How to minimise your exposure to a customer experiencing financial difficulties

Suppliers to a company in liquidation will typically be unsecured creditors and will rank behind secured creditors (typically banks) and employees in the queue for payment from the liquidator.  The likelihood is that unsecured creditors will only recover a fraction of the money they are owed.

Suppliers awaiting payment for work carried out will suffer an immediate impact on cash flow and potentially a risk of their own insolvency.

Mitigating your Risks

If you are a supplier, it is important to have contingency plans to guard your business against the impact of a customer’s financial difficulties.

Our Commercial Team can draft contractual protection which exclude or limit your exposure to customers. We can also prepare contractual documentation which secures your position to include:

  • use of a retention of title clause, specifying that you retain ownership of goods that you supply until they are fully paid for;
  • requiring full payment in advance or a deposit from your customers which becomes non-refundable in the event of their insolvency;
  • obtaining credit insurance in respect of your customer which pays out if they are unable to pay your invoices;
  • requiring your customer to provide a guarantee from the their shareholders, parent , connected company or its directors;
  • requiring a charge over your customer’s fixed assets, such as their office premises, ensuring that you would get a share of the sale proceeds if it was liquidated;
  • drafting licences or other restrictions so that rights granted to a customer fall away upon administration and/or liquidation; and/or
  • incorporating bespoke provisions governing what you are entitled to do on the occurrence of specified events such as late payment of invoices or the presentation of a winding-up

It is always easier to ask a customer to sign a contract containing security for payment clauses when you first do business together rather than when it is already in financial difficulties.

Warning Signs

Conduct due diligence on your customers and be alert to early warning signs that they may be experiencing financial difficulties such as:

  • late payment of invoices or requests to extend their credit terms;
  • company accounts filed late or an increase in the number of charges registered at Companies House;
  • County Court Judgments entered against the customer;
  • the presentation of a winding-up petition against the customer;
  • directors resigning and a high turnover in staff;
  • customers avoiding your communications;
  • other suppliers ending their relationship with the customer; and/or
  • press articles about the customer’s poor performance.

Regulatory Protections

Fortunately for some of Carillion’s sub-contractors and suppliers, the Public Contracts Regulations 2015 may allow some recourse and continuity of contracts.  These statutory regulations give some level of comfort against the risk of public-sector customers experiencing financial difficulties. There may also be statutory protections relevant to your business, but we would always advise that you speak to our Commercial Team to understand what these will be, as often they will not provide for improved protection over expressly written terms in a contract.

Damage Limitation

Our Dispute Resolution Team can also advise you about resolving disputes with customers if you are unsecured and without the above contractual protection.

It is important to have a dialogue with customers who are experiencing financial difficulties. Negotiating payment plans and contractual protection before a customer runs out of money can be the best way of getting what you are owed.

If a negotiated settlement cannot be reached, we can advise you about the different forms of litigation and how to use the pressure of Court proceedings to get paid.

When a company is in financial difficulties, its directors are likely to fear being forced into liquidation. Creditors of the company can exploit this fear by applying to the court to close or ‘wind up’ a company if it can’t pay its debts i.e. if the creditor is owed £750 or more; and can prove that the company cannot discharge the debt. The threat of winding up a company can prompt a debtor to quickly sort out their financial issues and pay the sums due as typically the customer will not want their business to be forced to close.

If your debts are disputed, we can also guide you through the process of issuing a Court claim, using litigation pressure points to bring your opponent to a swift commercial settlement or working with you to build a strong evidential case and afford you cost protection if the matter proceeds to a trial.

Freeman Fisher can help

At Freeman Fisher, we can offer you or your organisation support to mitigate and limit the impact of customers experiencing financial difficulties. If you have any questions or need some guidance then contact us today on 0161 835 9090 or enquiries@freemanfisher.com.