Protecting your business from debt
So, you’ve won a new customer or closed a sought-after deal, but how can you tell if your new or existing contact is in difficulty and what can you do to maximise your prospects of payment?
Cash is the life blood of any enterprise so it’s vital to protect your business from debt – some simple steps can go a long way to helping you do so.
Protect yourself at the outset
Know who you are dealing with. Different entities have varying obligations to their creditors. this it a limited company? A sole trader with a trading name? A partnership? It’s good to understand with whom you are trading.
Free checks can be carried out at Companies House: www.gov.uk/government/organisations/companies-house.
Ensure that you are provided with this information at the beginning of your relationship. Try to ascertain details of their assets. Do they have machinery and cars? If so, do they belong to the company or are they leased? This sort of information can help a bailiff or liquidator later if the worst happens.
- If you’re dealing with an individual, do you have their home address? Do they own their home? You can check ownership of any registered land in England and Wales: www.gov.uk/government/organisations/land-registry
- If you have any concerns over the creditworthiness of a limited company, a director can provide a personal guarantee. These can be invaluable in the case of company insolvency, but get legal advice to ensure enforceability later.
Don’t allow debt to mount up. If difficulties arise, think about instituting a “cash on delivery” policy or holding sums on account. This is particularly important where debts are below £10,000 – the new small claims track limit. If you do have to sue, you won’t be able to recover any legal costs.
What if things go wrong?
What do you do when you suspect your supplier or customer is in financial difficulty, even perhaps on the brink of insolvency?
Be alert and spot the warning signs
The most common warning signs of potential insolvency:
- Bounced cheques
- Late payment
- Payment schedule changes
- Slow down on site and/or of service/goods delivery
- Withholding payment on the basis of expected claims or third party payments
- Calls not being returned/change in established trading relationship
What to do if you suspect problems
1. Act early
Taking action early and before a key contact has gone into insolvency is one way to address the risk.
Trust your instinct: if you suspect problems, don’t wait! Act quickly to protect yourself, not least because if your supplier/customer goes into insolvency and either administrators or liquidators have been appointed, even contractual liabilities can be avoided.
Notwithstanding this, always make a claim in the insolvency – contact the administrators or liquidators immediately to assess what, if any, agreements can be reached to procure finalisation of the contract/project.
2. Protect yourself
- One of the key steps a business can take in these turbulent times is to review contractual arrangements and have contingency plans in place, so that if the worst comes to the worst and a key contact ceases to trade, the collateral damage is minimised.
- Ensure contractual agreements are properly documented and include provisions in relation to termination – is there a clause that allows termination at will? If not, has there been a breach (i.e. non-payment that would allow termination)? Any process to determine the contract must be followed correctly. Secure all information and items for which advance payment has been made.
- If the payment procedure under a contract is varied, this must be properly documented.
- If payment terms are varied then so should be terms for security rights.
- Review any parent company guarantees and ensure that any action relating to the overlying contract does not discharge the obligations of the parent company guarantor.
- If a company goes into insolvency, it does not necessarily mean that it will cease to trade. If funding is available, an administration process may start, gaining protection from creditors (“moratorium”) and allowing the business to continue as a going concern while a buyer for the business is sought.
- Where you have a supplier that provides a service or product which is key to your business proposition, bringing the supplier ‘in-house’ by buying all or part of the insolvent business from the administrator may be an option to consider.
- Don’t panic and think commercially!
Examples in practice
A person or company owes me money and they are not returning my phone calls – what do I do?
- Serve a Statutory Demand (no judgment or court involvement necessary so no fees!). This gives an individual or company 21 days warning to pay the debt. After the Statutory Demand has run its course, a bankruptcy or winding up petition can be presented. Statutory Demands are so successful that in 99% of cases, a bankruptcy petition NEVER is issued.
- A Statutory Demand is not necessary where the debtor is company. You can miss out this step and go straight to presenting a petition. But beware: a winding up petition process can be costly and is not suitable for any disputed debt.
- Issue a court claim – however you will have to enforce any judgment: the Court doesn’t make a debtor pay.
I am owed money by a company in compulsory liquidation (i.e. wound up by a court order) – what do I do?
If you are owed money by a company in liquidation, the Official Receiver (OR) will normally notify you within 12 weeks of the court order as to whether there will be a meeting of creditors. The OR will decide to hold a meeting if the company has significant assets that can be realised/sold for the benefit of creditors. If not, there is no need for a creditor meeting.
You will be sent a report giving estimates of the insolvent’s assets and liabilities and what the causes of failure are considered to be. If you think a bankrupt or a company is withholding assets you should write to the OR immediately.
Normally, if there is likely to be a distribution, the case will be allocated to an Insolvency Practitioner (IP) and all future contact must be with them. If you have any information which might assist their enquiries, do let them know.
For more information on debt recovery or to start a conversation on how we can help you, contact:
Alison Groves, Legal Executive, Dispute Resolution.
For more information on insolvency or to start a conversation on how we can help you, contact:
Tania Clench, Associate, Dispute Resolution.
Published: 14 Apr 2015