A major customer has gone under owing us money
When a major customer fails owing you money, two separate problems arrive at once and they need separating. The first is the bad debt itself: as an ordinary trade supplier you rank as an unsecured creditor, so recoveries are typically small and slow. The second, and usually the more urgent, is what the loss does to your own company, because a single large write-off can move a solvent business across the statutory solvency tests very quickly. Insolvency Act 1986; gov.uk
- Where you rank
- Unsecured creditor, behind costs, fixed charges and preferential claims
- First week
- Stop supply, submit a proof of debt, check retention of title
- The bigger question
- Whether the loss makes your own company insolvent
- Watch
- Any credit insurance notification deadline
- Do not
- Keep supplying on the same terms hoping to recover the position
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The first week
- Stop supplying immediately. Anything delivered after the appointment is very unlikely to be paid and rarely improves your position.
- Submit a proof of debt to the appointed office-holder. A claim not submitted is simply not counted, however sound the debt.
- Check for retention of title. Are any goods still identifiable and covered by a retention of title clause in your terms? This only helps for goods rather than services, and only while they remain identifiable and unsold.
- Check any credit insurance notification deadline straight away. These deadlines are strict and are the most commonly missed step.
Then ask the harder question about your own company
Write off the debt in your own numbers and look again at the two statutory tests. Can the company pay its debts as they fall due, and do total liabilities exceed total assets? Include the revenue that has now disappeared, not just the invoice that will not be paid, because losing a large customer usually removes future contribution as well as past cash. If the answer to either test has changed, the company may be insolvent, and from that point a director's duties shift toward the interests of creditors. That is a change in legal position, not merely a change in mood.
If your own position has moved
Take advice from a Licensed Insolvency Practitioner before incurring further credit. If your own company is now insolvent, your duties as a director have already changed, and continuing to trade and incur credit on the assumption that things will recover is where personal exposure begins. The risk is not the bad debt itself but what is done in the weeks after it: trading on while insolvent, taking on new borrowing to bridge a gap that cannot be bridged, or paying some creditors ahead of others. There are procedures designed for exactly this situation, including arrangements that keep a viable business trading, and they work better the earlier they are considered.
Concentration is the underlying lesson
A single customer failure is rarely fatal on its own. It becomes fatal when that customer was a large share of turnover, because the business loses its receivable and its forward order book in the same week. If one customer is a significant share of your sales ledger, that concentration is the exposure to work on once the immediate crisis is handled, whether through tighter limits, credit insurance, or deliberately widening the customer base.
Common questions
Will we get anything back?
Usually little, and slowly. Ordinary trade suppliers are unsecured creditors, which sits behind the office-holder's costs, fixed-charge holders, preferential claims including certain employee entitlements and some HMRC taxes, and the prescribed part where it applies. Submit the claim properly, but plan on the basis that it will not arrive.
Can we reclaim goods we supplied?
Sometimes, and only for goods. A valid retention of title clause, properly incorporated into the contract before supply, can allow you to reclaim identifiable, unsold goods. In practice it is defeated more often than expected because the goods have been sold on, mixed or cannot be identified. It is worth checking immediately because the window is short.
Could the liquidator ask for money back that we were already paid?
It is possible in specific circumstances, for example where a payment is later found to be a preference or a transaction at an undervalue within the relevant look-back period. This is uncommon for ordinary trading payments in the normal course, but if you were paid unusually promptly or ahead of others shortly before the insolvency, take advice rather than assuming the money is safe.
Should we borrow to cover the gap?
Not before establishing whether your own company is still solvent. If it is, a funding gap caused by a one-off bad debt is an ordinary financing question. If it is not, taking on new borrowing while insolvent is exactly the step that creates personal exposure. The order matters: establish solvency first, take advice if it is in doubt, and only then consider funding.