It’s official, credit crunch Britain has now moved into recession. The evidence is all around us. No more so than with the banking sector. Once proud City institutions are being brought crashing down to earth.

However, banks aside (where loss of confidence/funding can rapidly accelerate a decline), the credit crunch/recession is yet to materially manifest itself into UK insolvency figures. Yes company failures are up, but not by the degree you might expect, judging by the doom and gloom of the newspaper headlines. The most recent figures also show a small fall in individual bankruptcies.


A company does not go from being in rude financial health one minute to insolvency the next, there is often a slow period of decline.

How can customers/suppliers protect themselves when dealing with such companies? Nobody wants to be left holding the baby in terms of unpaid invoices/undelivered goods when a company ultimately fails. However, it is also commercially unrealistic to sever all ties with clients/suppliers who start to display signs of financial ill-health.


“The cheque is in the post” famously ranks alongside “I’ll love you in the morning”, as one of the great promises in life.

However, taking a long time to pay an invoice may in fact be a sign of a well run company which is prudently managing cash flow. Negotiating longer credit terms to pay suppliers is an approach infamously deployed by certain UK supermarkets.   

However, for other companies without such bargaining clout, sudden delays in making payments should set alarm bells ringing.

Other tell tell signs include a change in staff (unpaid wages), failure to file accounts at Companies House (an unpaid auditor) or a notice that your debt has been factored (an attempt to improve cashflow).


A. Credit Control

The best line of defence is to avoid unpaid debts/undelivered goods in the first place. A robust credit control policy should be a main stay of a well run company. Consider:

taking out credit insurance. This is becoming increasingly popular but exclusion clauses need to be carefully reviewed;

setting credit limits individual customers;

using the carrot and stick approach. Carrot in the form of a discount for early settlement and stick in the form of interest for late payment;

registering at Companies House for their web watch service in order to monitor filings in respect of key suppliers and customers;

chasing down unpaid debts and making sure commercial partners know you will not be fobbed off by repeated promises to pay. If you are in a hole, don’t keep digging and don’t be afraid to call a customer/supplier’s bluff by putting them on a stop list;

insisting on payment for the remainder of the goods, if a customer questions part of an order;

getting to know the cheque run date(s) of key debtors. Ring them up the day before and make sure your invoice is included;

insisting on post-dated cheque(s) or personal guarantees from directors/shareholders, if a customer can’t pay.

B. Retention of Title (“RoT”)

In respect of a supplier of goods, a RoT clause should be an essential part of your terms and conditions. Again, a few tips to follow:

a well drafted RoT clause will be of little use unless it is properly incorporated into your commercial dealings. At the very onset of a commercial relationship make sure that your customer signs a copy of your terms. Make sure your terms are then included on your purchase forms/invoices;

take advice on specific wording. Ideally, you should have sub-clauses which:

oblige the customer to store the goods separately and also to label them as belonging to the supplier;

include a right to enter the customer’s premises to check that RoT provisions have been complied with and/or to recover goods. It should, however, be noted that a supplier cannot use force to enter premises. RoT clauses should be enforceable on non-payment and without having to wait for a formal insolvency event. In fact, a company may have more chance of enforcing against a supplier than it would a wiry old insolvency practitioner; 

include an all monies clause. This may allow you to recover all goods even if some individual invoices have been paid. However, the goods being claimed under an RoT clause must still be capable of identification and a supplier must be able to link them to specific invoices. The goods should also be marked with the name of the supplier, with serial numbers deployed and quoted on relevant invoices;

take into account the risks of including a proceeds of sale clause. Too often suppliers include the kitchen sink in their RoT drafting. RoT clauses try to extend protection to the proceeds of sale when a supplier’s goods are onwardly sold. Unless extreme care is taken over the drafting/follow on procedures, the clause may be void unless registered at Companies House. Not only that, but the inclusion of an invalid proceeds of sale clause may void the rest of the RoT provisions.

However, suppliers should be realistic. For example, if they are supplying raw materials which are then used in a manufacturing process, if may be impossible to identify/separate your goods.

C. Know your rights

Often a knee jerk reaction of an insolvency official will be to reject claims that are lodged with them. Don’t be afraid to fight your corner and take legal advice as to the validity of your claim.

Equally, the directors may not always be able to hide behind the corporate veil of a limited liability company. If a director has traded past the point where the company couldn’t have avoided insolvency or made personal promises, they may be personally liable for the company’s debts.

D. Take security or otherwise improve your position

If you have extracted security or other comfort out of a distressed company, you should be aware that an insolvency official has the right to challenge actions taken by an insolvent company during the period of up to 2 years prior to its demise.

Transactions must not be at an undervalue or unfairly improve the position of one creditor over another (particularly when dealing with a connected party such as a relative or fellow director).

E. Keep it confidential

You may have concerns over a supplier/customer but it is not a good idea to broadcast these concerns. For example, Norwich Union were held to be vicariously liable for alleged defamatory comments made by its employees about Western Provident Association (“WPA”). Norwich Union employees were using the internal intranet to circulate emails amongst themselves alleging that WPA was in financial difficulties and that the DTI was investigating WPA.

WPA discovered that such emails were being circulated and obtained an order directing Norwich Union to preserve all of the offending emails and produce hard copies. WPA later obtained a further order allowing it to conduct a search of Norwich Union’s email records. The case was settled out of court by means of an apology and damages (reportedly £450,000 plus costs).

F. Spread your risk

If your company is beholden to one supplier, what is your Plan B if this supplier was to fail?

M&A specialists have been reporting that as the credit crunch deepens, companies are exploring opportunities for vertical integration to protect their supply chain. A distressed supplier may be receptive to an acquisition approach from a customer. If so, consider points in the author’s article on acquiring assets in such circumstances.

G. Take advice

It may be a suitable time for suppliers, in particular, to review their terms and conditions. As well as checking their RoT clause, prudent to have the express contractual right to cease to supply a customer if he fails to pay.

Please contact Paul Taylor if you would like to know more about any of the matters mentioned in this article or simply to discuss our particular approach to your legal needs. Paul is a partner in our Corporate department and advises clients on a broad range of business areas, including mergers and acquisitions, joint ventures, private equity, banking and insolvency.

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