The recent announcement that British Ceramic Tile, a distributor, has entered into administration is, at one level, a sign of changing times, in this case of the channel to market. But it also calls into sharp focus how a supplier should deal with the consequences of its distributor going into administration.
In this month’s blog, consideration is given to the financial exposure with which a supplier can be faced as a result of a distributor’s administration.
In a perfect world, distributors (and all other types of businesses) would never become insolvent. It is not a perfect world.
It follows that whilst pro forma invoicing by the supplier may be an answer, it is also unlikely to be the answer for the long term. Letters of credit or third party (bank) guarantees may also be achievable but each has its limitations.
The same is true of a reservation of title clause. It is the case that it serves a purpose and in some situations can be relied on. But it is one thing to have a properly drafted retention of title provision. It is another thing entirely for the provision to have been properly incorporated into all sale contracts made by the supplier with the distributor. Indeed, my own experience in seeking to rely on retention of title provisions in the Brantano administrations in 2016 and again, in 2017 (as well as other insolvencies), is that proper incorporation of retention of title provisions into sales contracts can be the exception rather than the rule.
Further, administrators only need a small “gap” – it is the possibility of being able to argue the toss as to the extent to which a retention of title provision can be relied upon that provides the opportunity for an administrator to put forward a proposal for payment at a discount to the face value of the outstanding invoice.
It follows that so far as financial exposure is concerned, there is no substitute for awareness of distributor’s financial status.
Awareness starts with the inclusion and enforcement of information provisions in the distributorship agreement. A supplier can require, for example, that it be provided with periodic management accounts. If they are not made available, the supplier should ask why – and quickly.
Other provisions requiring the distributor to periodically inform the supplier about the status of the distributor’s market should be included. Equally as to the distributor’s own financial performance.
Whilst responding to a distributor’s financial difficulty can rarely be expected to come at the best of times for a supplier, if and when the supplier has a concern as to the distributor’s financial wellbeing, it should be prepared to act – and act fast.
Next month’s blog will consider the issues arising from the supplier still needing to ensure that the now ex-distributor’s former market is best served.
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