My company is in trouble because a client has declared insolvency

In periods of economic difficulty, many businesses find themselves in financial trouble because one of their major clients has gone bust. When this happens there are a number of things that must be done quickly to save the business.

The situation where one of your major customers has become insolvent while owing you money is all too common in today’s economic climate. Unfortunately where this happens, it is unlikely that you will receive any of the money that you are owed.

If your client has gone into liquidation, then the business will stop trading. One of the first jobs of the liquidator will be to sell the company's assets. If any money is raised in this way, the liquidator's fees and some employee's payments will be paid first. Any remaining funds will be shared between the outstanding unsecured creditors. However, where this list is long, the amount of return to each creditor is likely to be a very small percentage of what they are owed if anything at all.

Given that the possibility of getting paid any of the money you are owed is very slim, it is far better to focus your energy on how you can save your business. There are some key operational actions you should consider:

Renegotiate your own payment terms
Speak to your own creditors and try to negotiate longer payment terms with them. After all, the longer you have to pay your debts, the more time you will have to collect other money in.
Reclaim Goods Supplied
Check your contract to see if you are allowed to reclaim any of the good you have supplied to the failed business. If you are allowed to do this, you should act swiftly
Cut overheads
One of the main costs to any business is generally its staff. If you have lost a major client, it may be a long time until you can build up replacement business. In the mean time, it may be wise to reduce your staff overhead. This is not easy and there is always the worry that you may not be able to get back key staff if business picks up. However, it is often better to take this risk to avoid you business being forced into closure.

If your business is facing insolvency and none of the actions above is likely to resolve the hole in your finances, then you should consider a formal business rescue package - either a Company Voluntary Arrangement or Pre-Pack Administration.

Company Voluntary Arrangement
A company voluntary arrangement (or CVA) allows you to make a formal agreement with the company's creditors to settle its outstanding debt. In order to avoid the company from going into liquidation itself, the Creditors agree to accept reduced payments over a fixed period of up to 5 years. After this any outstanding debt is written off. 50% or more of a company's debt could be written off in this way.

Pre-Pack Administration
Pre pack administration (commonly known as phoenixing) allows the assets of an old company to be purchased by a new entity. The new business is then able to continue trading without the burden of the old company's debt. The old company is then normally liquidated.

This solution may be a better way of deploying available funds to give a business a better chance of long term survival rather than using them to try and stave off creditors.

Unfortunately it is almost inevitable that at one time or other, your business will face the difficult situation of not being paid by one of its clients. When this happens, it is important to take decisive action. If the client has gone into liquidation, it is highly unlikely that you will be paid. Given this, it is important to focus on the changes you need to make to keep your company afloat rather than the impossible dream of reclaiming any money owed.

Derek Cooper - November 2009

Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

If your business is in trouble, why not talk to us about a solution for your situation. More details at http://coopermatthews.com/business-recovery-services-advice.html

Cooper Matthews specialise in Business Recovery Services Advice providing practical insolvency advice for businesses with financial problems and to Directors with Personal Financial troubles. They have significant experience in working with small to medium sized businesses.

Prior to Cooper Matthews Derek Cooper was the Managing Director of Wilson Philips specialising in personal insolvency and financial restructuring. He previously worked for 11 years as a financial advisor for Allied Dunbar, and later the J Rothschild Partnership. Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic environment.

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