What to do if your Key Client goes Bust

Alongside the current COVID-19 crisis, daily news headlines are dominated with reports about the vulnerability of many businesses, including large, well-established brands.

Published in Norfolk Director Magazine, Spring/Summer 2019
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A recent study in HR Magazine has named the top 10 high street brands at most risk of collapse in the near future, as a result of the pandemic.

So, what do you do when your largest customer has gone into administration, with your business owed significant sums?

Below are some tips and advice to help.

1. Act fast and act smart

Find out who the administrators are and speak to the person who is dealing with suppliers. Do this by contacting your customer, looking on their website, telephoning other suppliers or speaking with professional advisers. Once you’ve made contact, find out what they are hoping to achieve and if they expect to pay a dividend to unsecured creditors. Ask if they expect to sell the business or wind down operations.

2. Review the terms of any credit insurance policy

Tell your insurers of any potential claim and ensure that your business complies with the terms of the policy. Do not take any steps or agree anything with the administrators which could invalidate the policy.

3. Does the company need further supplies from you

Are you an essential supplier? If you decide to continue trading after administration has started, you must confirm with the administrators that the goods and services you provide will be paid for as an expense of the administration, and before any administration costs and payments are made to unsecured creditors.

4. Does the company still have goods you supplied

If so, you may be able to either recover these goods or obtain confirmation from the administrators that they will be paid for – provided you have an enforceable retention of title clause in your terms and conditions.

You will need to review your terms, identify and schedule your goods (probably by visiting the company’s premises) and show that your terms (and not the insolvent company’s) govern the contract. You will be asked to supply delivery notes, invoices and other contractual documents. Problems can arise when two suppliers have supplied identical goods, but doubts will often be resolved in favour of the unpaid suppliers. Note that if goods have been through a manufacturing process and have been altered in some way then the retention of title claim is likely to fail.

5. Do you have any other assets on the company’s premises

Are these secure or are they at risk of being claimed by other unsecured creditors? Should they be removed? Do the administrators know that these are your assets? Do you need to put them on notice, so that there is no risk of these assets being included in a sale? Generally, administrators can prevent creditors from removing their assets if this would frustrate the purposes of the administration.

However, after a company has entered administration it should pay its unsecured creditors for its use of their assets. For example, it should pay for the raw materials it uses and an appropriate rate for the use of any hired assets.

6. Review orders with your suppliers

If you have ordered goods or booked services which are no longer required, can you mitigate your losses by cancelling? The terms of your contracts with your suppliers will be relevant, but even if the contracts prohibit cancellation it may be possible to negotiate.

7. Look at mitigating losses in other ways

Do you need to start a redundancy consultation process with employees who have been working on the company’s contracts? Are any collective redundancy consultation requirements triggered and should you be giving the Insolvency Service notice of potential redundancies (by filing a form HR1)?

8. Establish what your client’s customers are going to do

If they still need the goods or services the company has been providing, it may be possible for you to contract with them direct and they may be able to withhold payments from the company and make increased payments to you, if the customers can show that the payments are necessary to mitigate their losses.

9. Are you interested in acquiring the company’s business from the administrators

Is it viable? Is an acquisition necessary to save your business? Do you have sufficient cash to fund an acquisition or would you need to borrow? If you are interested, you will need to act quickly; registering your interest with the administrators, obtaining an information memorandum and assembling your team of advisers. If you aren’t interested, find out who is. Can you engage with this organisation, understand their plans and secure future orders?

10. Plan for the short-term

Even if a dividend is likely, it could take months or even years for the dividend to be paid. Consider how you are going to deal with any additional short-term funding requirements. Do you have sufficient cash available or do you need to borrow? Is your current lender prepared to help, or do you need to approach someone else? Can you agree revised payment terms with suppliers? Can you negotiate a “time to pay” arrangement with HMRC? What other self-help remedies can be used to generate cash? Look for any unused or underutilised assets which can be sold. Find out if any other assets can be used to generate cash. For example, should sale and leaseback arrangements be considered?

11. Consider what you are going to say to your existing stakeholders

Your lender is likely to be aware of the importance of the company to your business. Will the administration impact your ability to make scheduled repayments? Do you need to extend your overdraft? If you explain the impact of the administration to your lender and your future plans, your lender is far more likely to be supportive.

12. Talk to your suppliers early on

Keep on good terms with them and explain the importance of the company in administration to your business as you may need to negotiate extended terms. Will they be taking any adverse action such as escalating their debt recovery processes, and can you prevent this?

13. Finally, consider the likely outcome of the administration

Although this is early days, work through what will happen if nobody acquires the business or if the acquirer does not want to deal with you. Consider whether your business is viable on a reduced scale and what your other options are. If you expect that your company may itself go into an insolvency process in the short or medium term, then it is important to engage with professional advisers sooner rather than later.

Ultimately, all businesses at risk when a customer enters administration should take professional advice from a reputable source as soon as possible to understand what their best options may be.

Mark Upton is a partner at Ensors Chartered accounts and was precisely Chairman of R3 Eastern, a trade association for the UK’s insolvency, restructuring, advisory, and turnaround professionals. It represents insolvency practitioners, lawyers, turnaround and restructuring experts, students, and others in the profession. Further background on the administration process and details of local insolvency professionals are available on the R3 website: www.r3.org.uk.

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