Wake-up call – Managing the threat of supplier insolvency

18 May 2012
Wake-up call – Managing the threat of supplier insolvency

A key supplier is in financial difficulties and you're not sure whether goods you've paid for will be delivered. Legal expert Jessica Lorimer explains your rights and how to manage the risks

The Problem
I have just discovered that a key supplier who provides me with food and goods is in financial difficulties and insolvency proceedings are imminent. What can I do to ensure that the goods I have already paid for will be delivered to me or will I get a refund?

The Law
Financial difficulties do not necessarily mean that your supplier will stop trading completely. Even if you can terminate the contract with your supplier, you may want to consider what type of insolvency proceedings the company has entered into as this may affect your decision.

If the supplier does enter into administration or liquidation, goods which you have paid for are unlikely to be delivered to you unless the supplier has separated your goods from his own or you can show that legal ownership of the goods has passed to you. You are unlikely to receive a refund on money paid in advance unless you have paid the amount into some form of trust account - which is very unlikely. You will rank as a so-called "unsecured creditor" among the company's general body of creditors and will have to rely upon the administrator or liquidator recovering money for the benefit of the creditors.

Expert Advice
There are several rescue procedures which are available to companies to help them to recover. The most common are administration or a company voluntary arrangement (CVA).

When a company enters administration, an insolvency practitioner will be appointed as the administrator of the company. The first aim in all administrations is to rescue the company as a going concern. While this is not always possible, and the majority of administrations result in a sale of the company's business to a third party, those third parties may wish to retain your business going forward and may be willing to negotiate on the previous orders.

If you are being asked to vote to accept a proposal for a CVA, think carefully about your alternatives. A CVA should only be proposed if it provides for a better outcome for creditors (or at least the same for some) than liquidation. It is a strict process monitored by an insolvency practitioner and by supporting it, businesses generally benefit.

Check list

Tips to manage the risk prior to the supplier's insolvency:
â- Keep the time between payment of the goods and delivery as short as possible (and, where possible, negotiate delivery prior to making payment). If possible, insist that the supplier labels up any goods as belonging to you as soon as payment is made or ask that they are separated from the supplier's own goods.
â- To cover situations where you are required to pay a deposit, the contract should provide that all payments are recoverable by you if the supplier fails to deliver. You may also require that the supplier places any such deposit in a separate trust account until they have fully performed their obligations.

Tips to manage the risk during the supplier's insolvency:
â- Take early advice on the implications of the type of insolvency process the supplier has entered.
â- Be persistent in seeking updates from the administrator or liquidator and preserve your position.
â- Continue to monitor the progress of the administration or liquidation as you may be eligible to receive a dividend payment in the future based on the value of your claim.

Any outstanding invoices due by you remain to be paid, as they would have done before insolvency. Regardless of the insolvency procedure entered into, an insolvency practitioner will always be looking for payment of any outstanding invoices so this will not mean that you do not have to pay (although if you have grounds for dispute or a potential counterclaim arising from the supplier's insolvency, these should be considered prior to making payment).

Jessica Lorimer is a legal assistant at Charles Russell LLP

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