Guides & Advice

Seven steps to handling a client insolvency

Published: 6th March 2020
Area: Corporate Restructuring & Insolvency

Seven steps to handling a client insolvency

Coronavirus is impacting the business community greatly. With the first UK business casualties reported this week, it’s likely that more are to follow.

When a business goes into insolvency, it’s important to remember that they are unlikely to be the only party that is affected – suppliers and partners also have to come to terms with a big loss to their income.

What do I do if a major client of mine goes bust?

There is nothing more stressful than learning that one of your major clients has done into insolvency but there are steps you can take to limit the damage as much as possible.

Step one – act quickly

If you find out a client has gone into insolvency, business owners must be quick. The action taken in the first 24 hours is crucial to limiting damage and recouping some of the cost.

Step two – find out what you’re dealing with

You need to quickly understand what type of insolvency process your client is going through. This may help you decide what you need to do next.

The most common insolvencies are:

  • an administration
  • a liquidation
  • a Company Voluntary Arrangement (CVA)
  • a bankruptcy (which may be relevant if your client is a sole trader)

Depending on which of the above you’re dealing with, will help you understand your rights, whether the insolvency is terminal for your client and if there is a chance that your contract might continue.

Step three – speak to the administrators

In order to find out the facts, speak to the appointed administrators or other appointed office holder. Don’t rely on the rumour mill or media reports to find out what you’re dealing with.

Speaking directly with the administrators as soon as you’re informed about the insolvency may also help you to receive payment for your goods or services more quickly, or if the future of the business isn’t over, you can negotiate a deal with the new purchaser and keep your contract running.

Step four – understand the pecking order

When a business goes into insolvency, there are often a lot of people – just like you – that are trying to get their physical goods or money owed back.

For example, if you are an unsecured creditor in a liquidation, you can presume that there is going to be no attempt to rescue your client’s business and that you are likely to be one of the last to get paid.

In these circumstances, it can take up to a year and sometimes even longer to receive what you’re rightfully owed.

Step five – know your inventory

You may be a goods or service provider, but for many, such as those in the manufacturing or construction sectors, there may be physical materials or even machinery at play.

If you have goods, materials or machinery in your client’s possession, you must try and retrieve your assets within the first 24 hours.

You must check the contents of your supplier agreements first, however. You’ll need to ensure a valid retention of title clause is present. This can allow you to physically go and retrieve your items from your client, but you should speak to the administrators first.

Step six – know your contracts

Regardless of where you sit in the creditor pecking order, it is always wise to understanding the detail in the contracts that you have with your clients. Depending on the circumstances, it can help you to recover some of your assets in the short term.

If part of your contractual obligation involves you having physical goods or assets on a client’s premises, you must ensure that ‘retention of title’ clauses are written into your contracts to provide you with a bit more protection.

Step seven – don’t panic

Insolvency has the ability to quake the boots of even the most hardened business owner, but it doesn’t always mean business failure. It can sometimes provide the perfect opportunity for you to renegotiate your contracts and forge better deals for the future.

For situations where you’re unsure where you stand, or just want some peace of mind that you have your house in order just in case one of your large clients goes bust, please contact Andrew Taylor on 07734 553369 or another member of the restructuring, recoveries & insolvency team in your local office.

For advice or guidance on any other legal issue, a member of our team can help – please click here to discuss.

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