When a client becomes insolvent, it can have a big impact on your business. Whilst it is a tough situation for them, it can also cause a disruption in the smooth running of your business.
It may be that you have bad debt written against your company and it can affect your cash flow, not to mention your bottom line.
However, there are some things that you can do to minimise the impact of an insolvent client. Firstly, try to negotiate with them to reach an agreement that suits both parties.
If you hold security over their assets, make sure that you take steps to protect your interest in those assets. Finally, keep good records of all correspondence and transactions with the insolvent client, as this will be helpful if you need to take any legal action in the future.
If you customer has gone bust, one major worry is about getting paid. There are certain measures you can take to protect yourself and your business. If the company goes into liquidation, you can apply to the liquidator to request to form a creditors committee, while it will not give you a say in how the assets are distributed, it will allow you to understand the reason for the failure.
While there’s no guarantee you’ll get paid if a client goes bust, taking these steps can give you a better chance of recouping your losses.
Has your client actually gone bust?
As a creditor, you may be owed money by a company that has ceased trading. If this is the case, it is important to act quickly in order to maximise your chances of getting paid. The first thing you need to do is to establish whether the company is truly insolvent or if they are just trying to buy time.
Some companies will claim that they have ceased trading or gone out of business in order to avoid paying their creditors. If you suspect that this is the case, you should check the company’s website and social media accounts for any signs of activity. If the company is still active, you should contact them directly to discuss payment arrangements.
However, if you are unable to get in touch with the company or if their website and social media accounts have been inactive for some time, it is likely that they are indeed insolvent. In this case, you should take steps to protect your interests by filing a Proof of Debt with the liquidator.
This will give you a greater chance of being paid when the company’s assets are sold off. Corporate insolvency can be a complex and confusing process, but as a creditor, it is important to be aware of your rights and take action quickly in order to maximise your chances of getting paid.
The type of business your client runs will determine their insolvency options and your likely hood of seeing a return of your money. For example, sole traders or partnerships will have different options to that of a Limited Company or Limited Liability Partnership (LLP).
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Sole traders and non-limited partnership
Sole trader or none limited partnership only have two options if they become insolvent, these are:
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Individual Voluntary Agreement (IVA)
An Individual Voluntary Agreement, or IVA, is a type of debt agreement between a debtor and their creditors. Under an IVA, the debtor agrees to repay their debts over a fixed period of time, usually five years. During this time, the debtor will make monthly payments to their creditors, which will be distributed among them according to the terms of the agreement. Once the repayment period has ended, any remaining debt will be written off.
What this means for you?
However, it’s important to understand that not everyone is eligible for an IVA. In order to be eligible, the client must have a regular source of income. If the business agrees to the terms of the IVA, they are legally bound to it. What does this type of arrangement mean for you?
The amount of money that is received may differ depending on the client’s situation and the agreement that is put forward. It’s highly unlikely that you will receive the full amount you are owned from your creditor. For businesses that are struggling to receive payments, it’s important to understand the ins and outs of an IVA before agree to anything.
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Bankruptcy
When a sole proprietor or partnership owes more money than they can realistically hope to repay, they may consider declaring bankruptcy. This legal process involves petitioning the court for relief from some or all of the debts owed. In order to declare bankruptcy, the individual or business must first be deemed insolvent, which means that their liabilities exceed their assets.
Once bankruptcy is declared, the court will appoint a trustee who will oversee the distribution of the debtor’s assets. In some cases, the debtor may be able to keep certain assets, such as their home or car. However, most unsecured creditors, such as credit card companies, will not be repaid in full.
Although declaring bankruptcy can provide much-needed relief for those who are struggling to pay their debts, it should be seen as a last resort. It will damage the debtor’s credit rating and make it difficult to obtain loans in the future.
What this means for you?
It’s unlikely that you will be able to get back any of the debts you are owed if your client declares bankruptcy. It’s always best to check with your clients’ trustee in bankruptcy, but the is little chance of you seeing any money returned to you.
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Limited Companies and LLP’s
When your client traded under a limited company or LLP, there is a better chance of a dividend being made to you. An insolvency practitioner will be advising your client on the best way forward, with the creditors interest placed firmly at the front.
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Administration
If your client is insolvent, the court may appoint an insolvency practitioner to be an administrator for the company. The administrator’s role is to manage the company’s affairs, business and property. They will work with creditors to reach a compromise about the company’s debts.
The aim is to rescue the company as a going concern, or if that’s not possible, to realise its assets for the benefit of its creditors. If your client is facing insolvency, it’s important to get advice from a solicitor as soon as possible. They can help you understand the options available to your client, and how best to protect their interests.
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Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is a formal arrangement between a company and it’s creditors to repay debts over an agreed period of time. This arrangement can be used to avoid insolvency and protect the company from being wound-up by its creditors. In order to be eligible for a CVA, the company must be insolvent or close to insolvency.
The company must also have a realistic prospect of being able to repay its debts within the agreed time frame. If the CVA is approved by creditors, it will bind all unsecured creditors of the company. This means that they cannot take any further action against the company, including taking legal action to recover debts or winding-up the company.
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Company Voluntary Liquidation
A company voluntary liquidation (CVL) is a process whereby a company can be wound up by its shareholders. This type of liquidation is typically used when a company is insolvent and is unable to pay its debts. In a CVL, the company’s assets are sold off and the proceeds are used to pay creditors.
Any remaining funds are distributed to shareholders. While a CVL can be an effective way to wind up a company, it can also have negative consequences for shareholders. In particular, shareholders may lose their investment in the company and may even be liable for the company’s debts. As such, it is important to seek professional advice before considering a CVL.
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Compulsory Liquidation
If your client becomes insolvent, you have the option of forcing their company into liquidation. This process begins with your issuing a winding up petition against your client in the court for permission to force the move. They will need to provide detailed information about the money they owe in order to be approved.
If the company is granted permission to go into liquidation, their assets will be seized in order to repay creditors. This process is known as compulsory liquidation. While it may seem like a daunting task, working with a professional can help to make the process go more smoothly.
Understanding your role
When dealing with a client that has gone bust on you, the best way to approach it is to make sure that you understand the process that your client is going through. Insolvency can be caused by many different factors, so it’s important to get in contact with your client’s insolvency practitioner to find out the formal situation and how best you can be advised.
There are many different ways that you can help your client through this difficult time, so it’s important to be informed about the options available to them. Insolvency can be a stressful and challenging time for both you and your client, but by getting informed and seeking professional advice, you can help them through it.
How to mitigate your losses
As a business owner, you always want to get paid for the work you do. But what happens when your client is insolvent and can’t pay you? If you find yourself in this situation, there are a few things you can do to protect your business and minimise losses. Check to see if the client has any assets that could be used to pay you.
If so, you maybe able to file a lien against those assets. While there’s no guarantee that you’ll get paid if your client is insolvent, you need to act quickly in order to protect your business and mitigate losses to avoid it affecting your cashflow and business.
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Make a claim
Making a claim with the insolvency practitioner will register your loss, if the company has assets then a distribution will be made to creditors by the liquidator. It’s highly likely you will not receive all the money you are owed, but you may get a proportion of it.
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Retention of title clauses
A retention of title clause, also known as a ROT clause, is a clause that is often included in sales contracts. This clause stipulates that the title to the goods sold under the contract will not pass to the buyer until the full purchase price has been paid. In other words, the buyer does not become the owner of the goods until they have paid for them in full.
This clause can provide important protections for sellers, as it ensures that they will retain ownership of the goods until payment has been received. It also allows sellers to reclaim the goods if the buyer defaults on their payments. However, retention of title clauses can also be complex and may need to be carefully drafting in order to be enforceable. As such, it is always advisable to seek legal advice before including such a clause in a contract.
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Use their data
If you have similar customers, there may be opportunities to do business with them as well. For instance, the liquidator offer for sale assets or intellectual property that you could purchase from them in order to gain new clients for yourself. Of course, it’s important to do your homework before approaching a potential customer. But if you have similar customers, it’s worth exploring the possibility of doing business with them in order to grow your business.
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Stay in contact
Developing a good relationship with your client is important for many reasons. It helps to build trust and understanding, and can make it easier to resolve disagreements. In some cases, it can also lead to improved financial outcomes. This is particularly true in the case of insolvency. If a client has gone into administration, they may eventually start trading again. If you have maintained a good relationship with them, you may be in a better position to receive the money you are owed. Similarly, if a client is facing insolvency, they may be more likely to work with you to find a solution that is mutually beneficial. Either way, it pays to keep lines of communication open with your clients.
Conclusion
Learning that one of your clients has gone bust, not only do you lose the potential revenue from that client, but you also may be left owed money for work that has already been completed. While the chances of actually collecting such a debt are slim, there are still steps you can take to protect your business.
It is important to stay informed about the insolvency proceedings. This will help you to understand the timeline and what, if any, assets the debtor may have that could be used to repay creditors. Additionally, you should take care to document any interactions you have with the debtor and their representatives.
This documentation can be helpful if you decide to pursue legal action in an attempt to collect the debt. Finally, it is important to manage your own expectations. It is unlikely that you will receive full payment, but taking these steps can help to minimise the financial impact on your business.
Read more: How to protect your business from insolvency
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.