Five Elements for Chinese Companies trading with UK counterparts Part 1: Gold

In our work with international companies supplying goods to the UK, we see a number of common issues arising regularly. In this series of five articles based on the five elements of the Wu Xing, we flag these key risks of doing business with UK customers and how a supplier can best protect itself, ensuring harmony in its commercial activity and business relationships. First is Gold, and ensuring you get paid for goods supplied, avoiding or minimising dangers, difficulties and dead ends.

Gold: harvest prosperity for your business and business relationships by getting paid promptly and in full

The top issue on which we are asked to assist our international trade clients is chasing payment. We therefore recommend that all suppliers ensure that they put themselves in the best possible position in the event of a customer default at the time when they enter into the contract or supply under standard terms of business.

The best claim is a property claim. With a retention of title (ROT) clause, a supplier remains the owner of the goods delivered to the customer until it has been paid in full. The supplier is entitled to repossess the goods (or receive payment) if the customer becomes insolvent.

Other contractual protections include:

  • Requiring full payment or a deposit in advance of delivery be made before further delivery of the goods/services by the supplier (or request a deposit payment which ensures that at least part of the payment is secured).
  • Providing for interest on late payments.
  • Other penalties in the event of late payment, such as a right of the supplier to withhold further deliveries.
  • Requiring bank guarantees for payment, credit insurance or other payment/delivery terms (letters of credit or documents against payment).
  • A lien, which is a right to retain other property or goods of the customer until outstanding sums are paid.
  • Allowing termination or suspension of the contract if the customer enters financial difficulty (to avoid being obliged to supply if payment is in doubt).

As with all contractual provisions, each of the above will need negotiating and then careful drafting to ensure they are effective and enforceable under applicable law.

Five Elements for Chinese Companies trading with UK counterparts Part 2: Wood

In our work with international companies supplying goods to the UK, we see a number of common issues arising regularly. In this second of five articles based on the five elements of the Wu Xing, we take the theme of Wood, the symbol of early childhood and spring, reminding us of the need to start well and plan ahead for future uncertainty.

Wood: lay a strong foundation with a clear contract that protects you from

uncertainty by allocating Brexit risks in your agreed terms

The UK may leave the European Union (“EU”) on 31 October 2019. The exact nature and therefore impact of this so called “Brexit” are uncertain, and the political situation remains very fluid. That said, clients can take steps now to allocate certain risks in their contracts and terms of business.

We recommend that – when entering new supply or distribution contracts or reviewing or renegotiating existing terms of business between now and Brexit – clients consider:

  • Whether any references to territory are clear (for example in an exclusive distribution agreement). Does a reference to the EU include the UK or not? Does a reference to “EU law” cover how such law is to be applied and interpreted in the UK after Brexit?
  • Whether they will be able to vary prices in the event of increased customs or other tariffs or taxes?
  • Who is responsible for customs clearance and consequent potential delays in delivery times?
  • What regulatory requirements the goods must satisfy (in the event of divergence between the UK and EU) and who is responsible for conformity assessments? Consider if the use of UK or EU components might have an impact on rules of origin for tariff purposes.

In relation to existing contracts, Brexit or its effects may trigger a renegotiation clause or a force majeure clause or may even amount to frustration of the contract (if performance becomes impossible). The English Court dismissed a frustration argument in the recent case of Canary Wharf v EMA[1], showing that each case will be very fact specific, so we recommend advice is taken before ceasing to perform under any contract.

Five Elements for Chinese Companies trading with UK counterparts Part 3: Water

In our work with international companies supplying goods to the UK, we see a number of common issues arising regularly. In our previous articles we looked at contractual payment protections for our clients. In this third of five articles based on the five elements of the Wu Xing, we take the theme of Water and explain what happens if a customer faces the fluid uncertainties of financial difficulties and descends into the winter of a formal insolvency process.

Water: understand what happens and your rights if your customer enters insolvency.

Most customers of our clients are English limited companies. If they hit significant financial difficulty, they may well enter a form of English law insolvency. It is therefore important for all our international clients to understand what such an insolvency could mean for them.

If a customer enters administration, this means that there is a chance that the business can be saved as a going concern. The customer company will be under the control of an administrator, one of whose objectives will be to satisfy the company’s creditors. This is no guarantee that all creditors will receive full compensation as it depends on the value of the company’s assets and some creditors (e.g. employees, and the tax authority, HMRC) get paid in preference to unsecured creditors. An administration may be converted into a liquidation if it becomes clear at any point that there is no future as a going concern. Many administrations end in a sale of the business and assets, which can be through a “pre-pack” process (where the sale is arranged before administrators are appointed to facilitate the deal). In this case, liabilities stay with the company and are paid from the sale proceeds. There is unlikely to be any recourse to the new owner of the assets.

If a customer enters liquidation, this is usually the first step towards being dissolved (ceasing to exist as a company). The liquidator, like the administrator, will realise all the assets of the company to pay off the creditors to the extent possible. Usually, creditors only receive a % of the debt owed to them. Once the assets are all sold, the company is dissolved (legally ended).

A company in administration or in liquidation is usually subject to a “moratorium”: no new claims can be made against it, and ongoing proceedings are stayed. Creditors can however file a proof of debt and should do so.

If a customer enters into a voluntary arrangement, the management of the company stays the same. The objective is for the company and its creditors to come to an arrangement or restructuring that allows trade to continue while reducing financial pressure from creditors. The largest creditors (in value of the total debt) may be able to approve the arrangement even if not all creditors do not agree.

In all insolvency proceedings, the insolvency practitioners have wide discretionary powers under English law to fulfil their duties. For example, they can dispose of assets, start proceedings, manage the company as they see fit or again challenge antecedent transactions (which we look at next in Part 4 in this series).

Five Elements for Chinese Companies trading with UK counterparts Part 4: Fire

In our work with international companies supplying goods to the UK, we see the same issues arising regularly. In Part 3, we examined the types of insolvency process a customer may be subject to. In this fourth of five articles based on the five elements of the Wu Xing, we take the theme of Fire and explain the significant powers that arise for the insolvency practitioner on the entry into insolvency: to investigate propriety and recover assets to the central pool to pay creditors.

Fire: the great powers of the insolvency practitioner regarding transactions defrauding creditors

An insolvency practitioner (an “IP”) (whether liquidator or administrator) may apply to the Court to set aside certain transactions that took place before a company entered insolvency. In this way, assets or funds can be recovered into the central pool from which creditors are paid. These “”antecedent” or “reviewable” transactions are if:

  • an asset or property of the company has been sold at an undervalue.
  • the company gives a preference to a creditor that puts him in a better position than other creditors before the company enters insolvency.
  • the company had entered into an extortionate credit transaction (one with grossly exorbitant terms).
  • the company entered into an invalid floating charge, that is a charge to secure loans already made or the costs of goods and services already provided.
  • the company has entered into a transaction is with the clear purpose to defraud the creditors, that is to remove assets of the company from the reach of the IP and the creditors.

Different time periods apply to the different types of reviewable transactions – for example a sale at an undervalue must have been within two years of the company entering insolvency.

In addition, the IP will review the conduct of the directors of the insolvency company and consider whether they are liable for wrongful or fraudulent trading. If a director knew, or should have known, that there was no reasonable prospect that the company would avoid an insolvency procedure but nonetheless allowed it to continue trading, then that director may be required to make a contribution to the company’s assets.

Be warned, if you have been lucky enough to be paid by a customer who then enters insolvency, the payment to you may be considered a preference or, if the customer has already entered insolvency, may be subject to statutory “claw back”. You may be required to pay into a pool to be shared by all creditors even if you did not know that the customer was in difficulties or there has been a winding up order made. The Court will in some circumstances “validate” a payment made but these grounds are very narrow. The best protection is to know your customer and be aware of its affairs.

Five Elements for Chinese Companies trading with UK counterparts Part 5: Earth

In our work with international companies supplying goods to the UK, we see a number of common issues arising regularly. In our previous articles, we explained what happens if a UK customer hits financial difficulties and the powers of insolvency practitioners. In this last of five articles based on the five elements of the Wu Xing, we take the theme of Earth and explain the options to get paid by an insolvent customer, completing the business as usual cycle of supply and payment and thereby restoring balance to your business

Earth: how to ensure your customer’s insolvency leaves a sweet not a sour taste in the mouth and get paid in the event of insolvency

Absent a retention of title clause (or any other protective clause in a contract – see Part 1 in this series), a creditor of an insolvent company has the following options.

  • A creditor should file a proof of debt in the insolvency process, supported by evidence such as the sales contract, proof of delivery and unpaid invoices. Aside from filing a proof of debt, in administration and liquidation, creditors are usually barred from starting proceedings against the company.
  • If the directors of the now insolvent company entered into transactions at an undervalue for the purpose of defrauding creditors (for example putting assets beyond reach), a person prejudiced by such transaction may apply for leave from the court to challenge it.
  • If directors or officers of the customer made any representations about the customer’s solvency to the supplier in reliance on which the supplier continued to deal with the customer, and the director knew or ought to have known that their statement was untrue, then the director might be personally liable for that misrepresentation (also known as the tort of deceit). This is only useful, of course, if the director has enough personal assets to meet the debt.
  • If the insolvency practitioners themselves missed an opportunity to collect funds for the pool of creditors or acted unfairly, a creditor could challenge them. However, given the wide discretionary powers the insolvency practitioners enjoy, it is rare to find sufficient evidence of wrongdoing to support such a claim.
  • Finally, the insolvency practitioner (the “IP”) has wide powers to investigate the insolvent company’s affairs, commence actions and recover assets for the benefit of all creditors so creditors should consider sharing information about the insolvent company and its directors that would assist the IP. We explored some of these powers in Part 4 in this series.