What happens when a customer goes out of business?

Everyday hundreds of businesses across the UK go bust. Therefore, it is likely that at some point, you will find that one of your customers has gone out of business, or ‘into liquidation’. And if they owe you money for goods and services at that point, you might be wondering – what happens now? Am I ever going to get the money owed to me? And if I am, what do I need to do to make it happen?

Everyday hundreds of businesses across the UK go bust. Therefore, it is likely that at some point, you will find that one of your customers has gone out of business, or ‘into liquidation’. And if they owe you money for goods and services at that point, you might be wondering – what happens now? Am I ever going to get the money owed to me? And if I am, what do I need to do to make it happen?

How Liquidation is Managed

When we’re talking about a business, if they have run into trouble and can’t pay their debts, they are known as ‘insolvent’. How you claim your money back will depend on their individual circumstances, but most companies in the UK who are insolvent go into compulsory liquidation, so that’s what we’re focusing on today.

If you are owed money by an insolvent customer, then you are a creditor. If the company isn’t in liquidation, then you can try to get your money back by applying to wind the company up. But if they are in liquidation, then your claim will be handled a little differently. Generally, the early stages of liquidation are normally handled by an Official Receiver (OR, who works for the Insolvency Service) or the liquidator, and their job is to deal with the assets of the business. This means evaluating them, selling them, and using the money raised from selling assets to pay off the company’s creditors. This is where the money you are owed will come from.

How Assets Are Distributed

However, don’t get too excited yet, as creditors are paid off in a very strict order, and you will have to wait your turn. Generally, creditors who have made loans secured on the assets (like mortgages on properties) are allowed to sell those assets to recover their money. Any money left over from that sale after the debt has been paid is added to the lump sum to be shared among the other creditors. The liquidator will then distribute the funds to all unsecured creditors in order of priority. This is a strict order, and it looks like this:

• secured creditors with a fixed charge (after costs of realisation)
• insolvency practitioners’ fees and expenses
• preferential creditors
• secondary preferential creditors
• prescribed part creditors
• secured creditors with a floating charge
• non-preferential creditors
• shareholders

Claiming Money You’re Owed

So, how do you make sure you’re on that list? Well, in general the liquidator should be able to find you as a creditor when they evaluate the business, and they will be in touch. They will ask you to complete a proof of debt form, and you will be allocated a priority on the list of creditors to be paid. So, once you have returned the proof of debt form, all you can do is wait. The procedure can be a little different for LLP companies, but once again, the liquidator will contact you to confirm the debt and let you know what the next steps are.

As a known creditor, you will receive a report that gives estimates of the insolvent company’s assets and liabilities, and the circumstances of the insolvency. This is to keep you informed of how things are proceeding and give you an idea of where things stand. You might receive many of these reports as things progress, so make sure the liquidator has up-to-date contact details for you.

You will get a notice to tell you if there is a distribution of money, but honestly, you might not hear from the liquidator for some time. It can take weeks, months or sometimes years to get things in order, so make sure you set your expectations accordingly, and talk to your accountant about how to handle the debt if your accounts become due before it’s paid.

However, if you think a company might be subject to insolvency proceedings, but you haven’t been contacted, then you can be proactive. You can confirm the insolvency by searching Companies House, checking the public notices sections of The Gazette, or contacting the insolvency enquiry line.

At Debtcol, we work with a lot of businesses whose customers have become insolvent or gone into liquidation and aren’t sure of what to do next. Our team are well versed in the process and know exactly what information to look for, so we can guide you through it all, step by step. If you would like more information, you can download our helpful guide here, or get in touch to book your free consultation.