When a client of yours becomes insolvent, it can have a big impact on your business. Whilst it is a tough situation for them, it can also cause a disruption in the smooth running of your business. It may be that you have bad debt written against your company and it can affect your cash flow, not to mention your bottom line.
When you think a client might have gone bust, you may still have options. Depending on the situation and the insolvency process they go through, there are certain ways you can still protect your business.
Find out their exact situation
It’s important to determine at what stage of insolvency your client is at. The process isn’t always straight forward, and different outcomes could have a different impact on your business.
It also depends on what type of business your client runs. For example, sole traders or partnerships will have different options to that of a Limited Company or Limited Liability Partnership (LLP).
Sole traders and non-limited partnership
When a sole trader or partnership becomes insolvent, there are two options they can take.
Individual Voluntary Agreement (IVA)
An agreement that is made with creditors to pay back all or part of their debts. The client will agree to make regular payments to an insolvency practitioner. This money is then divided amongst all the people they owe money too.
What this means for you?
Not everyone is eligible for an IVA. Usually, it means your clients still have a regular source of income. If you agree, as a business, to accept the terms of the IVA it means you are legally bound to it. What it doesn’t mean is that you will receive some of the money that is owed to you. This may differ depending on the situation of the client and the agreement that is put forward.
Bankruptcy
The other option for sole traders and partnerships is to declare bankruptcy. This means your client will petition to the court to seek relief from some or all of the debts they owe because they have become insolvent.
What this means for you?
When your client becomes bankrupt, it’s unlikely that you will be able to get back any of the debts they owe. It’s always best to check with your clients’ insolvency practitioner, but the chances of you seeing any money is slim.
Limited Companies and LLP’s
When a client is a limited entity, they have more options available to them. They will be advised by their insolvency practitioner on the best solution, dependent on their situation.
Administration
When your client is insolvent, the court may appoint an insolvency practitioner to be an administrator for the company. It protects your client’s business until they are able to form a plan that may save the company, which means you’re unlikely to see any money.
Company Voluntary Arrangement (CVA)
A CVA is similar to an IVA, in that your client will get support from an insolvency practitioner to come to a legal agreement with creditors on repaying debts.
Compulsory Liquidation
When your client becomes insolvent, they can put their company in liquidation. This requires your client going to the court to force the move via a petition with information regarding the money they owe. If the company is forced into liquidation, their company assets are seized in order to repay creditors.
Understanding your role
Quite often, there isn’t much you can do when your client becomes insolvent. However, the best way to find out is to make sure you understand the process your client is going through. Regardless of the situation, it’s important that you get yourself informed and get in contact with their insolvency practitioner so that you know what the formal situation is and how best you can be advised.
It is also important to find out in case your client isn’t using it as an excuse to bide time until they can pay their debts. Check their company pages, contacts and social media to make sure they have officially ceased trading too.
How to mitigate your losses
If your client is insolvent and following one of the above procedures, you need to realise that seeing any money from your client is slim. Therefore, it’s integral to find ways to protect your business and mitigate losses to avoid it affecting your cashflow and business.
1. Make a claim
If you do want to see some money coming in, it is always worth making a claim. You can do this via the liquidator or their insolvency practitioner. You are unlikely to receive all the money you are owed, but you may get a proportion of it.
2. Use their data
If you have similar customers, you could find information on your client’s customers to generate more business for yourself. They may have assets or intellectual property you could purchase from them in order to gain new clients for yourself.
3. Stay in contact
Sometimes, insolvency can’t be helped. If you have developed a good relationship with your client, it may be worth staying in contact. Particularly if they have gone into administration and may start trading again. Maintaining a good relationship could up your chances of receiving the money you are owed one day in the future.
If your client has gone bust, you need to manage your own expectations. Whilst chances of receiving money are low, there are still ways you can protect your business to ensure that your own cashflow isn’t heavily impacted. Manage your expectations and stay informed for the best outcome for your business.
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