When a company collapses, there can be a devastating ripple effect through the supply chain as other business casualties suffer collateral damage and some are left fighting for their own survival.
A high-profile example of this occurred in 2018 when the British construction and facilities management company Carillion plc collapsed. This triggered a 20 per cent surge in the number of building firms filing for insolvency, as numerous sub-contractors were forced to the wall as a result of cancelled contracts and unpaid debts.
So what steps should you take if a key supplier or customer goes bust and you are worried about the potential impact that this may have on your firm’s financial viability? Michael Clinch, insolvency expert with Ingram Winter Green provides a useful checklist for business owners.
Step 1 – Find out what has happened
The first thing you need to do is to find out what sort of insolvency process your supplier or customer has entered. This is because different processes have different objectives, and the likely consequences for you as an affected party will also vary.
For example, if a company has been put into compulsory liquidation, then the objective of the appointed insolvency practitioner will be to close the company down in an orderly manner and to collect in whatever assets they can. They will then distribute the available pot to creditors according to a priority list shaped by statutory rules and contractual agreements.
However, where a company voluntary arrangement (CVA) has been proposed, then the principal objective will be to see if the underlying business of the company can be saved by implementing an agreed rescue plan. If this looks possible, then the insolvency practitioner will see if they can get at least 75 per cent (in value) of the company’s creditors to approve the proposal, as this is threshold that needs to be met to enable the plan to be executed.
In the first scenario, your focus as an affected business is likely to be on proving the debt that you are owed, maximizing the value of your claim e.g. by adding on interest and recoupment costs where possible, and in deploying contractual arguments to try to push your way up the pecking order or to improve your eventual monetary recovery rate.
This is in contrast to the second scenario, where there will be a lot more to think about, including what you might stand to gain by supporting the underlying business of the company to survive and whether this justifies the pain of having to write off some of your pre-CVA debt.
Step 2 – Check your contract
Once you know which insolvency process is underway, the next thing you need to do is check your contract documentation to see if you have any rights which may help to bolster your position and thereby increase your chances of achieving a positive outcome.
For instance, it might be that you have a retention of title clause which can be used to press for the return of any goods that you have supplied but which have not yet been paid for.
You might have a contractual right of set-off which enables you to deduct any monies that you are owed from any monies that your supplier or customer owes you.
You might also have the right to terminate your contract with immediate effect, which may avoid the need for you to meet any continuing obligations.
Step 3 – Evaluate your options
After assessing your situation, your next task will be to decide on the strategy you want to adopt. As this will be heavily influenced by the insolvency process that your supplier or customer is going through, your personal circumstances and the strength of your position, it will normally be prudent to seek legal advice at this stage if you have not already done so.
By speaking to our specialist insolvency lawyers, you can evaluate your options and decide on a course of action which best serves your immediate needs and your long term interests.
For example, where a company voluntary arrangement has been proposed, we can advise you on your rights as a creditor to vote on whether the proposal should be approved. We can also help you to negotiate favourable onward trading terms where your continued relationship with the company is integral to a planned sale or a suggested restructuring.
Where it is one of your suppliers who is in trouble, and the knock-on effect that their collapse could have on your production capacity may be significant, then we can advise you on the strategies you could adopt to lessen the blow – which may include forging links with new suppliers and perhaps trying to strike a deal with the insolvency practitioner for the bulk purchase of certain items of now-embargoed stock.
Step 4 – Open a dialogue
Once you have decided how you want to play things, your next step should be to get in touch with the insolvency practitioner and to explain to them where you stand. It is important that you do this quickly, as there will be time limits in place in respect of creditor votes and claims.
If you are asserting contractual rights, like the ability to reclaim goods under a retention of title clause or to rely on any security that may have been given for a particular debt, then it is important for this to be made clear and for any supporting documents to be provided.
You will also need to complete a proof of debt form in which you set out the full amount of any monies owed, together with any interests and recovery costs that you are entitled to claim.
Step 5 – Watch and wait
After submitting your claim, asserting any contractual or statutory rights that you may have and negotiating the terms of a continuing trade relationship where appropriate, all you can then do
is wait to see what happens next and to be ready to challenge the insolvency practitioner if you or your lawyer think that they are not handling your claim appropriately.
Contact us
For further information, please contact Michael Clinch on 020 7845 or via email at michaelclinch@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.