That’s a very good question, and not one you’re the first to ask. There are few things worse for a business owner than sending off an invoice to a customer, only to find they have become insolvent and gone out of business. Nice of them to tell you they were struggling financially before they placed that order wasn’t it? Now you’re left to pick up the pieces.
A major customer or supplier going out of business is one of the leading causes of company insolvency. A recent survey of insolvency professionals by the insolvency trade body R3, found that the failure of a supplier or a customer was the primary or major factor in 20 percent of all insolvency cases in the UK last year. And it stands to reason. If you’ve spent a month of your time fulfilling a major order for a customer, only for that customer to go bust, how are you going to pay your employees, your bills and your rent at the end of the month? When you’ve been relying on that payment coming into the business, you’re likely to experience serious cash-flow problems of your own.
So what should you do? Is it worth taking action to try and recover some of the money you’re owed? Or are you better off putting a line through this episode and focusing on fulfilling new orders?
What do you need to consider?
One of the most important factors when deciding whether to bring legal action against an insolvent debtor is to establish whether it is commercially worthwhile to do so i.e. if the debt is relatively small, you might be better writing it off. After all, this is time which could be better spent focusing on growing your business.
You will also have to consider whether you are legally entitled to make a claim. The ability to bring legal action against a debtor can be restricted once a party enters into a formal insolvency process. It all depends on which insolvency regime applies in their case.
It’s also worth noting that your position as a creditor may be improved by the recent changes to the Third Parties (Rights against Insurers) Regulations 2010. This allows a third party to proceed directly against the insolvent company’s insurer, without first having to establish the liability of the insured (as was previously the case).
If the customer has entered into administration, a statutory moratorium applies (a period of debt relief during which creditors cannot take action). There has also been talk of introducing a 21-day moratorium for failing businesses too, but that is still in the discussion stage. During this time, no legal proceedings can be commenced or continued against the company without the consent of the administrator or the permission of the court.
Wound up by the court
If a customer is in the process of being wound up by the court, no legal action can be continued or commenced after a winding-up order has been made, without leave of the court. If the company is to be liquidated, a balancing exercise will be carried out that considers the interests of the party bringing the claim against the insolvent company, and the interests of the creditors as a whole.
Creditors’ voluntary liquidation (CVL)
In the case of a company voluntary liquidation (CVL), there are no restrictions to prevent proceedings against the company, although the court can stay proceedings on the application of a liquidator or creditor.
Company voluntary arrangement (CVA)
Once a company voluntary arrangement (CVA) has been agreed, the terms are binding on all the creditors entitled to vote on the proposal, so your ability to make a claim will be restricted by the terms of the agreement. Companies that have filed a CVA proposal at court are usually protected by a moratorium which prevents legal proceedings. However, it may still be possible to make a claim against the company in some cases, but if an action is successful, it does not necessarily guarantee that a payment will be made.