Businessman protecting business with hand

How can I protect my business when a customer becomes insolvent?



The Federation of Small Businesses (FSB) recently surveyed 1,400 firms, with findings suggesting that a record number of businesses are planning to close over the next year, while exporters are being pushed to the brink as they navigate the UK’s new post-Brexit trade arrangement with the EU.

At the start of 2020, some 99.3 per cent of the UK’s six million businesses were small firms. Together, they employed 13.3 million people, with a combined turnover of £1.6 trillion.

It is predicted that at least 250,000 small businesses will collapse unless the government offers more sufficient help to endure its coronavirus restrictions.

Consequences of a customer entering into an insolvency process

If you are a supplier of goods or services, you normally will be classed as an unsecured creditor in an insolvency process. Unfortunately, unsecured creditors are the final group in the hierarchy to receive payment when a customer goes bust. In a nutshell, once your customer has entered an insolvency process you have very limited options to retrieve your financial position.

This position has been made worse since the beginning of December 2020. HMRC are now a secondary preferential creditor in relation to outstanding taxes ‘paid’ by employees and customers that are held by a business on its behalf, such as PAYE, VAT, employee NICs and Construction Industry Scheme (CIS) deductions. This means that in an insolvency process, HMRC will move up the rankings of who gets paid out first, jumping ahead of floating charge and unsecured creditors.

All of the above means that in the current financial crisis, as a company director you must be on high alert when dealing with your customers to avoid losses if they become insolvent.

What can I do now to protect my company?

  • Do the basics correctly

This means setting credit limits when you start to trade with a new customer. Cash is king. If it is possible to get an upfront payment that is great. Don’t be afraid to ask especially if your product or service would be difficult to source elsewhere. Make sure that you raise sales invoices in a timely manner and send out regular statements. If a customer does not pay by the due date you cannot afford to let this position slip. Cease further supplies until the bill has been paid

  • Monitor supplier stability

Close communication with your customers is vital. You can often pick up if they are struggling financially and can amend their credit terms accordingly to adjust your exposure. Also, you should consider signing up one of many on-line services who will notify you of any County Court Judgments against any of your customers. This could be an early warning sign that they are in financial difficulties.

  • Retention of Title Clauses (“ROT”)

A straightforward retention of title clause within a contract of sale essentially means that ownership remains with the supplier, until full payment for the goods has been received. If your customer were to enter into an insolvency process you would be able to reclaim your stock.

But beware. Your customer must be made aware of any retention of title clause before, or when a contract is agreed, for it to be enforceable. It is advisable to include these clauses in the overall terms and conditions of trade, rather than an invoice. The contract should be signed as proof that the customer has accepted the terms.

It is worth having an “all monies” clause in your contract. This type of clause is more expansive and allows for retention of title until all monies due from the debtor are paid to the supplier. This contrasts with the order-by-order basis of a simple retention of title clause.

This is a complex legal area, and you would be best advised to get a lawyer to draw up an appropriate clause. You may also want to consider covering such eventualities as your stock being sold on or mixed with other materials before it has been paid for.

  • Ipso Facto Clauses

These are clauses within a contract for the supply of goods or services, which permit you to terminate solely on account of an insolvency event affecting your customer. These are useful in limiting your exposure in dealing with such a business.

However new legislation, introduced in June 2020, with a view to encouraging the rescue of failing companies, has affected the ability to utilise certain termination clauses or other rights in all contracts, including “non-essential” contracts for the supply of goods and services.  To avoid the effects of these new rules you would have to prove that the continuation of the contract would cause your own company hardship. This could prove difficult as the Government has suggested that the threshold would be quite high (essentially if the continued supply threatens the supplier’s own insolvency).

It is worth noting that these rules also relate to your customer if the company goes into liquidation. This is not usually a procedure used to facilitate a recovery. With the legislation favouring the distressed company rather than the supplier, it may be worth considering adding some non-insolvency related events which may trigger termination or amendment of contractual terms; for example, adding cross-default clauses, triggered when the distressed company fails to pay amounts due to any of the company’s creditors, but your company in particular.


In order to protect your company, there is work to be done at the time that you start to trade with a new company. You must show financial discipline at all times in trading with a customer. It is vital to keep lines of communication open so that you can understand how your customers are trading, to protect your position.

It is also very important to get the right professional advice regarding contracts and debt collection. If you feel that your customer could be heading for some sort of insolvency procedure you need to contact an Insolvency Practitioner. They will be able to talk to your customer, on your behalf. And who knows they may be able to suggest a recovery strategy to your customer that could save the day.

For insolvency advice, please contact Head of Restructuring and Insolvency Mike Kienlen on 07770 536214 or email

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