This article was originally written for and featured in Plastics and Rubber Weekly.
A company does not go from being in rude financial health one minute to insolvent the next; there is often a slow period of decline.
There are a number of warning signs which include taking a long time to pay an invoice, although ironically that may be a sign of a well-run company, one which is prudently managing cash flow.
Other signs include a change in staff (unpaid wages); failure to file accounts at Companies House (an unpaid auditor), or a notice that debt has been factored (an attempt to improve cashflow).
You don’t need to become an unwitting victim to a company failure as there are measures you can put in place to protect your business.
It is best to avoid unpaid debts in the first place. You should consider taking out credit insurance, but exclusion clauses need to be carefully reviewed; setting credit limits; offering a discount for early settlement and interest for late payment; registering at Companies House for the Monitor service to watch key contacts; and chasing down unpaid debts.
Do not be afraid to call a customer (or a supplier’s) bluff by putting them on a stop list. Or insisting on payment for the remainder of the goods, if a customer questions part of an order, and getting to know the payment run dates. Ring them up the day before and make sure your invoice is included, or insist on post-dated cheques or personal guarantees from directors or shareholders, if a customer cannot pay.
If you are involved in the supply of goods, a Retention of Title (RoT) clause should be part of your terms and conditions. A well-drafted 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.
Ideally, you should have sub-clauses which oblige the customer to store the goods separately and 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.
RoT clauses should be enforceable on non-payment and without having to wait for a formal insolvency event. This may allow you to recover all goods, even if some individual invoices have been paid. However, the goods being claimed under a RoT clause must still be capable of identification and a supplier must be able to link them to specific invoices.
Often insolvency officials will reject claims that are lodged with them. Do not be afraid to fight your corner and take legal advice as to the validity of your claim. Equally, if a director has traded past the point where the company could not have avoided insolvency or has made personal promises, they may be personally liable for the company’s debts.
If you have extracted security out of a distressed company, you should be aware that an insolvency official has the right to challenge actions taken by an insolvent company up to two years prior to its demise. Transactions must not be at an undervalue or unfairly improve the position of one creditor over another.
You may have concerns over a supplier/customer but it is not a good idea to broadcast these concerns. Norwich Union was held to be vicariously liable for alleged defamatory comments made by its employees about Western Provident Association. The case was settled out of court by an apology and damages – reportedly £450,000, plus costs.
Finally, it may be a suitable time for suppliers, in particular, to review their terms and conditions. As well as checking their RoT clause, it is probably a good move to have the express contractual right to cease to supply a customer if it fails to pay.