A Basic Guide To Insolvency For Suppliers

In today’s volatile business environment, suppliers face a unique set of challenges when a client goes into insolvency. Whether it’s unpaid invoices, stalled contracts, or the uncertainty of future business, the financial instability of a client can have a significant impact on your own operations. Understanding the insolvency process and knowing your rights as a supplier are crucial for minimizing losses and protecting your business.

In this blog, we’ll provide you with practical strategies to help navigate the complexities of client insolvency. From understanding the different types of insolvency proceedings to taking proactive steps when you suspect a client is in trouble, we’ll cover everything you need to know to manage risk and protect your cashflow.

Understanding Insolvency

Insolvency is when a company is unable to pay its debts as they fall due, or when their liabilities exceed their assets. In other words – when they can’t pay their bills, or when they owe more than they own. Alot of companies will continue to trade whilst insolvent on the hope that they can “trade out “of their financial difficulties but it does leave them open to a wrongful trading claim. So most companies facing this situation will choose to take professional advice from an insolvency practitioner although many may do nothing at all or simply cease trading.

When a company becomes insolvent, it usually means big decisions need to be made quickly, such as restructuring the business, selling assets, or even closing down. All of this can affect you as a supplier and creditor, which is why it’s important for you to know the basics.

The Types of Insolvency Proceedings

There are only 3 types of insolvency that a UK limited company can go through, which are:

• Liquidation: The company will cease trading and the company’s assets are sold off to pay creditors. The company is dissolved once the liquidation comes to an end. This can be voluntary (initiated by the company) or compulsory (initiated by creditors).
• Administration: An insolvency practitioner is appointed to continue to trade the company to realise the company’s assets or to try and rescue the company.
• Company Voluntary Arrangement (CVA): The company proposes a plan to repay creditors over time, which must be approved by the creditors.

It is important to understand which of the insolvency procedures your customer is going through, as this will inform your actions and what is needed from you moving forward.

Key Steps in The Insolvency Process

Insolvency is not an easy process, and you will have to await contact from the insolvency practitioner, based on the statutory timeframes.

Notification: You will usually be notified by the insolvency practitioner (IP) or the company itself that it has entered insolvency proceedings. They should provide you with some basic information and what to expect next.

Creditors’ Meeting: Depending on the type and size of business and the amount of money owed, creditors may be invited to a meeting where the IP outlines the situation and the proposed plan. You will get another opportunity to ask questions here.

Appointment of Insolvency Practitioner: An Insolvency Practitioner is appointed to manage the process. They become the primary point of contact for you moving forward.

Proof of Debt: You should submit a proof of debt form to the Insolvency Practitioner to be considered for payment. This includes details of what is owed to you, when it was due and any retentions of title etc.

Your Rights as a Supplier

If your contract with the client includes a retention of title clause, then you may be able to reclaim any goods that haven’t been paid for. This is provided that they are still identifiable, and in good condition.

Finally, you might need to decide whether to continue supplying the company with your product or service if they are still trading. This is entirely your own decision, and should be informed by how likely you are to receive payment and the importance of the client to your business. It is your right to decide not to continue trading with them.

What to Expect as a Creditor

If your client is going through liquidation, then payment to creditors is usually based on a prescribed order with secure creditors paid first, and priority moving down. Unsecured creditors (which is most suppliers) are often paid last, and often receive only a fraction of what’s owed to them, if anything.

The insolvency practitioner will send creditors a report to creditors.  Such a report should be provided within the prescribed timeframe, keeping you informed of their progress and your prospects of receiving payment. Depending on how complex this is, insolvency proceedings can take months or even years.

Most of the insolvency process happens without your involvement or knowledge, which can be incredibly frustrating.

Being Proactive

Whilst things are moving in the background, you can review your contracts for clauses like retention of title or any terms regarding insolvency

The last thing any company wants is to be caught off guard by their client declaring insolvency. While you cannot control the financial situation of your clients, you can protect yourself from becoming inconvenienced or worse, put out of pocket by them. You should regularly monitor the financial health of your clients.

Dealing with a client who is going through insolvency can be challenging, but understanding the process and your rights as a supplier can help you to manage the situation more effectively. Importantly, make sure you’re reviewing your clients regularly for warning signs, and that you have robust credit control processes in place. For more help with this, just get in touch with the team today.