One of the things everyone dreads hearing is that their client has gone out of business. It can understandably cause a lot of stress in your business, as you don’t know if or when they will ever be able to pay your invoices or just how much trouble the debtor company is in.
It’s a depressingly common occurrence in modern business life, but dependent on the situation all may not be lost, says Adam Home of Safe Collections. There are a number of steps you can take to try to mitigate your losses and get your money back. The first thing is to identify if your unlucky client has actually gone bust.
Have They Actually Gone Bust?
The first thing you need to determine is if your customer is telling the truth about the situation and not just playing for time, some companies will claim they have ceased trading or gone “belly up” just to fend off creditors. Corporate or company insolvency procedures can be confusing so we have included a brief guide on the main types below:
If your debtor is an individual in business I.e. a Sole Trader or member of a non-limited partnership the types of insolvency action they may face include:
- Individual voluntary arrangement (IVA). This is where an individual comes to agreements with creditors to pay their debts over time instead of petitioning for bankruptcy. It is set up by a licensed insolvency practitioner (IP). The agreement is legally binding on acceptance and will usually see creditors paid a percentage of the debt over a fixed period.
- Bankruptcy. This is where an individual or a creditor petitions the court to have their assets and liabilities discharged by the court and the Official Receiver. In a majority of cases it is discharged in a year and as a general rule, creditors will not receive any return as most bankrupts have little or nothing in the way of assets.
If your debtor is a limited entity I.e. Limited company, Limited Liability Partnership, Public Limited Company or similar the following types of insolvency may apply:
- Administration. This is a mechanism intended to give limited entities the breathing room to consolidate its position with a view to ultimately being able to trade again. The appointment of an administrator can be nominated both in and out of court and their appointment shields a company from enforcement of legal proceedings whilst they attempt to identify if the company can be “rescued”. An administrator will oversee the day to day running of the company and deal with any creditors during this period.
- Company voluntary arrangement (CVA). This is similar in scope to the IVA above but applies to a company instead of an individual. Again any agreement reached with the creditors is legally binding and overseen by an insolvency practitioner. But unlike with administration the directors will remain in charge of the company during the period of the CVA.
- Compulsory liquidation. When a company cannot pay its debts as they fall due a creditor can petition the court to “wind up” a company and force it in to liquidation. A petition stating the sum of money owed (that the company cannot pay) is submitted to the court and if successful the company is liquidated and the Official Receiver takes control of company assets in order to liquidate these and make repayment to creditors.
- Members voluntary liquidation (MVL). Members of a solvent company pass a resolution to wind the company up without the need for court. A meeting is held to determine the liquidator who is in charge of assets and repayments. A company entering MVL will usually clear any unpaid debts prior to completion of the liquidation.
If the insolvency is one of the types above, then you need to speak to your errant customer and secure the contact details of the insolvency practitioner. The aim here is to confirm that the company has formally started the process and is not just using vague discussions with the insolvency practitioner in an effort to avoid paying what it owes.
If the insolvency is informal i.e. the customer claims they have “ceased trading” or “closed down”, you need to ensure they have indeed ceased trading. You can do this by checking to see if their phones are still being answered, if their business social media is still being updated, and if they are still taking new orders. If they are then the chances are they haven’t ceased trading and you should move quickly to take effective action to recover the money owed.
If your client has really gone bust, then the chances of you being paid can be quite slim and the hole in your cashflow can cause significant issues even for a healthy business. But that doesn’t mean you should give up. It is always worth lodging a claim with the liquidator or insolvency practitioner, it only takes a few minutes and might mean you see some payment when the insolvency is finalised.
Failing that you could look to mitigate your losses in some other way, for example can you now supply your client’s customers; or can you purchase the customer list, valuable assets or intellectual property from the insolvency practitioner for use in your own company? This can work well, and you may end up with some excellent long term clients.
It is important to remember that not every insolvency is a deliberate act and that sometimes these things just happen. If you have a good working relationship with the client then staying in contact even after they have gone bust may deliver opportunities to to recover your losses further down the line.
The final word
The best way for you to avoid losing money to an insolvent client is to make sure you properly vet your customers before offering credit and to take swift recovery action when invoices start to go unpaid. A credit report on a new client will tell you if they are a good or bad risk for credit and an effective credit control process will ensure that you have the best chance of actually getting paid.
After all, if a customer has debts of £50k and reserves of £20k the creditor that shouts loudest will always get paid first.