Trading Safely: Ensuring You Minimise Your Exposure to Distressed Customers


As we approach the busiest trading period of the year for many businesses they need to ensure they are doing what they can to protect themselves from the consequences of customers who go bust. The key concern for any supplier, whether of services or goods, is that they will get paid for the goods or services that they supply to their customers, and that where supplies are made on terms where the customer gets a period of credit, that these such debts will be settled.

In this context it is crucial that suppliers review their contracts to ensure that they contain provisions that will allow them to cease supplying to customers in financial difficulties. Typically contracts will contain clauses that trigger on the insolvency of a party, but if the trigger is formal insolvency proceedings this may be too late. Both the balance sheet test (fewer assets than liabilities, taking into account its contingent and prospective liabilities) and the cash flow test (pay its debts as they fall due) of insolvency are open to interpretation and debate and it is therefore advisable to make sure that supply contracts also refer to other less technical matters. These could be triggers such as the customer ceasing to trade or threatening to cease to trade, the customer failing to pay money due under the contract, the customer breaching the contract or the customers’ creditors taking action against that customer.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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