How do you protect your business if your contracting counterparty fails?

The recent compulsory liquidation of international sports agency MP & Silva after a petition from the French Tennis Federation has raised concerns about sports governing bodies’ exposure to agents, as it is understood that federations are owed substantial amounts. Whilst some have the benefit of bank guarantees in respect of their exposure, many are understood to be unsecured.

It is unusual for a trading business to be wound up by the court.  If a company is insolvent, but there is some value in its business and assets to be realised as a going concern, the company would usually go into administration where the administrator has the power to trade and sell a business, rather than a liquidation where the liquidator has very limited powers and will usually sell assets on a “break up” basis for a lower return.

The liquidator’s job is to realise assets and then distribute the proceeds, after costs, to the creditors.  The priority of repayments under the insolvency legislation means that, generally, unsecured creditors are left at the bottom of the pile and recoveries are minimal, if not non-existent.  The average return from an administration is 1p to 3p in every pound owed.  The return on liquidation is lower and often unsecured creditors recover nothing in either process.

So how can you better protect your business in these circumstances?

There are various ways to increase your recovery prospects on an insolvency process.  As mentioned above, some creditors of MP & Silva appear to have obtained bank guarantees, which should pay out on a counterparty going into an insolvency process, depending on their terms.

You could also obtain security to cover any claims or losses, in addition to any money owed, that you suffer as a result of a counterparty’s failure.  Depending on the nature of security, you could have first priority, before costs in insolvency process.

One option is to consider holding payments made in trust or in escrow such that, if your counterparty goes bust, that money has not passed to the counterparty, to be distributed amongst its creditors, and will be available to recover as still being your money or held on certain terms.

In any circumstances, your credit control needs to be as tight as it can be and you want terms that ensure that you are only paying for what you get and not overpaying for a service that might not be delivered if the counterparty fails. You should also keep your ear to the ground on counterparty performance and rumours of any financial difficulties for them and their competitors.

In addition, you need to carefully consider your standard terms & conditions and what they say about the insolvency of a counterparty.  Can you terminate contracts if a counterparty is insolvent?  Can a counterparty terminate on its own insolvency?  These clauses are not just boilerplate, they could be crucial as creditors of MP & Silva will be finding out.

There is also a difference between a company being insolvent and being in an insolvency process and this needs to be considered in your terms. Give yourself as much flexibility on insolvency as you can and your counterparty the least amount of flexibility to protect your position.

It remains to be seen what effect MP & Silva’s liquidation has on the industry and the performance of its competitors, but, where possible, steps should be taken to improve recovery prospects if the worst were to happen. 

If you would like to discuss these issues further then please do not hesitate to contact Neil Smyth.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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