Solicitor Jennifer Scott, in law firm Blandy & Blandy’s Corporate & Commercial team, explains how to protect your business from debtors and the insolvency of a buyer.
You may recall headlines regarding the administration of big companies such as Paperchase, Joules and Missguided. Sadly it has been a difficult time for retailers in particular, and the ripple effect is felt down the supplier chain, sometimes hitting the smaller businesses the hardest. So, what can you do to protect yourself from the insolvency of a buyer?
Its all about the contract. We have provided a summary below that sets out some provisions that businesses should have in place as standard, particularly when supplying goods.
Contract termination if the other business is in financial difficulty
We recommend checking the termination provisions in the contract to see what events can trigger terminating the commercial relationship to preserve your business.
As standard there should always be clauses that allow either party to terminate the contract, either immediately or subject to notice, if the other is involved in a formal insolvency process or if they have an ‘inability to pay debts within the meaning of section 123 of the Insolvency Act 1986’.
The former is self-explanatory but the latter carries a wide definition that includes when a company cannot pay its debts as they fall due, or if the company has fewer asses than its liabilities (taking into account its contingent and prospective liabilities) referred to as ‘balance sheet insolvency’.
Can you get your goods back if they haven’t paid?
Contracts for the sales of goods should have, what is referred to as ‘retention of title’ terms. This sets out at which point in the transaction the ownership of the goods will pass to the buyer. This can be from any point from leaving the seller’s warehouse in transit, to when the goods are unloaded at the premises of the buyer or when the buyer has paid for the goods.
If you have a retention of title clause that prevents title to the goods passing until the buyer pays for them, you may be able to get an insolvent company to return the goods to you on the basis that you still retain ownership of the goods (even if they are at the buyer’s premises).
It may seem obvious, but if there is any whiff of a concern in a buyers ability to pay for the goods you can consider having payment terms which require upfront payment of the goods (although, depending on the commercial leverage, this may be difficult to negotiate) or consider incorporating terms that require payment within 14 days of the invoice, so that if there are any cashflow issues this can be brought to light quicker.
If you would like a review of your sales contracts, please get in touch and we will be happy to discuss how we may be able to help.