Protecting supplies and cashflow

If you run a business supplying goods or services to customers then you are likely to be part of a supply chain.

If a supplier's business is having financial problems and as a result supply has become interrupted, you will need to consider whether it is possible to terminate the supply agreement and seek another source of supply. You may also wish to consider delaying payment until the point of actual delivery to avoid paying for goods which you never receive.

Sometimes a supplier or one of its assets may be so integral to your business that to simply terminate and seek an alternative will not be possible. In this case, you may wish to consider whether 'step-in rights' should be included in your supply agreement. These will allow you to literally step in and take over to keep things moving, avoiding a total breakdown. If the integral factor is an asset, you may wish to consider including provisions in your agreement that the other party may only offer third party security over that asset with your consent.

You should also consider provisions to protect your interests should a business go into administration including negotiating a payment upfront. Other options are available such as 'retention of title' clauses, letters of credit or guarantees from appropriate third parties or the individual directors of a customer company.

Protection long term

It may be attractive to offer 'deals' or sell off assets cheaply to raise cash but directors should consider their duties.

Directors are required to promote the success of their company and can be held accountable for debts in situations where a company has gone into insolvent liquidation but the directors continued to trade knowing that the company was unable to pay its debts. Transactions where assets are sold cheaply or at an 'undervalue' can be set aside and returned to the business or the 'proper' price demanded. You should also be careful not to offer 'preferences' to current creditors.

Borrowing

Borrowing is an integral process in business, ensuring continual cash flow. You may find that income has slowed and you cannot keep up with loan repayments.

Drastic action such as foreclosure is not in the interests of lenders and they will potentially negotiate. A bank may agree to suspend temporarily its right to foreclose and may then renegotiate the terms of your loan. A subsequent restructuring may include extending the repayment date or decreasing the monthly repayments which will ease the immediate burden.

It is always good practice to seek professional advice as soon as it becomes apparent that your business is in financial difficulties.

Acquiring assets of another company from an administrator

The main benefit of acquiring the assets of an insolvent company from an insolvency practitioner is that you can obtain a business or its assets at a much lower price.

Purchasers should be aware of the potential pitfalls. The seller will avoid giving warranties so you will be buying on a 'sold as seen' basis. In these circumstances there will be very limited or no rights to claim against the seller as with a normal sale and as the proceeds will need to be distributed to creditors immediately, monies will not be retained to settle potential claims.

When buying single assets, information will be scarce and the onus will be on the buyer to investigate the title as fully as possible. Physical inspection may prove difficult if you cannot gain access to the premises.

You will also need to consider when acquiring all the assets as a going concern that legal responsibility for employees will pass to the buyer. You will therefore need to take advice to ascertain if the purchase will initiate a transfer and what your level of liability and future responsibility will be, together with what employment law procedures you need to follow.

If you require any further advice or assistance please contact Sue Dowman or a member of the Corporate Commercial team at Wortley Byers on 01277 268355 or sdowman@wortleybyers.co.uk.

<< Return to News page