Can I protect against bad customers?

My company supplies organic food and equipment to restaurants. Recently, one of my customers got behind with payments, then went in and out of administration, wiping their debts. I’ve ‘lost’ £6,000 and don’t think the restaurant was shut for one night. What can I do about this and stop it happening again?

A. James Bradney writes:
I’m afraid you’re unlikely to recover this debt. It seems the administrator has affected a ‘pre-pack’ deal where the business and its assets have been sold. This may have been to the former directors, without giving anyone else the chance to make a bid. This can be a useful tool to preserve viable businesses, but there have been cases of abuse. There’s a perception the process may lead to wrongdoing on the part of the directors by facilitating a debt-free ‘phoenix’ acquisition of the company’s assets or that the administrator will not maximise the business’ market value. As a result, a new code of practice for UK licensed Insolvency Practitioners came in on January 1 (SIP16 – Statement of Insolvency Practice 16), and this may help you.

To comply with SIP16, the joint administrator appointed to your customer’s business should have provided you with full details of the transaction that has occurred. Also, he may be required to convene a meeting of creditors at which you would be able to ask questions and potentially serve on a creditors committee. The administrator also has an obligation to report to the government’s Insolvency Service on the conduct of the company’s directors in the period leading up to administration. This would highlight any potential misconduct and, if any has taken place, it may offer you some redress. You should certainly advise the administrator of your concerns so that he can consider these when he prepares his report.

To minimise your chances of incurring further bad debts of this nature, I suggest you undertake thorough credit checks on your customers and review your terms of business, ensuring credit references are supplied before opening new accounts. 

Also, consider taking out credit insurance or obtaining personal guarantees from customers if the credit risk appears substantial. Finally, effective reservation of title clauses may provide you with the opportunity to exert leverage to obtain payment, either prior to or following your customer’s insolvency in so far as the debt relates to the dining equipment that you supply.



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