What steps should you be taking?
Now, not every one of these instances can lead to an insolvency event but taken together, they become clear and unmistakable signs that a company could be experiencing financial distress and they should look to take steps to alleviate it – including contacting experts at rescuing and restructuring businesses like, erm, us.
However, you won’t necessarily know a supplier or customer is close to the edge until it happens – so here’s our guide of what steps to take to better spot and be able to better protect your business against insolvency events happening to others:
Read up on Companies House information
It’s still surprising the number of people and companies that don’t do due diligence – whether they’re looking to enter into a new business relationship with a company or spend money or provide services to one.
Companies House offers a free searchable database of UK businesses filed accounts and other pertinent financial information and events and lists of company officers and others with significant control. It’s not real-time accurate but is always interesting and sometimes vital. This should be the first search you make.
Obtain credit checks and references
If a significant amount of money or goods and services is involved then you could do additional checks including an audit of their financial health including obtaining a credit check or ask for credit references from other suppliers and vendors they’ve dealt with recently.
Remember that if a company is in difficulty, it might not be permanent or terminal and you shouldn’t necessarily contact a solicitor or an insolvency practitioner at the drop of a hat.
If you’re a creditor then remember that your debtor has to keep your interests uppermost at all times. By maintaining good, honest and constant communication, arrangements and compromises can usually be made.
For example, if you decide to extend or spread payment terms, this might be the difference between a company remaining solvent or not.
Should a company go into insolvency then having good communication channels and attitude when dealing with the insolvency practitioner will help facilitate goodwill and hopefully positive results.
Early dispute resolution
You always have the option of taking the initiative if you believe a company you are dealing with might be subject to an insolvency event and you want to secure payment before this happens.
You can look at different methods of formal dispute resolution in order to obtain an adjudication as these can’t be later pursued against companies in administration or liquidation.
Retention of title clauses
This is a contract clause that allows a supplier to retain ownership of any goods they’ve supplied until they’ve been paid for or other conditions are met.
This could stop a supplier from delivering goods but not receiving payment if the customer were to become insolvent.
Collateral warranties or third party rights
Most commonly used in the construction or engineering industries, a collateral warranty is a contract where a professional consultant or building contractor or sub-contractor agrees to the satisfaction of a third party (a funder or whoever brings the warranty) that they’ve fully complied with their professional duties as stipulated for the project.
Collateral warranties can be bought by funders, purchasers or tenants and allow them legal redress to reclaim funds if there are any damaging faults or issues caused as a result of the professional’s actions, even if they’re not immediately apparent.
Parent company guarantees
This is another financial fail safe mainly used in the construction industry but can also be applicable to many others.
It provides protection for a company if a supplier or vendor goes into administration and they’re owned or controlled by another or parent company. Any liability will then transfer upwards to them and they can be pursued accordingly.
Third Party (Rights Against Insurers) Act 2010
This kind of clause allows claimants to act against the insurers of companies that become insolvent or default on payments. They’re tightly written as the rights, limitations of liability and the ability to claim will be very specific as set down under this specific act of Parliament.
Suspension or termination clauses
These clauses allow a contract to be suspended or even terminated if one of the parties to it becomes insolvent. It’s a standard but effective clause that effectively seals a business off from any ongoing or cumulative negative effects of the insolvency process.
This shouldn’t need to be stated but if you maintain clear, up-to-date and accurate records, it will be far easier to demonstrate any losses that arise out of insolvency and can help your case if you have to liaise with an insolvency practitioner down the line.