Protection for Small Businesses
When Important Customers go under
In the week when locally-based national building services firm Connaught plc has gone into administration, Paul Keeling, Head of the Litigation and Dispute Resolution team at Stones Solicitors LLP, looks at what smaller businesses that are contracted to larger businesses and the public sector can do for protection when their customers get into difficulty.
The recent administration of parts of the local building services firm Connaught plc puts the spotlight on not just those who are directly employed by businesses that collapse, but also highlights the ripple effect that the collapse of big businesses can have on the overall business community.
Suppliers and subcontractors are often left owed substantial sums of money which can severely impact on those businesses’ ability to survive. It can also be the case that the collapse of a major customer leaves a contracted business with a sudden and potentially catastrophic fall in demand for their goods and services.
Once there has been a big business collapse it is often too late to do anything about it, but there are practical and legal steps that can be taken up front to try and minimise the risk to individual businesses. For example:-
• Do not put all your eggs in one basket. If all your business comes from one particular source consider diversification.
• Know who you are contracting with. Big companies often have subsidiaries which are themselves separate legal companies which may or may not be affected by the collapse of the parent company.
• Insofar as possible do credit checks on any other business that you are intending to deal with.
• Ensure you have a written contract and that work is not just done on a handshake, and that the contract has been drafted in a way that offers you as much protection as possible e.g. gives you the ability to stop work/stop supplying goods if invoices remain unpaid after a specified time.
• Monitor your credit terms and chase hard if payments become overdue.
• Consider Retention of Title clauses in your contracts – these have to be very carefully worded but essentially provide that in certain circumstances title to goods supplied will not pass to the recipient until they have been paid for in full.
• Consider taking security – perhaps in the form of personal guarantees from the directors of the company that you are dealing with, or a bank guarantee or a letter of credit.
• Finally, consider obtaining credit insurance which in recent years has become more widely available.
The time to address these issues is when you are negotiating the contract not after the collapse has happened!
It pays to have your contracts vetted and to seek expert advice the moment difficulties arise.
Contact Paul Keeling at Stones Solicitors LLP, Head of the Litigation and Dispute Resolution Team, which also has expertise in insolvency, on 01392 666777 or at paulkeeling@stones-solicitors.co.uk. Further information is also available by logging on at www.stones-solicitors.co.uk.