What happens if someone you are dealing with - a contractor or another party you have an ongoing business relationship with - looks like they are heading towards insolvency, or suddenly tells you that they are now in administration or liquidation?
In the current economic climate, this sort of situation is arising more and more. The first step anyone who finds themselves in this situation should always take is to ascertain exactly what the true position is and then open up lines of communication, or if already opened, make sure that those lines of communication are with the correct individual, be that the director or another employee you usually deal with, or the insolvency practitioner who has been appointed. It is equally important that those lines of communication remain open throughout any insolvency process that follows.
Where The Third Party Is A Debtor
While general debt recovery issues are not in the scope of this article, it is important to note that when a company is put into liquidation or administration, court proceedings cannot be started or continued against that company if a moratorium is in place. In liquidation, that moratorium arises automatically (s. 130 of the Insolvency Act 1986) and in administration there are various criteria that apply before a company can seek to have the benefit of a moratorium. (For more details please see the recent article by Derek Ellery).
In practice, what happens when a business goes into liquidation or administration is that all creditors file claims with the liquidator/administrator but will not receive any payment until after completion of all the statutory procedures that the liquidator/administrator has to undertake.
In liquidation, that procedure involves the liquidator gathering in all of the assets of the company and realising those assets (which can often include the sale of the business as a going concern). The creditors of the company are then paid out in order of the priorities laid down by statute. If the debt is an unsecured one, the best advice for creditors is normally to write off that debt as a bad debt so that any sums that are eventually received in satisfaction of their claim (usually by way of a pence in the pound dividend) will be viewed as a windfall. The payment of any dividend will not be made for a significant period of time, generally at least 12 months after the start of the liquidation process, but often a good deal later than this.
In administration, the whole purpose of the procedure is to restructure the company with a view to avoiding liquidation where possible. Whether debts will be paid, and, if so, how and at what level, will depend on the circumstances of each administration. The administrator will give notice to all known creditors of the purposes for which the administration is being set up and the steps being taken to try and achieve these. Again, the earlier comments about unsecured debts being written off also apply in an administration situation.
It is important to note that your business relationship with the third party needs to be preserved in a different manner in the case of administration, as the third party company may remain in existence after the administration process has come to an end and, in that event, you may well have an ongoing business relationship with that company post-administration.
Where The Third Party Is A Creditor
Any sums that are due to a third party company that is going into liquidation or administration will not simply fall away because of that company's insolvency - you will remain liable to pay outstanding sums. Liquidators and administrators are having to be much more proactive in the current climate in order to satisfy their overriding duty to the company's creditors to best realise the insolvent company's assets. This means that they will be more inclined to go to court to try and recover sums due to the insolvent company.
Ultimately, while the insolvency of a business you have dealings with may be unavoidable, the management of the process is helped greatly if your own business has good existing debt management practices in place.
Note: We have already covered how to get rent paid if your tenant goes into administration in a recent article. To read more click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.