Gardner Leader

We are all trading in difficult times, yet it is surprising how many businesses miss the opportunity to protect themselves against the insolvency of others, whether in relation to a manufacturer, supplier or customer.

Chris Felton, Dispute Resolution Partner at Gardner Leader Solicitors, looks at how such problems can be foreseen and potential litigation avoided. 

First – Don’t ignore the warning signs

Don’t turn a blind eye to the obvious. There are often early warning signs for those who are vigilant. Look out for:

·         Returned cheques.

·         Delayed payment by customers.

·         Delayed receipt of goods and services from suppliers.

·         Poor quality of goods and services supplied.

·         “Peter and Pauling” i.e. spreading credit between suppliers

·         High staff turnover.

·         Directors taking excessive salaries

Any of the above can spell trouble and may be an underlying symptom of more serious financial circumstances. So make sure you have processes in place to confront these issues.  Make enquiries with existing suppliers/customers and get trade references for significant new business.

Preventative Measures

It is not always possible to avoid exposure to the insolvency of others, but a business can fail very quickly as a result of matters entirely outside of its control.

The key is to review the terms and conditions on which you do business and include and/or improve financial security clauses.  Consider the following:-

·           If you are in a strong negotiating position, insist on deposits or pre-payments. Parent company or bank guarantees, or personal guarantees from the directors should be sought. 

·           Fixed or floating charges over all or some of the assets of the business. The advantage of this is that you will have priority over unsecured debtors. However such charges must comply with the formalities of s395 Companies Act 1985 and need to be registered within 21 days at Companies House.

·           Include a right to terminate for late payment (in the absence of an express clause in these terms, it is possible you may risk a claim being made against you if you unilaterally terminate the contract).

·           Interest charges for late payment.

·           Retention of title clauses – (often called Romalpa clauses after the case Aluminium Industrie Vaasen v Romalpa Aluminium Limited (1976)) – Such clauses, if correctly drafted, may allow you to take back goods that have not been paid for.

·           Agreements with suppliers should dovetail your agreements with customers, especially in relation to rights to terminate if your supplier becomes insolvent.

·           Escrow arrangements for software – these are very important if a supplier of software that you are reliant on becomes insolvent.  Often the Intellectual Property Rights in the software or the source codes to carry on the service can be held by an independent third party on certain terms to cover the situation if the supplier becomes insolvent.

The above list is not exhaustive.  A great deal depends on your business, but it pays to have back-up plans in the current climate, especially in areas where you are heavily reliant on third parties.