A recent press release from the insolvency trade body, R3, (click here) has identified that more than 20%
of UK corporate insolvencies in the last 12 months have been caused
by debtor default or late payment.
That means that a significant number of corporate insolvencies
have been caused by matters that are outwith the control of the
directors of that company – or does it?
When a supplier gives credit to a customer, the supplier is, in
effect, making a loan to that customer. It is in the interests of
the supplier to give that "loan" to encourage customers
to transact and to increase the turnover (and hopefully the profit)
of the supplier.
The giving of credit necessarily exposes the "lender"
to the risk of default by the customer, most notably of course upon
the insolvency of the customer.
Where the giving of credit and the subsequent failure to repay
would constitute a substantial risk to the business, it is
incumbent upon the directors to first consider the risk of that
insolvency or other non-payment upon the cashflow and balance sheet
of the business. After all, no sensible business would make a
substantial cash loan to a doubtful debtor if the consequences of
non-payment would be fatal to the business. However it appears from
the R3 figures that that is exactly what has happened in a
significant number of cases. R3 have identified that this seems to
be particularly prevalent in the construction industry.
Businesses can of course take steps to minimise the risks that
they are exposed to as a result of the potential failure of their
customers. Credit insurance may be available (at a price).
While bad debts and customer insolvency can appear out of nowhere,
it is often the case that there will be prior warning signs about
the solvency of a debtor. Continually monitoring the financial
position of major customers can pay off.
If there are any doubts about the solvency of a debtor, steps
should be taken as early as possible to minimise the exposure to
that debtor. That may mean restricting credit, seeking
security or guarantees or ensuring that terms and conditions of
supply are watertight and contain appropriate protections –
(such as retention of title).
Taking early debt recovery action against a debtor who it is
suspected may later default, may elicit payment from that debtor
prior to a subsequent insolvency.
Of course taking such action may imperil any future trading with
that debtor, but it has to be borne in mind that the only customer
worth having is one who pays. Sometimes taking the hard decisions,
such as demanding guarantees or taking pre-emptive legal action,
may be necessary to save a business – even if it means losing
There are a number of steps that can be taken to identify and
minimise the risks from defaulting debtors and MacRoberts Debt
Recovery and Dispute Resolution teams can assist.
The material contained in this article is of the nature of
general comment only and does not give advice on any particular
matter. Recipients should not act on the basis of the information
in this e-update without taking appropriate professional advice
upon their own particular circumstances.
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