Creditor protections in insolvency proceedings
In 2015, approximately 113,000 (mostly medium-sized) businesses were trade creditors in insolvency procedures, according to research by the insolvency trade body, R3. That’s around 6% of all UK businesses being put at risk because of monies owed by another firm or individual.
Restrictions imposed on civil litigation costs, which came into effect back in 2013, didn’t cover insolvency procedures, but a recent Government statement (available here) has confirmed this will all change in April 2016.
Currently, insolvency proceedings permit the use of ‘no win, no fee’ claims, essentially making an unsuccessful defendant liable to pay the claimant’s solicitor’s success fee (i.e. a risk based uplift on fees) and after the event (ATE) legal insurance premiums as part of a costs order. From April 2016, however, this will no longer be the case. Instead, the liability will pass to the funds held by the insolvency practitioner; funds which would otherwise have passed to the insolvent company’s creditors. As seen above, that could affect a sizeable number of businesses.
Trade creditors rank fairly low on the list for insolvency repayments. What steps, therefore, can your business take to help protect itself in 2016? Here’s a few thoughts:
- Think carefully about who you trade with. What are the risks of trading with them?
- How flexible is your cash flow? For example, do you pay your own suppliers in advance, but then find you’re not paid in advance for your own goods or services?
- Introduce efficient credit control procedures, or update your existing procedures, to help manage what’s owed to your business.
- If you do become a trade creditor in insolvency proceedings, engage with the insolvency practitioner or Official Receiver at the early stage possible to help maximise your returns.