What to do when a major customer goes bust

No matter how big the company, how long you’ve been working with it, or how good your overall credit control, the chances are that one day one of your major customers will go under while owing you money.

The first thing to look at in this situation is what has actually happened. It’s one thing hearing on the grapevine that a customer has folded or ‘gone pop’, but in reality that could mean one of several things. Libby Pritchard is an associate director and solicitor with Clitheroe-headquartered transport specialist Backhouse Jones, and has seen many such situations.

“If it’s administration, they’ll be looking for a buyer for the company. If the company is in liquidation, however, things are very different. Then the company can’t pay its debts, potentially putting your business in a very difficult position.”

Preferential creditors are those who are guaranteed priority when it comes to any money left with which to pay the company’s debts. “Unfortunately, HMRC and the liquidator’s fees get paid before anybody else,” Pritchard informs us. Next on the list are secured creditors – people who lent money or provided credit on the basis that there would be a charge on property owned by the debtor if that company became unable to pay.

“Other than that, you’re just an unsecured creditor, so you don’t take preference over anybody,” Pritchard says. “You’re literally just all in a pot, and then it’s pence in the pound.”

Once HMRC and other preferential creditors have been paid, any remaining money is split between the unsecured creditors by percentage. For the sake of illustration, if £1m was owed and there was only £100,000 to pay people with, then each creditor would effectively get a tenth of what they were owed. “So, say that a company was owed £100,000 out of the £1m; it would only actually get £10,000,” Pritchard explains. Unfortunately, this means that there is often a knock-on effect when a company goes into liquidation. “We’ve seen it before, where it sadly puts other companies out of business as well.”

Believe it or not, this can happen even if your business has had invoices paid before the plug is pulled, if the customer knew it couldn’t pay its overall debts. There are set time periods prior to the insolvency where these would be deemed to have been preferential payments, and the money therefore liable to be recalled. In the case of invoices for services, this time period would be six months.

“Because of this, we would recommend caution when receiving payments from a company where there are whispers of insolvency,” Pritchard warns. “Although practically speaking, it is better for the operator to have the money in its bank, and to argue over whether it needs to pay it back, as opposed to trying to recover it from an insolvency practitioner or liquidator.”

One of the first questions Pritchard and her team are often asked when a company becomes insolvent, or sometimes when there are simply rumours of difficulties, concerns goods that operators already have, be that loaded on vehicles or in storage. Can an operator keep hold of them to try and get paid? “The answer is, it depends on what your terms and conditions say,” Pritchard replies. 

Backhouse Jones always advocates for the haulage sector to operate under the RHA Conditions of Carriage. “They are drafted with these types of issues in mind, and they do have a clause in there to say you can exercise a lien on any goods you hold,” she tells us. “The problem we have is that the goods you’ve got may not actually belong to the company concerned.” 

In other words, they may belong to a third party, with your customer only acting on their behalf, in which case the actual owners may come along and claim them.

That doesn’t necessarily mean all bets are off on that particular tactic, however. “That, in itself, is a complex area of law, but it’s always worth looking to use it as a bargaining chip,” Pritchard says. “It is often the case that it might get you some sort of settlement from the liquidator, for it to get hold of those goods. But just be careful,” she cautions. “Because equally, it could apply to the court for you to deliver those goods instead.”

Next, you may have reason to believe there’s been wrong-doing by the directors of the company in insolvency, such as fraudulent activity. “In that instance, the liquidator can sometimes go past the protection of the limited company status and go after the directors personally – we refer to it as ‘piercing the corporate veil’,” Pritchard explains. “However, it is in the hands of the insolvency practitioner to make this application to the court, so it is to the insolvency practitioner that evidence should be provided.” 

The final thing worth looking at is whether there’s a personal guarantee. “When you enter into a contract with a limited company, which is often the case in these scenarios, the limited company is the legal entity that owes the debt,” Pritchard reminds us. “So, if that does go bump, there’s not a lot you can do.” 

By contrast if you, as part of your credit account with that company, ask the director signing it to give a personal guarantee, they’re then personally liable for it. “If you have that signed, you can get what money you can out of the liquidation of the company, and then you would go after that director for the rest,” Pritchard continues. 

Personal guarantees aren’t easy things to get. “Generally, we only see them with banks, when entering into an agreement to purchase something of large value, or finance companies for vehicles,” Pritchard concedes. “But I always think that, with this kind of thing, the industry does a lot on trust, and with the attitude that ‘It’s okay, it’s a big company, it’ll pay us.” In reality, of course, the events of the last year or so serve as a harsh reminder that isn’t necessarily the case, so perhaps now is the time to stop being quite so friendly.

There are a few things you can do to protect against the worst of the fallout from an insolvency situation, Pritchard says. “First of all, just don’t rush into these contracts,” she advises. “Then – and I suppose we’re talking about shutting the door after the horse has bolted a bit – there are a few admin points to consider that may help warn operators about potential trouble ahead.”

The first of these is to set up alerts. “If you’ve got three or four big clients for the majority of your work, and you’re letting them rack up invoices and pay over 90 days, you’re effectively giving them a credit facility,” Pritchard points out. “We would recommend you set up an alert with Companies House, or a commercial credit checking service like Creditsafe, so if anything changes about the customer’s financial situation you’ll be notified straightaway.”

Admittedly there is, as mentioned above, a chance that payments received after being alerted to a problem could be recalled, but in those instances that would happen regardless of whether you knew the position or not. It’s far better to know about CCJs or other court judgements being entered, and to be able to review payment terms accordingly. 

Next, make sure your terms and conditions are watertight, and look at personal guarantees. This is particularly important if you’re going to be doing business for amounts that would take you under if the customer didn’t pay.

“In those instances, look at trying to get some form of security in place,” Pritchard advises. “I appreciate the company may simply say it’ll give the work to someone else, but that’s then a risk assessment and judgement call for you to make as a business.”

Finally, there’s the question of retrieving physical equipment that may be on an insolvent customer’s premises – vehicles based in its depot or stand trailers, for example. “In those circumstances, you would contact the liquidator and arrange for collection, on the basis that it doesn’t form part of the assets for liquidation,” Pritchard tells us. Breaking into locked premises to do this, however, is not recommended. “Then there would be the criminal and civil implication of the damage done as well, so legally we’d say you can’t do that.”

 - This article was previoulsy published in Commercial Motor, to subscribe see the latest Commercial Motor subscription offer