One of my customers has gone into an Insolvency Process – will I be paid?

“Will I still be paid” is a question likely to be have been asked by many of the suppliers to the 23,880 companies that were placed into a formal insolvency procedure during 2024.  Whilst the overall number of company insolvencies reduced slightly during 2024, this number remains significantly higher than the pre 2020 Covid period.  Given the current economic pressures, it is anticipated that this number will increase during 2025, particularly in industries which are most at risk such as retail and hospitality.  Prudent businesses supplying these industries should be prepared.

What do I do when my customer goes into an Insolvency Procedure?

Whilst there are different insolvency procedures, each varying in their notification requirements, the majority of company insolvencies are Creditors Voluntary Liquidations, (“CVL’s”), we will therefore examine this process.

• You should be notified by an Insolvency Practitioner prior to the CVL. You will be provided with the Notice of Decision Procedure which explains the whole process, the date on which the Company will enter into CVL and the name of the Liquidator to be appointed. You will also be provided with a Report to Creditors, which sets out the trading history of the company, the Statement of Affairs and a Proof of Debt form to enable your claim to be submitted.
• The Statement of Affairs effectively acts as a Balance Sheet and sets out the insolvent position of the Company and should list all of its assets and liabilities. At this stage it is good to check this and ensure that your liability is correctly listed, and if you believe there are any assets not disclosed, you should notify the nominated Liquidator.
• It is important to note that at this stage a creditor cannot object to a company entering into CVL, as it is the members/shareholders who pass resolutions to wind up the Company. Creditors can, subject to certain criteria, object to the appointment of a Nominated Liquidator and request an alternative (but this very rarely happens) and request a physical meeting be convened.
• Also check the terms and conditions of your contract with the customer. If it includes Retention of Title clauses, you may be able to recover goods that have not been paid for. You should alert the Insolvency Practitioner to this as soon as possible for the best chance of your goods being returned.
• It is also important to notify any trade credit insurances you may have as you may be able make a claim to mitigate your Company losses.
• You will be notified once the company has formally entered into CVL and provided with a questionnaire. This is your opportunity to provide any supporting evidence and raise any concerns you may have regarding the Company’s trading. You should complete the form and submit your claim with full details of all unpaid invoices, copies of the contracts and any supporting documentation such as orders and delivery confirmation etc.  It is important that you complete this as accurately and promptly as possible.
• Notice of the CVL will also be filed at Companies House and in the London Gazette, so in the event that your customer has poor records and/or fails to respond to you, this is a good way to check their position.

How much am I likely to be paid?

Once appointed, a Liquidator has a duty to realise assets for the benefit of creditors, however these are dependent upon the Company and recoveries may be limited.

The order of priority of payment in Insolvency Procedures is set out in the Insolvency Act and is:

1. Fixed Charge Holders (Security against fixed assets such as property)
2. The Costs and expenses of the Insolvency Procedure
3. Preferential Creditors – Employees Arrears of Wages and holiday pay, employers’ pension contributions
4. Secondary Preferential – HMRC, VAT and PAYE
5. Secured Creditors with a floating charge
6. Unsecured Creditors, suppliers, landlords, trade creditors
7. Shareholders

As an unsecured creditor, it may be worth seeking advice from your own Insolvency Practitioner about how to proceed and what further steps you can take.  You will be able to claim VAT relief on bad debts after 6 months and you should discuss with your accountant how to write off the debt for tax purposes.

How can I minimise my potential liability in the future?

No-one wants to be in the situation of not having their bills paid so you should consider:

• Always carry out credit checks before trading with a new customer and investigate any red flags such as previous insolvencies.
• Set very clear credit terms and limits including penalties for late payment.
• Request Personal Guarantees from the Company’s Directors.
• Ensure you have a Retention of Title clause so the goods remain yours until you have received payment.
• Make sure your own bookkeeping is robust and you monitor all payments very carefully. Xero accounting software, for example, can include “pay now” buttons on invoices and can  automate invoice reminders.
• Follow up any unpaid invoices immediately and stop supplying or request pre payment if payments are delayed.

More businesses are likely to go into an Insolvency process during 2025 so the earlier you take measures to protect your own business against bad debts, the better.   Your accountant will be able to provide more information on this but always speak with an Insolvency Practitioner if you have unpaid debts for the best advice on how to recover them.

Gareth Hunt and the RPG Business Recovery incorporating Crawfords Team are always very happy to have an informal discussion with any businesses either potentially in distress or affected by other business in distress and to discuss options with them.  It’s best to take advice as soon as possible when more options are likely to be available.  Please call 0161 608 0000 or email info@rpg.co.uk to speak to an Insolvency Practitioner in Manchester for further information.