What can businesses do to protect against customer default and insolvency?

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Ed Husband

The first few months of 2018 have seen the financial demise of three high profile businesses, in Carillion, Maplin and Toys R Us.

A ripple financial effect is inevitably being felt by the thousands of businesses at all levels that contracted with them.

So what can businesses do to best protect against this scenario and ensure that they get paid as quickly as possible?

Have an Effective Written Contract and Ensure That it Governs the Relationship

As a minimum, such an agreement should include:

  • Effective payment terms – is your bargaining position strong enough to require payment before delivery of your product or service? If not, ensure that your credit terms are short and the consequence of non or late payment are clear, including your right to suspend or terminate and charge interest.
  • Retention of title (ROT) – perhaps most importantly for suppliers of goods, ensure you have a clause retaining ownership in the goods you supply until you have been paid. ROT clauses have long been included in standard contractual terms and can operate effectively to enable you to recover your goods provided that they are properly incorporated, worded right and that you enforce those rights promptly in the event of non-payment.

This is very much a starting point, but it is also worth remembering that you need to ensure that it is your contractual terms that prevail, as a customer’s terms will invariably favour them. Which terms apply is not always obvious, particularly where parties each purport to operate on their standard terms (perhaps printed on purchase orders or invoices), so having a signed agreement is always best.

Remain Vigilant

It’s rare for a customer to fail without there being a number of warning signs, which would enable you to take pre-emptive steps to improve or protect your position. Typical warning signs might include, slow payment or requests to extend payment terms; unusual requests for price reductions or discounts; or a delay in filing accounts or accounts that include a qualified report from auditors.

Keeping alert to these kind of signs will mean that you can act quickly to protect your position.

Act Promptly

Enforce your contractual rights and do what you say you are going to do. A number of law firms, including VWV, offer commercial debt recovery charged as a percentage of any monies recovered.

If you have concerns, consider reducing the period and/or amount of credit allowed, obtain alternative forms of security (for example a bank guarantee or letter of credit) or seek credit insurance.

But What if My Customer is in Liquidation or Administration?

Although any existing legal proceedings are suspended and a creditor cannot begin new legal proceedings against the company unless it has permission to do so from the court, certain steps can still be taken to enhance your recovery, including:

  • taking action against 3rd parties who have provided guarantees
  • if you have taken security to secure a debt, you will stand first in line to recover any monies out of the insolvency
  • if there are mutual debts owed between you and the insolvent company, these will be automatically set off in either a liquidation or administration. This will mean that any monies you owe can be set off in full rather than you only receive a small dividend
  • ROT rights will survive insolvency meaning that you will retain ownership of your goods and be entitled to recover them

Ed Husband is an Insolvency and Restructuring Partner at award-winning law firm VWV. Ed can be contacted on 0117 314 5233 or at ehusband@vwv.co.uk.

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