Business insolvencies continue to rise in the UK, posing a particular threat to small- and medium-sized enterprises (SMEs). But there’s an added complication when your business partner becomes bankrupt, as this can affect your own company. Here we take a look at how you can tackle this situation and how to mitigate the impact of insolvency.
What is corporate insolvency?
When a business has insufficient assets to pay its debts, or cannot pay off its debts when required, it becomes insolvent. It is the directors’ responsibility to know whether a company is trading while insolvent, and they can be held legally responsible for trading while in this situation (this is called “wrongful trading”).
An insolvent company has a number of options for handling insolvency, as outlined in the Insolvency Act 1986.
Three of these options allow for the potential rescue of the company or its business:
- administration
- company voluntary arrangement (CVAs)
- administrative receivership
The other two options mean the company has to cease trading:
- compulsory liquidation
- creditors’ voluntary liquidation (CVL)
Insolvencies in the UK: state of play in 2024
In 2023, there were 25,158 corporate insolvencies in the UK, the highest figure since 1993. Sadly, the upward trend shows no signs of abating in 2024: the latest government statistics show that registered company insolvencies in England and Wales in June 2024 were 16% higher than in May 2024 and 17% higher than a year ago, in June 2023. The number of company insolvencies remained much higher than during the COVID-19 pandemic and between 2014 and 2019.
CVLs accounted for 79% of all company insolvencies in June 2024. Compulsory liquidations rose by 10% in the same month, CVAs by 21% and administrations by 30%. Administrative receiverships are now rare and there were no cases in June 2024, with only two cases being recorded in the twelve months leading up to this date.
High interest rates, inflation, increasing costs and weak consumer confidence have all contributed to a challenging economic climate. Most industries saw increases in company insolvency numbers in the 12 months to May 2024. The top five industries with the highest number of insolvencies were construction (17% of cases), wholesale and retail trade (16% of cases), accommodation and food service activities (15% of cases), administrative and support service activities (10% of cases) and professional, scientific and technical activities (8% of cases).
How to tell if your partner company is at risk of insolvency
It’s not always easy to tell in advance whether your business partner is at risk of insolvency. However, there are a few signs you should watch out for:
- Changes in payment behaviour (requests for deferral of payments, asking to pay in instalments or early payment terms for the partner’s own receivables)
- Decrease in the quality of goods or services delivered
- Unreliable deadlines
- Increase in staff dismissals
If you suspect there may be a problem, contact your partner company immediately. If your suspicions are confirmed, find out who the appointed administrators are and inform them that you are a creditor. You must be able to prove your claim, whether this is monetary value or the right to receiving a product or service: if you can’t prove this, you risk losing your claim.
The key in this situation is communication: with your partner company, the administrators, and of course your own customers and suppliers. Find out as much as possible about the situation and get appropriate legal advice.
Make sure not to supply any more goods or services to your partner company, unless it is payment on delivery. You will need to arrange this with the administrators. Remember that if the partner company does go into administration, it’s unlikely you will get any money back.
Managing partner insolvency
Although even seemingly successful companies can go into administration, there are measures you can take to check on the viability of your potential partners.
- Draw up a retention of title (ROT) clause in your supply contract. This means you still own the goods until they have been paid for, and is common in contracts in the retail industry. It’s wise to have this clause drawn up by a lawyer to ensure it’s valid.
- Use a credit rating tool such as Experian or Creditsafe to check the financial health of your partner company.
- Take out trade credit insurance, which protects you against the risk of not being paid for the goods or services you sell.
- When setting up a partnership, create a written partnership agreement. While not required by law, without one your partnership will be governed by the Partnership Act 1890, which states that all partners have equal control and ownership of assets, and that all are considered equally liable. This means that a partner’s mistake could cause major losses for your company. A partnership agreement allows you to create an explicit statement of roles and purposes, including liability and control of ownership and assets.
Source from europages
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