When a company gets into financial difficulty, everyone owed money by that company (known as creditors) are likely to suffer to some extent. This is particularly the case for unsecured creditors, who fall last in line to be paid when a company doesn’t have enough money to pay everyone. For more information see: Who will get paid first in insolvency? and check out our guide for creditors’ dealing with a company in financial difficulty.
This can have a disastrous knock-on effect for companies owed money, who may suffer with cashflow issues and may not be able to pay their own creditors. This can lead to more insolvent companies.
With a bit of careful planning, there are ways a creditor can minimise, or reduce altogether, their losses should a customer become insolvent. Prevention is far better than a cure when it comes to insolvency. Below are some top tips for creditors to put in place to reduce or avoid loss.
Tighten up your debt collection process
A creditor who extends credit to a customer should keep a very close eye on the business of the customer, as well as a firm grip on their debt collection procedures.
If a customer stops paying you, or avoids your calls and emails, then don’t let the situation continue. You might decide to stop providing that company with any more credit until you are paid in full. Communication with your customers is key to enable you to evaluate if non-payment is just a short-term glitch that you are prepared to forbear with for a short while, or if it is a serious issue and you should cut your losses with that debtor. Don’t forget, the squeaky wheel gets the oil, so keep pushing for outstanding monies with a trading company and you have a better chance of being paid. Ensure any time to pay agreements are always met or cease further supply if necessary.
If you have concerns, then contact one of our team today to discuss debt recovery options before this gets out of hand.
Tighten up your contractual paperwork
Contracts should clearly state what is to happen in the event of the insolvency of either party, and what is considered ‘insolvency’. Will this be going into a formal process, or the failure to pay a debt after a certain amount of time? What should be a triggering event for your contract?
Whatever you decide, contracts should be clear on when they can be terminated for insolvency, and whether termination is automatic in the event of certain triggers.
Consider providing some leeway, so that termination is not automatically triggered but you have the option to continue with a contract if you wish, without losing your right to terminate in due course should it be necessary.
If you are a supplier of goods that can be easily identified, then ensure you have a well drafted Retention of Title clause (ROT) in your contract. This allows you to retain ownership of the goods until payment is made in full, and in the event of the customer’s insolvency, will allow you to take back your goods rather than wait in line as an unsecured creditor.
Whatever your position, it is vital you take legal advice on your contracts well in advance of any problems, to ensure everything you want is fully covered and will stand up to future scrutiny. Contact one of our specialist commercial lawyers to discuss your needs today.
Take security if possible
Secured creditors have recourse to particular assets in the event of a company’s insolvency. This puts them at the top of the list for repayment. For more details see: A creditors’ position on a company insolvency.
When negotiating credit, request security over assets. Whether this will be granted will be a commercial negotiation depending on how much you and your customer want to do business with each other. If you do agree security, ensure that the paperwork is watertight. Security must be registered within a certain time to be valid. Find out if there is already security over an asset, which might wipe out your claim, even if validly documented. Secured creditors tend to take priority depending on the date the security was taken.
Other options for security might be to ask the directors for a personal guarantee. Again, find out how many personal guarantees have already been given, and determine if the directors are good for it, but overall a personal guarantee is usually a great bargaining chip to have.
Consider supplying on a licence
If possible, try to supply goods or services by way of licence rather than a sale. This means you retain ownership and can retain your goods in the event of insolvency, rather than be sold for the benefit of all creditors. For example, if you are supplying IT services, provide a licence to use your copyright, rather than selling the copyright outright.
Communication is key
Always keep lines of communication open with your customers. Knowing what is happening with your customers and your own suppliers is invaluable, and will allow you to prepare and to make timely decisions, which can save you money in the long run.
How we can help
If you would like to explore any of the above options, then contact our specialist lawyers who can talk you through the various processes. Our commercial lawyers have many years’ experience drafting contracts, and our corporate team have extensive experience of arranging suitable security, depending on the circumstances. Our dispute resolution team can guide you on debt collection options, and should the worst happen and your find yourself with a customer in insolvency, our specialist insolvency lawyers can guide you to get the best return on your debts. Contact us for a chat on any of the above matters today.