What to do if your key customer goes into administration

The recent demise of Carillion has brought into focus the wide-reaching impact of business failure.  Our Business Recovery partner and insolvency expert Mark Upton advises on what to do if your key customer goes into administration.

You hear on the news that your largest customer has gone into administration, with your business owed significant sums, threatening its future. It is the first time this has happened to you and you need to know what to do in the immediate aftermath.

This is a highly stressful situation for all those affected, but you need to act fast and act smart to secure the best returns for your business. Find out who the administrators are. Do this by contacting your customer, looking on its website, telephoning other suppliers or speaking with professional advisers.

Speak to the member of the administrators’ staff who is dealing with suppliers. Find out what the administrators are hoping to achieve.  Ask if they expect a sale of the business or an orderly wind down of the company’s operations. Find out if they expect to pay a dividend to unsecured creditors such as your business. The administrators will probably have been working with the company for weeks, or even months, before the start of the administration, so they are likely to have agreed a strategy and should have an answer to your query.

Consider the terms of any credit insurance policy, notify the insurers of any potential claim and ensure that your business complies with the terms of the policy. Do not take any steps or agree anything with the administrators which could invalidate the policy.

Think about whether the company needs further supplies from you. Are you an essential supplier or can the administrator get the supplies from anyone else? If you do decide to trade with the company after the start of the administration, you should get confirmation from the administrators that the goods you supply and the services you provide will be paid for as an expense of the administration. This means they will be paid for before the costs of the administration and before payments are made to unsecured creditors.

If the company still has the goods you supplied, then you may be able to either recover these goods or obtain confirmation from the administrators that they will be paid for - provided you have an enforceable retention of title clause in your terms and conditions. You will need to review your terms, identify and schedule your goods (probably by visiting the company's premises) and show that your terms (and not the insolvent company's) govern the contract. You will be asked to supply delivery notes, invoices and other contractual documents. Problems can arise when two suppliers have supplied identical goods, but doubts will often be resolved in favour of the unpaid suppliers. Note that if goods have entered into a manufacturing process and have been altered in some way then the retention of title claim is likely to fail.

Find out if you have any of your other assets on the company’s premises. Are these secure or are they at risk of being claimed by other unsecured creditors? Should they be removed? Do the administrators know that these are your assets? Do you need to put them on notice, so that there is no risk of these assets being included in a sale? Generally, administrators can prevent creditors from removing their assets if this would frustrate the purposes of the administration. However, after a company has entered into administration it should pay its unsecured creditors for its use of their assets. For example, it should pay for the raw materials it uses and an appropriate rate for the use of any hired assets.

Review your orders with your suppliers. If you have ordered goods or booked services which are no longer required, consider whether you can mitigate your losses by cancelling. The terms of your contracts with your suppliers will be relevant, but even if the contracts prohibit cancellation it may be possible to negotiate.

Look at mitigating your losses in other ways. Do you need to start a redundancy consultation process with employees who have been working on the company’s contracts? Are any collective redundancy consultation requirements triggered and should you be giving the Insolvency Service advance notice of potential redundancies (by filing a form HR1)?

Establish what your client’s customers are going to do. If they still need the goods or services the company has been providing, it may be possible for you to contract with them direct. The customers may be able to withhold payments from the company and make increased payments to you, if the customers can show that the payments are necessary to mitigate their losses.

Ask yourself if you have any interest in acquiring the company’s business from the administrators. Is the company’s business viable? Is an acquisition necessary to save your business? Do you have sufficient cash in your business to fund an acquisition or would you need to borrow funds?  If you are interested in acquiring the company’s business you will need to act quickly. You should register your interest with the administrators, obtain an information memorandum and start assembling your team of advisers. If you are not interested in acquiring the business, find out who is. Can you engage with this organisation, understand their plans and secure future orders?

Even if a dividend is likely, it may take months or even years for the dividend to be paid. Consider how your business is going to deal with any additional short term funding requirements. Do you have sufficient cash available in the short term or do you need to borrow additional funds? Is your current lender prepared to advance additional funds or do you need to approach an investor, your shareholders or a finance broker? Can you agree revised payment terms with suppliers? Can you negotiate a “time to pay” arrangement with HMRC? What other self-help remedies can be used to generate cash? Look for any unused or underutilised assets which can be sold. Find out if any other assets can be used to generate cash. For example, should sale and leaseback arrangements be considered?

Consider what you are going to say to your existing stakeholders. Your lender is likely to be aware of the importance of the company to your business. Will the administration have an impact on your ability to make scheduled repayments? Do you need to extend your overdraft? After you have established most of the facts, if you explain the impact of the administration on your business to your lender and your future plans, your lender is far more likely to be supportive.

Regarding your suppliers, consider whether they know the importance of the company to your business as you may need to negotiate extended terms. Will they be taking any adverse action? For example, will they be escalating their debt recovery processes? Can you prevent this? If you are on good terms with your suppliers, early engagement may help.

Finally, consider the likely outcome of the administration. Although this is early days, work through what will happen if nobody acquires the business or if the acquirer does not want to deal with you. Consider whether your business is viable on a reduced scale and what your other options are. If you expect that your company may itself go into an insolvency process in the short or medium term, then it is important to engage with professional advisers sooner rather than later.

Ultimately, all businesses at risk when a customer enters administration should take professional advice from a reputable source as soon as possible to understand what their best options may be.

For more information on the above please speak with Mark Upton in the first instance.

« Back to news articles