A recent survey has shown that 26 per cent of businesses questioned had suffered financial distress due to the insolvency of contractual counterparties. The effect of Carillion’s liquidation on the construction industry has been well documented, with delays on the delivery of two major regional hospitals in Liverpool and the Midlands. But supply chain distress is not limited to the construction sector, it may well have knock on effects in the delivery of healthcare services.
What the Carillion liquidation has also exposed, however, is the far reaching consequences that the financial failure of an entity in the private sector can have on operators in both the public and private sectors. That impact is not only financial, but can also be political and reputational where provision of healthcare services are restricted or delayed. The recent cancellation of clinical waste contracts by NHS Trusts also shows how business disruption can come from many different sources.
Assuming that you are contracting with a limited liability company, the only entity responsible for repayment of money owed to you is the company. If that company goes into an insolvency process then, as an unsecured creditor, your prospects of recovery are very low.
The average return from an administration is 1p to 3p in every pound owed. The return on liquidation is likely to be lower and often unsecured creditors recover nothing in either process.
Entities operating on low margins and “just in time” processes are susceptible to the current economic uncertainty that we are currently suffering. That pressure will undoubtedly increase as we approach departure from the EU on whatever terms are agreed, if any.
Where will you be left if one of your counterparties, key or otherwise, goes into an insolvency process? If that happens, can you do anything about it? The answer to the first question is one for you to answer. The second question is one we can help with.
There are various ways to increase your recovery prospects on an insolvency process. You could obtain security or guarantees to cover any claims or losses, in addition to any money owed, that you suffer as a result of a counterparty’s failure. You could retain cash or stretch or reduce payment terms.
Either way, in these economic times, your credit control and/or stock control needs to be as tight as it can be. Keep your ear to the ground on supplier performance and rumour of any financial difficulties of your counterparties and their competitors.
If you are supplying goods you can consider retaining title in the goods until they are paid for or creating a lien over goods, depending where they are held post-delivery. This is recommended because, as a matter of law, title to goods supplied passes on delivery, even if payment is not yet due. If your customer goes into an insolvency process therefore, you run the risk of losing both your goods and your money without further protection.
In addition, you need to carefully consider your standard terms and 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.
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.
A reactive approach to the insolvency of a counterparty can result in a significant loss. A proactive approach can have financial, as well as reputational benefits.
Planning for the failure of your counterparties will give you a better chance of safeguarding your own ability to deliver and avoiding the same fate.