Rebecca Cowdy is an Associate specialising in dispute resolution at Forbes Solicitors.
With an end to a ban on winding up petitions fast approaching, dispute resolution lawyer Rebecca Cowdy from Forbes Solicitors looks at how businesses can protect themselves from other companies going bust.
The latest data from the Government’s Insolvency Service shows that registered company insolvencies were 23% lower in April than the same time last year. This continued a trend since the start of the first UK lockdown, with a decline in company failures caused by the Government’s pandemic response.
As well as grants, low-interest loans and furlough payments, the Government introduced temporary restrictions on statutory demands and certain winding up petitions. The latter of these support measures ends on 30 June 2021, prompting concerns that the declining trend of insolvencies will end with a sudden surge of companies going out of business. The Institute of Directors and R3 has written to the business secretary warning of a ‘cliff edge’ of failure and urging HMRC to help businesses at risk of collapse.
While many companies will be breathing a sigh of relief that they aren’t amongst those dependent of further Government support, they aren’t immune to the effects of a potential wave of insolvencies. Their customers and suppliers could be amongst those struggling for survival and there are a number of steps they can take now to protect their interests from the domino effect of business failures.
Review payment terms and conditions
An early warning sign of insolvency is repeatedly late payments. In such cases, businesses should look beyond simply levying interest and charges on overdue invoices and actively look to revise payment agreements. This will involve a review of contractual terms and conditions before any changes can be made but can prove an effective means of reducing credit terms and risk. For example, goods and services could be supplied on a payment-to-order basis, eliminating the implications of non-payments.
Taking this step can also provide an indicator of a pending insolvency. If a customer is unwilling to negotiate on payment terms and unable to provide reasonable grounds for doing so, it maybe because they are masking financial difficulties.
Avoid accepting invoices until completion
In some instances, suppliers may raise invoices at the point of ordering, with these widely accepted by companies as they tend to stipulate payment isn’t due until a future date. Although there may be some form of acceptance amongst the procuring company that they won’t be making payment until the goods or services have been delivered, this may not necessarily protect them during an insolvency. A raised invoice may well be treated as an unpaid amount of money and action taken by insolvency practitioners to recover the debt. To avoid this, businesses can request that invoices aren’t raised until goods and services have been completely delivered.
Formalise ownership of goods
Some suppliers will request part or whole payments upfront. Although this may form part of a standard agreement and not have proved problematic historically, it could be costly during an insolvency. Any goods will be treated as an asset of the failed enterprise and frozen to help settle, where possible, the insolvent company’s outstanding financial liabilities. Businesses can protect themselves against this by ensuring that advance payments provide entitlement to ownership of goods as soon as they are produced. This means that even if the goods are still on the insolvent company’s premises, they are effectively the property of the procuring business and cannot be frozen as part of the insolvency.
Seek third party guarantees
When extending credit to customers or relying on suppliers for the provision of goods and services, companies can stipulate third party guarantees. These act as a type of insurance, providing a degree of certainty that the guarantor will cover payment defaults or fulfil supply agreements in the eventuality of an insolvency.
Consider a right to termination
Legislative changes during the pandemic, including the Corporate Insolvency and Governance Act 2020, have strived to offer companies enhanced protection during insolvency. These measures are likely to evolve as the economy bounces back and it becomes unsustainable for the Government to keep propping up failing businesses. Companies should take heed of this by considering termination clauses in third party agreements that provide them with the right to end any agreement when a customer or supplier enters insolvency. Such clauses might need reviewing to ensure they are fit for purpose in a changing legislative environment and to effectively limit the wider impacts of an insolvency.
Unfortunately, even if HMRC and Government offer struggling companies further support in the coming months, it may simply delay the inevitable. There are hundreds of thousands of UK companies in financial distress – the most recent Red Flag Alert data shows 723,000 companies in such a position – and a number of these do not have the cash flow to survive the pressure of paying debts when Government COVID-19 measures are withdrawn. Companies are best placed to act now to protect themselves against a wave of company insolvencies.
