How will debtor liquidation affect my business?

When a company struggling with debt enters liquidation, there is always a knock-on effect for associated parties. If the failing company has outstanding debt at the point of liquidation, this may go unpaid, and in turn, have a detrimental effect on its creditors’ businesses. It is important, therefore, that you know where you stand as a creditor if your debtor faces liquidation.

How can I tell if my debtor’s company is failing?

As a supplier or creditor, it’s crucial to recognise when a partnering business is facing financial difficulty.

Signs that a debtor’s company may be failing:

Spotting the signs of a debtor business failing, enables you to take caution in supplying more goods, or lending more money, protecting you from potential further losses if the company should enter liquidation. These signs include:

·         Late/missed repayments or action on invoices

Due to the poor financial situation of their failing company, your debtor may struggle to make payments on outstanding invoices or debts. This can often lead to knock-on effect such as cash-flow problems within your own business.

·         Failure to respond to demand letters/emails

A clear indication that a partnering business is failing, is if they fail to respond at your attempts to make contact. If their declining financial situation means they are unable to repay the money they owe, they may choose to avoid you all together rather than facing any confrontation.

Facing financial difficulty is a stressful time for any business-owner, and it is understandable that they may not cooperate with you in their usual manner.

What happens if my debtor faces liquidation?

In the event of a debtor facing liquidation, how significantly you will be affected depends entirely on how much you are owed, and the position of the debtor to repay their creditors. A liquidator will contact you to inform you of the impending liquidation, and will be your main point of contact throughout the process.

Will I get back what I am owed?

When an insolvency practitioner (IP) is appointed to liquidate a company, the company’s financial situation is evaluated to establish how much of the outstanding debt can be repaid after the liquidator’s fees. This involves the valuation of assets, and accumulation of any cash funds that the company may have. When this is complete, the IP will conclude how may ‘pence in the pound’ of its outstanding debt the company can afford to repay.

‘Pence in the pound’ is calculated so that each of a company’s creditors receives the same percentage of what they are owed, for example:

If it is established that a debtor can repay 30p in the pound (30%), a creditor who is owed £1000 at the point of liquidation will be repaid £300. Equally, a creditor owed £10,000 will be repaid £3000 (30%). This is to ensure that no special preference is given to any of the company’s creditors, and is the fairest way of distributing available funds.

What can I do if I think my debtor company is failing?

If some or all of the signs of business failure are present in a debtor company, it is vital that you act as soon as possible to prevent further losses. This means ensuring that no further credit is given to the company from this point. Another option is to start legal action, looking at either issuing CCJ’s to the debtor company or initiating a winding-up petition.

In summary

As a creditor, the failure of a debtor company can be an extremely stressful time for all parties involved. Uncertainty over the level of repayment you will receive, if any at all, can have a detrimental effect on your company, causing all kinds of cash flow problems.

Key signs that a debtor company may be failing include:

• Late/missed payments on debts or invoices.
• Failure to respond to your attempts to communicate.

When a liquidator is appointed to a failing business, they will establish how much of the debt the company can repay to its creditors as a percentage based on ‘pence in the pound.’ This means that all creditors will receive the same percentage back of what they are owed.