The Association of Business Recovery Professionals suggests that unsecured creditors, on average, receive 1% of the debt due to them from a company that undertakes a pre-pack sale and 3% in cases in which a going concern sale is achieved. Given such poor prospects, investment of time in identification and reduction of insolvency risk can pay dividends.
There are a number of warning signs of supply chain risk, and it is key that you are familiar with these:
- Is your supplier holding notably less stock, so that deliveries are short or late?
- Are there signs that your supplier is subject to creditor pressure such that their creditors are repossessing goods and/or issuing winding up petitions?
- Have you received a request to amend your T&Cs (i.e. title to goods does not pass until payment is received by your supplier’s supplier in full or payment terms are extended with your customers)
- Reduction in quality standards
- Official announcements to your supplier’s or customer’s shareholders or the stock market such as profit warnings
- Large scale redundancies or the sudden removal of key personnel
How to protect your company:
- Due diligence at the outset of a trading relationship can provide a benchmark against which you can measure any deterioration
- Assessment of key customers and suppliers should be carried out regularly
- Place limitations (where possible) on the amount each supplier provides
- Keep direct contact with suppliers, customers and others in their sector so that you are informed of changes and/or deteriorations
- Within your contracts ensure that you have an all monies clause (i.e. title to the goods does not pass until all invoices have been paid) and include sufficient powers to assist in retrieving such goods
- Require customers to ensure that goods that have not been paid for are distinguishable and stored separately and mark your goods where possible for identification purposes to assist with your claim
- Within your contracts ensure that you have the right to terminate the arrangement on the occurrence of specified insolvency events
Given the increase in formal insolvencies, and research that evidences that the average lifespan of an S&P 500 business is down to just 18 years today, from 82 years in the 1930s, the noticeable trend is that the majority of businesses trade for a much shorter period of time and therefore you must be ever watchful that it is not your suppliers or customers that are facing insolvency.
If a customer or supplier enters an insolvency process it is imperative to understand the type of process that they are subject to. Each process will require a different approach.
Liquidation is essentially the process of last resort:
- as an unsecured creditor you are unlikely to receive payment in a liquidation; and
- as a supplier your arrangement with the company will most likely come to an end rapidly.
Administration on the other hand:
- is more likely to provide a higher return to creditors than in a liquidation, as there may be a continuation of the business or time to conduct a sale of the assets rather than a firesale approach (as may be required in a liquidation);
- may involve a period of trading the business whereby you can supply the administrators with goods or arrange for the administrators to sell your goods and the payment terms can be agreed between yourselves and the administrators;
- may involve the continuation of the business in the form of a new company, whereby you may be able to leverage continued supply in exchange for payment of all outstanding sums owed.
One of the best examples in recent times of proactive supply chain management was the successful completion by the Olympic Delivery Authority of the Olympic Park and Athletes’ Village in London. This was a project that was successfully completed despite some 43 potential insolvencies and 11 actual insolvencies in the construction supply chain. The impact of these insolvency events was mitigated through decisive early actions, which is imperative to alleviate supply chain risk.