Insolvency is imminent

Lines of communication

It will be important to maintain communications with the company so that you are able to plan effectively and mitigate the impact on your own business:

  • reassure the company that their business is important to you, and that you wish to be kept informed. This may mean you need to sign a confidentiality agreement
  • be alive to any information that may indicate the company is attempting to defraud creditors. In some jurisdictions, if the company subsequently goes into liquidation, any person who was knowingly a party to carrying on the business may be pursued by the liquidator

Should I try to help the company?

Whether it is better to help a company in distress or begin proceedings to place it in liquidation will depend heavily on the facts. You should bear in mind the following:

  • you may accomplish more working with a business partner than attempting to place them in liquidation
  • issuing draft documents can prompt a company to take creditors seriously
  • issuing a winding-up petition can trigger defaults in financing arrangements, which may ultimately damage creditors
  • issuing a winding-up petition as a method of debt collection may be considered an abuse of process

Providing loans to the company

In certain jurisdictions, assisting a troubled business with a loan may help to ensure your business continuity:

  • providing the company with funds for a specific purpose eg purchasing goods you will ultimately require, may, in certain jurisdictions, be an effective way of keeping the company going whilst securing your money
  • in certain common law jurisdictions, if you communicate the purpose clearly to the company’s management and make it clear that the money is only to be used for that purpose, the company may only be able to use the funds for the purpose you specify. In such circumstances, the insolvency practitioners may subsequently be required to return the funds provided in the event of insolvency
  • however, you should not attach overly extensive conditions to the loan, nor try to exercise control over the company; in certain jurisdictions there is a risk that you may become a ‘shadow director’, making you potentially subject to claims by the insolvency practitioner
  • any loans made to the company (that are not for a specific purpose, as explained above) should only be made if security is taken, or you may not receive priority over other creditors

Breaching your contractual obligations

You may consider, in the face of insolvency, that the best option is in fact to breach your contract, for example by contracting with an alternative supplier despite an exclusive supply clause. You need to bear in mind:

  • the administrator, receiver or liquidator may have a claim for damages for breach of contract if this happens
  • a safer option may be to re-negotiate your agreement on more favourable terms but you could risk having no supplier, in the event of insolvency
  • be careful not to interfere with the company’s other agreements – procuring a breach of contract may expose you to damages claims by third parties