Three “Ms” to help avoid the suppliers nightmare of a key customer who can’t pay

In the first quarter of this year, in England and Wales, 3,694 companies and 20,383 individuals were unable to pay their debts and went into a formal insolvency procedure (The Insolvency Service: Insolvency Statistics – January to March 2016). It goes without saying that these statistics mean that a very considerable number of suppliers to companies or sole traders will have been left as unsecured creditors, likely to receive a fraction only (or nothing at all) of what they were owed for goods or services supplied.

It’s easy, when things are going well and you have a customer who is taking a sizeable part of your output, to forget that things can change very rapidly, even if that buyer may seem immune to insolvency (think Polly Peck and Equitable Life, to name two of many). So what should the careful supplier, who may possibly have too many eggs in one basket, be doing to mitigate the risk to it of an important customer becoming an Insolvency Service statistic?

First, “Make Sure” there is a contract (which might be your standard terms and conditions, a bespoke contract or a combination) in place with your customer (if you are having to contract on a customer’s purchase terms, do your best to agree terms to protect your position for payment/insolvency etc.). The contract should:-

• Be clear, unequivocal and specific on payment (such as days allowed from invoice), manner of payment and interest for late payment.
• If you are supplying goods, and it is practicable to do so, include carefully-worded retention of title provisions to allow ownership of goods supplied to remain with you until you are paid. These provisions can be tricky to get right, particularly since some forms of retention of title may amount to a charge registrable at Companies House, with failure to register within 21 days making them unenforceable against an administrator or liquidator; so, if you are going to be heavily reliant upon them, seek specialist legal advice.
• Have detailed termination provisions which cover matters such as unremedied failure to pay, and insolvency and similar circumstances. You should note, however, that, under Section 233A of the Insolvency Act 1986, as well as utilities, suppliers of computer software or hardware may not be able to rely on a termination clause in the event a customer goes into administration or is the subject of a company voluntary arrangement.
• Ideally give the supplier the right to suspend its obligations under the contract if there is any failure to pay.

Next, “Manage” payment of sums due to you pro-actively, and with continual sensitivity to what is going on at the customer end.  This may be particularly onerous for smaller businesses, but cash-flow is your life-blood. Ensure your contractual payment terms are adhered to tightly, and be ready to chase any late payment with polite but firm reminders and notifications, with mention of consequences, such as interest, suspension or termination, as the issue escalates. Consider at what point you need to invoke suspension provisions, if you have them, or even termination provisions; this may mean loss of an important customer but such a customer is of no use if they are not paying.

And finally “Monitor”. The price of your own success or even survival is constant vigilance.  Be alert and aware as to whether the relationship with your customer is changing. Are there any warning signs, such as hitherto reliable payments becoming erratic?  Have you heard anything “on the grapevine” from other suppliers, chance remarks from your contacts at the customer and so on which might suggest all is not well? Is there anything on the internet or otherwise in the public domain that might indicate problems? Although records at Companies House, which are now readily publicly available, may not help much, the state of the Charges Register of the customer may give you a feel for its indebtedness and bank commitments. You can also get details of windings-up at the Companies Court too, but it may be too late to do anything at this stage.

A major risk of selling and trading is and will always be that you don’t get paid. It’s impossible to eliminate that risk. But, even as the good times roll, don’t be lulled into a false sense of security, be aware of the risk, and apply the three Ms. They might just avoid a financial disaster for you.

For further information on how our commercial law team can support you with insolvency please feel free to get in touch.