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:

  1. A creditor should file a proof of debtin 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.
  2. 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.
  3. If directors or officers of the customer made any representationsabout 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.
  4. If the insolvency practitionersthemselves 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.
  5. 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 informationabout the insolvent company and its directors that would assist the IP. We explored some of these powers in Part 4 in this series.