Management
Administration – A Supplier and Customer Perspective |
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| Management | |
| Written by Philip Jones, Consultant Solicitor with Keystone Law | |
| Tuesday, 17 January 2012 | |
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How should a business prepare for this eventuality of going into administration?
The news that Von Essen has gone into administration and their suppliers are set to lose £65m has raised understandable concerns for businesses. For both those going into administration and those owed money it is a worrying and stressful time. But how should a business prepare for this eventuality and what should be done to protect your business’ position? Suppliers need to assess a number of issues which may affect their risk. Some may be linked. So a supplier which is confident that it can retain title to items it supplies until it has been paid in full may be more willing to allow credit and extend the payment terms it requires. The most obvious starting point concerns the level of credit (if any) and payment terms the supplier is willing to allow. Clearly a commercial balance may need to be struck. The supplier’s customers may well want, or need, a substantial level of credit and an extended payment period. The supplier may wish to resist this from a risk perspective but in its quest for business may feel uncomfortable opposing its customers’ demands. Whatever terms are agreed the supplier must ensure it has proper procedures in place to monitor the customer’s compliance with them. In terms of risk reduction the supplier’s ideal is to move itself as far as possible from simply being an unsecured creditor of the customer. A variety of methods might be considered. Where the supply is of goods retaining title to those goods until the supplier is paid is likely to be beneficial. How realistic this is depends upon the nature of the goods. The more the goods retain their original form after being supplied the easier this is likely to be. Obtaining security over assets of the customer covering amounts due to the supplier may assist, though this is unlikely to be available in the majority of cases. Security from third parties, such as guarantees and payment bonds from other companies in the customer’s group, financial institutions or individuals, of sufficient substance to be able to pay the amounts owing to the supplier, might also be considered. Other risk management tools which a supplier might consider are credit insurance and finance funding the period before the customer pays its debts. Credit insurance can provide support against delayed payment or payment failure due to insolvency of the customer. The availability of such insurance and terms on which it is available may be less advantageous than was the position a few years ago but cover can still provide useful support. Funding may take various forms depending upon the financial requirements of the supplier. If finance linked directly to cash flow is needed factoring or invoice discounting facilities can provide support in terms of raising finance against unpaid debts, sales ledger administration, credit control and assistance where debts are not paid due to customer insolvency. The customer’s perspective about terms of supply will normally be that the more flexible the terms which can be agreed the better. Continuity of supply will clearly be important to a customer even if administration appears likely. However care is needed to ensure that the customer’s business is not operated improperly. Where administration appears likely the interests of creditors may be paramount and the directors may have a duty to the company to act in the best interests of creditors. If the customer cannot alter its supply requirements so that its need to obtain credit is reduced or removed its incurring of credit needs careful consideration. If administration were to lead on to the customer’s eventual insolvent liquidation then obtaining credit when there was no reasonable prospect of avoiding such a liquidation could result in personal liability for the customer’s directors. A careful balance may therefore need to be struck between continuing the customer’s business and incurring credit sensibly to do so. Clearly documenting the reasons behind any such decisions will also be important. Once a customer enters administration the administrator will be responsible for negotiating with suppliers the terms on which, if at all, they are willing to supply the customer. This will raise additional issues but this article is not the place to deal with them. The above provides a high-level overview of the difficulties which administration and the period leading up to it raises for suppliers and customers. Where customer credit is needed no approach will be bullet proof but as this article attempts to demonstrate a little forethought can identify and reduce the risks undertaken.
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