It can be concerning when a company that owes you money is placed into Administration. But receiving a proposal explaining that a pre-packaged sale of the customer’s business has taken place raises the question; should they continue trading with the new entity?
Trade creditors usually find out that a customer has entered into Administration upon receiving a letter and set of proposals. If the insolvent business has completed a pre-packaged sale, with the same director at the helm of the new company, creditors should receive a detailed explanation, including why this course of action has been taken, within a week of the commencement of the Administration.
Proposals should be considered with care
Proposals should provide a detailed explanation justifying why the pre-packaged sale was undertaken and why alternatives were not appropriate. They should contain information about the marketing campaign conducted and the sale price achieved. If a previously connected party has purchased the insolvent company out of Administration, the Administrator must include Statement of Insolvency Practice’s (SIP) 16 disclosures, providing further details of why the business has been sold to them.
Creditors deciding whether to continue trading with the new company and on what terms, can present a genuine dilemma. There could be an opportunity to protect future revenues by continuing trade with the new entity, if creditors are willing to cut their losses and accept that existing debts may never be paid in full. However, there’s always the risk that the new entity could fail again, driving up losses even further.
Steps to avoid a second loss
Creditors looking to continue trade with a new company, could ask the director for a personal guarantee, which would allow them to pursue the director personally for any money owed if the new company were also placed into an insolvency process.
To avoid outstanding invoices and giving credit to the new company, creditors could consider requesting payment on delivery. They could also consider reducing the payment terms, so that the new company pays all outstanding invoices within a shorter period than usual credit terms give. Consequently, if reduced payment terms are not met, the account can be placed on hold, mitigating the risk of substantial outstanding sums being owed. To conclude, customers being involved in a pre-packaged Administration, doesn’t have to lead to the termination of trading relationships. Taking necessary precautions and seeking reassurances that the new company is doing things differently makes it possible to protect future revenues and mitigate the risk of a second loss.
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