Debtor Liquidation

Debtor Liquidation – how it may affect your business

My debtor has gone into liquidation – my business is now struggling.

There are often revealing signs that a customer’s business has financial difficulties such as:

  • Starting to pay invoices late
  • Making implausible excuses for missing payment deadlines
  • Ignoring phone calls and demand letters.

As a supplier, it can often be hard to draw a line in the sand when you have a long standing relationship with a customer so it is easy to allow the debt to accumulate.

If the debtor company has entered or is about to enter liquidation it is imperative you know your rights as a supplier. If you have a credit agreement and your customers company enters liquidation, you are owed all monies (including interest and late payment charges) up until the day it enters liquidation. Proof of debt must be provided, so ensure you have all the invoices, late payment and interest charges as well as all the letters chasing the debt close to hand as you will need to supply them to the liquidator on request. The liquidator has an obligation to contact all known creditors and inform them of the impending liquidation. They will provide you with a date of a creditors meeting will be held and although it is not obligatory for you to attend the meeting, we advise that you do so if you can, especially if you have comments to make regarding the directors conduct. It is possible for you to get someone else to attend in your place or you can vote in favour or against the debtor’s choice of liquidator.

It is essential you do not supply any more goods or services or give any more credit to the company from the moment you are aware of the company’s intention to enter liquidation. If you continue to supply credit the debtor is technically breaking the law.

The directors/shareholders may have decided to continue to trade by setting up a phoenix company which will buy back the assets of the old company at market value (this process is referred to as pre-pack liquidation). In this scenario you have the opportunity to continue to trade with the newly formed company if you wish, which might give you the possibility of recouping your losses through future trading. Obviously we would advise you do not offer any new credit terms and get them to pay upfront via a pro-forma invoice or pay cash on delivery for any products or services you supply.

Unfortunately, sometimes when a company suffers a significant financial loss due to their customer entering liquidation it can have a knock on effect and cause problems. If you are a director of a company that is suffering financially due to losses incurred from a customer going into liquidation, it is imperative you get advice as soon as possible.  There are far more choices available to you if you act quickly as the last thing that you would want is for your company to follow your customers into liquidation also.

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