What Happens if a Client Files For Insolvency?
Discover the process of business insolvency and how trade credit insurance offers protection in today’s uncertain economic climate
In today’s turbulent economic climate, UK businesses are facing myriad challenges.
While the inflation rate is on a gradual decline, businesses may still feel the ripples of the cost of living crisis affecting consumer behaviour, and with the UK now in a recession, it’s no surprise that insolvency rates are on the rise. This poses a significant risk to businesses that offer credit to their customers.
In this blog, we explore the process that happens once a business declares insolvency, and what you can do to protect yourself if a client becomes insolvent with bad debt.
What happens to a company declared insolvent?
When a company becomes insolvent, it triggers a series of legal and financial processes to sort its affairs and allocate its assets to creditors. Here is a brief overview of what typically happens:
Identify insolvency
When a company cannot pay its debts on time and experiences a significant decrease in cash flow, resulting in mounting pressure from creditors, it is known as insolvency. This can either be declared voluntarily by the company or initiated by creditors through legal proceedings.
Appointment of an insolvency practitioner
Once a company is declared insolvent, an insolvency practitioner (IP) is appointed to manage the process. The IP's role is to act as an impartial third party and ensure that the interests of all the stakeholders are taken into account. In some cases, the IP can be appointed by the company's directors, creditors, or the court. Creditors may establish an IP if the company owes them money and believes it is insolvent. The court may also get involved if it is in the interest of the creditors or shareholders.
Assessment of the company's financial position
Once appointed, the IP will take control of the company's assets and liabilities and work to recover as much money as possible for the company's creditors. The IP will also investigate the company's affairs to determine the cause of the insolvency and whether any legal action needs to be taken.
Decision of insolvency procedure
Once the IP has evaluated the company's condition, they choose an appropriate procedure to follow. There are several insolvency procedures available, including administration, liquidation, or Company Voluntary Arrangement (CVA). Administration is a procedure that aims to rescue a company by restructuring its operations or selling its assets. Liquidation, on the other hand, involves winding up the company and selling off its assets to pay off its debts. A Company Voluntary Arrangement (CVA) is a legally binding agreement between the company and its creditors to repay debts over an agreed period. This decision determines the course of action that the company will take, with the aim of protecting its interests while the creditors receive whatever payments are due.
Distribution of assets to creditors
Creditors are notified of the insolvency proceedings and given an opportunity to submit claims for outstanding debts. The IP communicates with creditors throughout the process, providing updates on the status of the insolvency and the expected distribution of assets. When the available assets have been identified, the IP takes control and proceeds to sell them off to creditors. The order of payments is based on priority, with secured creditors like banks getting paid first. This means that, in instances where assets cannot cover debts, you (as a creditor) may not receive the full amount owed.
Review and investigation
During the process, the IP conducts a thorough review and investigation into the company's affairs to identify any misconduct or wrongdoing by the directors. This may result in legal action being taken against the directors for engaging in wrongful trading or for breaching their duties.
How to protect yourself from customer business insolvency
An effective strategy to reduce the risks of non-payment and insolvency is to use trade credit insurance. This type of insurance provides a safety net for businesses by covering a percentage of the outstanding debt if a customer is unable to pay.
By transferring the risk of non-payment to the insurance company, your business can protect themselves from the negative financial impact of insolvency.
This proactive approach not only protects your business from the financial fallout of bad debt, but also provides you with peace of mind, allowing you to focus on growing your business and meeting ongoing goals.
Trade Credit Insurance from PIB: a safety net for uncertain times
With so much uncertainty surrounding the stability of the UK economy in 2024, it is essential to take proactive measures to ensure the survival of your business.
Our tailored trade credit solutions are designed to help you navigate through turbulent times, protecting your cash flow and allowing you to continue pursuing growth objectives without fear of client insolvency.
If you're concerned about the threat of customer/client insolvency, don't hesitate to contact our team today.