The effects of Brexit and Covid-19 on the UK economy, amongst a range of other factors, mean that many businesses are experiencing financial difficulties, and for a large percentage, insolvency is a possibility that they must navigate. However, as well as facing their own financial struggles, UK businesses are increasingly likely to work or deal with insolvent companies (or companies that are close to insolvency). As a result, it’s important that as a business director, you are aware of the warning signs and take the right actions to protect your company.
In this article we will discuss some of the most common warning signs of companies facing insolvency, as well as warning signs you should look out for when you consider entering into a new contract with another party.
Common warning signs of Insolvent companies
If you already have a contract with a business that is close to insolvency, then there can be a range of knock on effects on your business, depending on your specific contractual relationship. For example, do you provide products or services to them, or do they supply to you?
Whatever way you are linked to a business experiencing financial difficulties, it’s important to take action as early as possible to protect your business. To do this, you must look out for warning signs such as:
Slow payments
Is a company you have a contract with slower to pay you, or are they failing to pay other suppliers, contractors or subcontractors in a timely manner?
Late delivery of products or services
Have you noticed a pattern of late or missed delivery of products, or the failure to perform contracted services in the agreed time?
Changes to contracts
Has a company you are in contract with switched to requesting payments be made up front as opposed to upon delivery of products or services? Have there been requests to amend the terms of previously agreed contracts?
Late filing of accounts
Has a contracted company failed to file their accounts on time?
Staffing issues
Have you noticed staffing problems such as under-resourced staff or a high turnover of team members?
No response
Have you experienced issues with getting a response from your contracting party, or have you recognised that they are being dishonest or failing to provide all requested, relevant information?
Evidence of any of the above warning signs could point to a company that is insolvent or close to insolvency, which could have an extremely negative impact on your company. For example, if a company fails to pay you what you are owed, or deliver the products or services they are contracted to provide, not only could this leave you at risk of debt and lost earnings, but the knock on effects could also result in damage to your reputation if you are consequently unable to meet your own commitments to other businesses you share a contractual relationship with.
Due diligence for new business
When you are seeking to enter into a new contract with a customer or supplier, now more than ever it is important that you are extremely thorough with due diligence on the other contracting party, not only before agreeing to a contract, but on an ongoing basis.
Not only should you carry out full initial credit checks, you must also continue to monitor the finances of any company you will share a contractual relationship with in order to make sure they remain a financially viable partner. Needless to say, the above warning signs should also be considered when you do your research into a new customer or supplier.
Reducing risk
In the event that due diligence suggests that a contract with a customer or supplier is financially viable, it’s important to consider that this may not always be the case, to any commercial terms should be considered extremely carefully to help reduce risks to your business.
If you are a supplier, you should ensure that payment arrangements are secure and work in your favour. If you are a customer, then you should take care to have strong contingency plans in place to replace a supplier in the worst case scenario.
Steps to protect your company from an insolvent contracting party
If you suspect that you are contracted to a company that is facing financial difficulties that could have a serious knock on effect for your business, then it is absolutely vital that you act quickly. Failure to do so could result in a wide range of issues, for example, a loss of revenue, a build up of debt, and potentially, if you are unable to fulfil your own commitments to other partners, serious damage to your reputation. To protect your business and mitigate risks, seek legal and financial advice immediately.
Firstly, review your contract to be clear on your rights. For example, it may be that termination rights exist in your contract, allowing you to break your contract as a result of breach of contract from your contracting partner, failure to pay you what is owed, or in the case of formal insolvency. Should the latter be the case, it’s important to be clear on which stage the insolvency procedure has to reach before you can terminate the contract – would you benefit more from exiting the contract right away, or by waiting to see if a solvent solution is a prospect?
When you are owed money, make it clear to your debtors that you will not ignore missed payments and issue regular statements that list all outstanding invoices. State the consequences of failure to make all payments.
You should also consider whether you can put pressure on your partner to pay you ahead of other creditors, but be aware that if a company is on the verge of insolvency, paying you ahead of other creditors may be an unlawful preference that could leave you in hot water.
For advice on protecting your company from an insolvent contracting party, or the steps to take should you face your own financial difficulties, contact BEACON Licensed Insolvency Practitioners.