With the risk of increased administrations, it is essential to be aware of steps you can take if you supply a company that is at real risk of going into administration.
Administration is when a company cannot afford to pay its debts, and an insolvency practitioner (IP) is appointed to run the company. The IP takes control over the company’s assets, allowing these to be sold to pay back creditors.
What if you suspect your client is heading into administration?
So, how can I avoid getting stuck in this tricky position?
Know your industry
Keep up to date on the activities of the businesses you engage with and supply. If you can see distressing signs, then you should reconsider your deal. Of course, sometimes you may hear rumours through the grapevine, but you can never be sure – so always gets your facts checked.
Use a credit rating tool
Companies like Experian, Creditsafe and Redflagalert track the financial health of companies. You can set up alerts for your clients so you will be told if there has been a CCJ raised against them or if their recent filed accounts point to problems. If you receive warnings, it would be wise to check that there is not too much credit being granted to such companies.
Recognise excuses for late payment
Don’t be fooled by excuses to buy time. For example, “The cheque may have got lost in the post, it is definitely on the way”, or “My accountant is not in today, I will get it done next week”. Once the delay is 60 days or more, these excuses are no longer valid.
Get credit Insurance
Although expensive and more for more substantial businesses, it is possible to insure against not being paid. However, the credit insurers are well informed and may well withdraw insurance if there is a real risk of default, but they have to give thirty days’ notice. The withdrawal of credit insurance often precipitates a company’s failure as no one continues to supply on credit.
Get a personal guarantee for goods supplied
A personal guarantee is quite common in the construction industry. Be aware though that it can be expensive to claim on a personal guarantee and quite often directors will have given out personal guarantees to many suppliers, and so a recovery in an insolvency situation may not be that great.
Draw up a Retention of Title (ROT) clause in your supply contract
Retention of Title means that in effect, you still own the goods until they have been paid for. A ROT clause is common in contracts in the retail industry, i.e. even if the shoes are in the shop, until the shoemaker has been paid for them, they could take them back. The problem with these ROT clauses is they need to be valid and probably should be drawn up by a lawyer. Also, there is the problem of what is called “conversion”. As soon as your supplied goods are changed in any way, i.e. ingredients have been added to a food product or sand used in cement, you no longer own its title as the product has changed.
Of course, administration is unexpected, and so the chances of it happening are not always foreseen, and you stand to lose money.
What to do if a company you supply goes into administration
- Find out who the appointed administrators are and inform them that you are a creditor. You must be aware of your claim and be able to prove it. It could be monetary value or the right to receiving a product or service. Not proving the above means you risk losing your claim.
- Know your rights and the law regarding your relationship. Are you entitled to anything if the company goes bust?
- Whatever happens, do not supply any more goods or credit to the company, unless it is payment on delivery. You will need to arrange this with the administrators.
- Be realistic. If the company does go into administration, then it is highly unlikely that you will receive any money back. Usually, unsecured creditors receive nothing.
- Communicate – this is key. Speak to the parties involved and find out what is going on.
Use this information to help with your decisions for future trading.
- Are you happy to continue trading with the struggling company if they become a NewCo under a pre-pack sale? Will having the same management be a risk?
- Are you happy to continue trading if the company is rescued out of administration? Does it mean you are now safe? Or is risk still there?
- Do new terms need to be agreed i.e. reduced credit? A pro forma?
- For future trading, request payment upfront to get a guarantee of payment
Look for new customers – either additional and or instead of this struggling customer. Can you get better revenues elsewhere? Never rely on just one customer. If they go bust, you will likely become financially unviable too. Put your eggs in more than one basket.
- Do the administrators see the company as viable? What is their opinion for the future?
- Be aware that six months after a debt is written off in your account, due to the administration, you can claim for VAT Bad Debt Relief from HM Customs and Excise (up to the amount of VAT you have paid).
Remember, always keep a close eye on the companies you are in business with – even those who seem successful – you can never be sure. Administration can happen at the spare of every moment… I mean, who expected Carillion to collapse? Toys R Us? Debenhams?
Be cautious now… and be administration ready.
How to avoid the SME bankruptcy ravine