Softening the blow of Insolvency

Peter Sullivan of Byrne Casey & Associates talks us through the intricacies of insolvency and how to make the most of a bad situation.

While sometimes it may not be possible to avoid the domino effect from the collapse of a large-scale construction organization such as Carillion, Manley Construction and Sammon Contracting, from a hardware supplier’s perspective the best protection against insolvency is to try and avoid it happening in the first instance by implementing some key safeguards within your financial control systems.

Key Safeguards

1. Customer Due Diligence – This should be done as a matter of course when taking on a new customer or granting credit in relation to a significant order. Asking your Accountant or Financial Controller to review publicly-available information (the CRO) in relation to a customer may help to give an indication of their financial health and flag any damaging financial issues.
2. Set and Follow Strict Credit Terms – This goes without saying but ensuring that accounts do not stray outside permitted limits that your business can live within will help to minimize the impact of any nasty shocks from an insolvent customer. Receiving regular payments from customers, especially a large customer, is the best way to protect your business from the impact of insolvency.
3. Retention of Title – Incorporating a Retention of Title clause on your Order Forms, Invoices and Delivery Notes can be a strong tool where payment for goods supplied is not forthcoming. This clause allows the supplier to retain ownership of those goods until payment has been received. In a liquidation situation it may allow the aggrieved hardware supplier to redeem their materials from the liquidator or give the supplier preference over unsecured creditors of the insolvent company. It should be noted however that Retention of Title claims can often become complicated if the materials supplied have become integrated into construction works.
4. Advance Payment or Guarantees – Particularly in the case of a large order, if there is any doubt about the financial credibility of a customer, the option of insisting upon an advance payment or a guarantee from a parent company or director should be considered.
5. Credit Insurance – Credit insurance can provide a company with piece of mind that a debt will be paid even if a customer defaults on payment. The cost of putting sufficient cover in place would need to be weighed up against any potential advantage.

In the unfortunate event that one of your significant customers becomes insolvent and you receive notification of an imminent Creditors Meeting, it is important that you are aware of your rights as a Creditor. A strong voice from Creditor’s at the outset of the liquidation process can dictate how the liquidation is carried on and maximize any potential dividend for the unlucky creditors.

Rights of Creditors

1. Inspect the List of Creditors – under the Companies Act 2014, prior to the holding of the creditors meeting, any creditor may inspect the list of creditors of the company at its registered office. This may allow fellow creditors to come together in advance of the meeting and formulate a strategy or prepare an alternative liquidator for nomination at the creditor meeting.
2. Ensure Representation at the Creditors Meeting – If you cannot attend the meeting in person the Proxy form will allow you to nominate an alternate to attend on your behalf. This alternate could be your Accountant or an Insolvency Advisor. It is important to have representation at the Creditors meeting to raise concerns about the conduct of the company and its directors prior to insolvency. It also makes the Liquidator aware of any issues that need to be addressed or reviewed during the liquidation. Attending the creditors meeting is also a useful way to ensure that the liquidator is immediately aware of any retention of title claims that you may have.
3. Nominate to the Committee of Inspection – A Committee of Inspection is a representative body of the unfortunate creditors of the company. The liquidator is obliged to invite creditors to form a Committee to carry out the following functions:

• Attend meetings and review the course of the liquidation
• Aid the liquidator with the investigation of the company affairs
• Provide the liquidator with information on the activities of the company
• Liaise with other creditors on behalf of the liquidator.
• Approve the liquidator’s fees.
• Approve any compromise arrangements with company debtors.
• Approve legal actions.

A strong Committee of Inspection has the power to infl uence the course of the liquidation in an effort to ensure the maximum recovery and realisation from the remaining assets of the insolvent company.

Conclusion

While the insolvency of a significant customer can often come as a shock, the best protection is to constantly monitor your debtor controls and heed any warning signs. Strict payment terms and the threat of suspension of credit accounts can often be the best form of protection. If you do receive the dreaded notice of the impending winding-up of a customer, it is important to know your rights as a creditor and how to influence the process as much as possible.

This Business Support article featured in the September/October 2018 edition of The Hardware Journal.