What happens if a customer goes bust?

Nigel Millar, restructuring and recovery partner at Baker Tilly's East Anglia office, warns of the need for swift action if a major customer collapses

DANGEROUS though it is, many owner-managers rely on the business of their biggest customers in making profits and, ultimately, generating their wealth.

But what happens if your biggest customer goes bust?

Communication is key, and if you find yourself in this position, get in touch with the liquidator, administrator or receiver - whichever office holder is relevant - as soon as you can.

By letting the office holder know your interest in the failed company, you are more likely to improve your prospects of a recovery. Get to the premises of the business as soon as you can to take an inventory of any of your stock.

You should always have a Retention of Title (ROT) clause in your terms of trade in case something like this happens to your company, as an ROT claim is likely to be your best prospect of a recovery, particularly if there are insufficient funds to pay unsecured creditors.

The clause must be watertight, and you should always ensure that your customer has signed your terms and conditions, and that you have a copy of this. Take legal advice on them to ensure they are adequate and compliant with current case law.

Review your stock levels and be prepared to make cuts where necessary, no matter how hard that might be. Also, if you have had to hold any bespoke stock for the failed customer, then you need to work out how you are going to dispose of that to the best effect.

Is there another firm that might be interested in it, especially at a knock-down price or does the insolvent customer require it to continue to trade whilst looking for a purchaser?

Your bank and other funders may have concerns about your own firm's position if you lose a major customer, so consider telling them about what you are doing to remedy things. If you need more funding to help you through the crisis, ask sooner rather than later.

You should consider informing your suppliers of the situation so you can prevent them becoming nervous and making any unhelpful changes in their supply terms, which could impact on your working capital.

Keep your staff informed of what is going on. If you keep them in the loop, they will worry less, and that will help with the ongoing operation of your own business.

When you submit your claim in the resulting insolvency procedure, ensure you are listing every item you are owed, and do not be deterred from revising this, if necessary, at a later date.

Ensure you exploit all recovery options. For example, make any bad debt VAT reclaims you are entitled to as soon as possible, and submit any credit insurance claims swiftly.

Remember though, it is not all doom and gloom, and by handling things in the right way, you might be able to turn a failure into an opportunity.