is why it is important to speak to your solicitor about any proposals for a voluntary arrangement, particularly where these are likely to result in a better outcome.

For advice on what to do if a customer runs into financial difficulty, please contact us on 01732 770660 or email [email protected]

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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