How to stick if suppliers bust

28 September 2008
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29 September 2008

With insolvencies on the rise, how can purchasers be sure their organisation doesn't go to the wall when a supplier does? Andy Allen reports

At a time when even institutions such as the once-mighty Lehman Brothers are failing, many buyers are likely to be casting questioning glances at the health of their suppliers.

Pessimism in UK plc has been growing sharply since the events of mid-September. Statistics in late summer showed 3,560 corporate insolvencies in England and Wales in the second quarter, an increase of 15 per cent on 2007.

And, as law firm Freshfields Bruckhaus Deringer points out, the number of companies in administration increased by 60 per cent on this time last year.

In July, the insolvency practitioners' association R3 released findings showing 84 per cent of members thought insolvencies would start to rise dramatically in a year's time. Peter Sargent, R3's vice-president, believes members would be far more pessimistic if canvassed today. "It's been a poor summer for UK business and I think it's going to hit home at the end of this quarter."

He believes demands for firms to pay third-quarter bank interest, rent and PAYE at the end of September will be too much for many.

So what can organisations do to ensure they do not catch a cold when a supplier coughs its last?

According to Sargent, preventative action is key. "If the supplier is already insolvent the horse has bolted and the stable door is swinging wide open. Creditors must protect themselves by diversifying their supply chain as much as possible."

Alastair Lomax, a partner in the restructuring team at law firm Pinsent Masons, says his firm advises clients to take a proactive approach to analysing risk in its supply chain, heading off problems early.

Buyers can gain advance notice of a supplier's difficulties by consulting official documents, such as the London Gazette, or bodies such as Companies House or the Royal Courts of Justice.

Yet often when information is in the public domain, he warns, insolvency proceedings may have begun and it may be too late to mitigate disruption to supply. A buyer may get earlier notice of a supplier's problems by talking to staff, who may mention that wages or other creditors are unpaid.

In instances where buyers have paid in advance for services such as travel or marketing agencies, they are unlikely to be able to recover much of the value of undelivered services if the supplier becomes insolvent.

In this case they become a creditor and must queue behind banks and employees for a slice of what remains of the supplier's assets.

The emphasis should rest on prevention rather than cure as, Lomax points out, insolvency practitioners are under no obligation to sell remaining goods in storage to the buyer who ordered them first and may dramatically increase prices.

Kevin Mawer, a director of KPMG, says: "I would strongly advise against pre-paying at any time."

But if a buyer has prepaid for an order of material carrying their company logo, they have considerably more chance of recovering the materials than if they are unmarked. "In this case they're of no value to anyone else so you may be able to pick them up cheaply from the administrator," says Mawer.

If a business-critical supply line dries up there may be a temptation to seize undelivered goods from a suppliers' warehouse. Sargent says he has come across many examples of this. Although he adds: "Let's be serious - that's the gangster approach."

SMsep2008

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