Surviving customer insolvency

Monday October 24, 2016

A bankrupt customer can put a hole in your cash flow, but it needn't sink you.

When one of your customer goes bust, you've got to be extremely careful that your own cash flow pipeline doesn't spring a leak. It may not be a total wash-out, though - so make sure you know your rights. If a customer declares bankruptcy, there are things you can do limit the damage to your business.

Customer bankruptcy is just one of the cash flow perils you're going to face out on the Business Battlefield. If you've been living in the RIFT for a while already, you'll have heard us talk before about protecting your cash flow in case you hit an unexpected lean period. A customer going bust can send an uncomfortable jolt through your whole business, so it's important to know how to ride it out.

In general, bankruptcy means your customer's assets are split up between its various creditors. You're unlikely to be the only one waiting for their share, so everything's got to be done the right way. Be sure to have full records of what you're owed ready. Once your customer's formally declared insolvent, it's too late to take action yourself to get your money back on your own.

To make things even messier, there are several different kinds of insolvency:

  • Individual Voluntary Arrangements (IVA)
  • This is where someone arranges with their creditors to pay off debts. It's an alternative to bankruptcy, but it's still legally binding. It does protect the debtor from legal action, though.
  • Company Voluntary Arrangements. This is basically the same as an IVA, only it applies to companies, rather than individuals.
  • Compulsory Liquidation. This is where the courts step in to wind up a company that can't pay its debts. It's usually kicked off by one of the creditors, rather than chosen by the debtor. There are strict rules about which debts get paid off first.
  • Creditors' Voluntary Liquidation. Companies can be wound up without the need for a court order, if the Shareholders agree. There are still generally still charges to pay and an order of priority for paying off debts, though.
  • Administration. With Limited Companies and Partnerships, Administration can be a way of getting the business back on its feet again. Administrators are either appointed by a court or by the business itself when it's struggling under a lot of debt. The goal is to rescue the business, or at least to get a better deal for creditors if there's no saving it.

When a customer goes bust while owing you money, you're automatically contacted by the Official Receiver or Insolvency Practitioner. That relies of there being a record of the debt, of course. If you've heard nothing but think your customer's bankrupt you can check at either the Individual Insolvency Register (for people) or Companies House (for businesses).

You can also check if your customer's going through compulsory insolvency by ringing the Insolvency Enquiry Line (0845 602 9848), or by email at enquiryline@insolvency.gsi.gov.uk

As with all cash flow crises, surviving a customer bankruptcy is more about plugging the main leak than scooping up every last drop of spilled water.  That's the key to staying afloat - so keep your head up and check back here for more Voices from the RIFT...

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