Insolvency of supplier or customer
The recent insolvency of a large UK construction company has been potentially devastating for many of the building company’s suppliers and sub contactors. How would I stand if one of my main customers went into liquidation?
Steven Corfield of FBC Manby Bowdler says: This very unfortunate liquidation has shown how vulnerable sole traders, small and medium sized businesses and major corporations can be to a large corporate insolvency.
It is a part of modern business that small suppliers often have to sign up to binding Contracts containing terms which are more favourably balanced in favour of the large company concerned. Hence contractual provisions may leave suppliers exposed when it comes to an insolvency event.
An insolvency event such as a company being put into liquidation or a bankruptcy of an individual will generally override contractual provisions. However there are some contractual clauses that can assist a supplier if it is able to include them in the contract such as one known as a Romalpa clause. The name of Romalpa came from a court case dating back to 1976 and is also known as a “retention of title clause”. It operates by stating that title for the goods remains with the seller until certain conditions have been satisfied (one such condition being the making of full payment of the price by the buyer). Such a clause may well prevent unpaid goods being lost in the liquidation. As an example without a Romalpa clause, title to frozen produce supplied to a retailer will informally pass when it is delivered and not when the price is paid so if it has delivered the goods and not been paid the supplier cannot seek to recover the goods on the insolvency.
A different aspect for insolvency is the position of property leased to a company which becomes insolvent. A lease will often contain a forfeiture clause which will operate in the event of an insolvency so the landlord can break the lease and seek to re let the premises. However a landlord may not wish to exercise the clause if the liquidator thinks he can sell the lease to a buyer which would enable the landlord to retain rental income for the future.
If there are no clauses in the contract which support recovery of unpaid goods then the liquidator will apply the law as prescribed by the Insolvency Act 1986 (as revised in 2002 by the Enterprise Act). On the assumption that there are insufficient monies to pay off all the debts the liquidator has various courses of action to pursue but when it comes to unsecured creditors it is frequently the case they will only receive a partial repayment or no repayment at all.
Liquidation is a complex area as are receivership and administration.
When signing up to a supply and/or purchase agreement for a major part of your business it is well worth the cost of having a commercial lawyer look it over and check the provisions relating to insolvency aspects. It is not always possible to do this but the adage of “not having all your eggs in one basket” has been around for a long time for a good reason.
