Credit management involves making sure a business gets paid for the goods or services it supplies by checking that the potential customer is creditworthy, then taking all necessary steps to turn the invoices it raises into cash. Put simply, it’s minimising risk and maximising cash. Using his credit management experience that spans over decades, Philip King FCICM, gives us his top tips when it comes to credit management, particularly for SMEs. 

Understand why cash flow is so important to every business. However big they might be, businesses fail when they run out of cash. When the wages, the rent, or a key supplier can’t be paid, then the writing is on the wall and failure is inevitable unless further funding can be found. Recognise the impact of not being paid: suffering a bad debt of £10,000 where the net profit margin is 10% will require sales of £100,000 to recover the bottom-line loss and, on top of that, there’s the opportunity cost of not selling instead to a company that would have paid, the distress and distraction to the business owner, and the cost of the goods or services that have been lost along the way. Monitor cash levels, know what’s coming in and going out, and when, and react when timings slip so a cash flow hole doesn’t open up. 

Know who you’re supplying. The status of the business, the exact name and trading style and, where applicable, the Company Registration Number, are all vital. The status determines who is responsible for the debt and, if the worst happens and you end up in court, it’s imperative that you have the correct details. How viable and sustainable is the business you’re going to supply or contract with, and how creditworthy are their customers? Beware of the domino effect when one company goes bust. Remember, thousands of small contractors fell into insolvency after Carillion collapsed in January 2018. Learn as much as you can about the business, get a credit reference agency report, talk to peers in the industry, and subscribe to Top Service where you can see real-time payment experiences that will help you make the right decision. Never fall into the trap of assuming that, because someone’s got a nice house, or a flash car, or is a “good bloke”, they’ll be a good customer. They may have the big house or the flash car precisely because they don’t treat their suppliers well! 

Agree when you’re going to be paid and never just assume. Talk about it at the earliest possible stage, negotiate and agree what is acceptable to you and the customer, then confirm it in writing so there’s no doubt. What’s the use of being told they’ll pay you in 30 days if their company policy is never to pay in less than 45 days. And, whatever the terms, make sure there’s clarity about when the clock starts and ends ticking. Does 30 days mean the end of the month after the invoice is received, or exactly 30 days? The former can be almost 60 days if you invoice at the start of the month.

Ask for your money. Yes, it’s your money; if you’ve provided goods or services in line with what’s been ordered and you’ve submitted an invoice that conforms to their requirements, the money should be in your bank once the due date is reached, not theirs. If it’s a new customer or a sizable amount, make contact shortly after you’ve submitted it to check that it’s been received, is in order, and is being processed for payment on time. If money hasn’t been received on the due date, ask where it is and when it can be expected. Never bury your head in the sand and hope for the best; if a company is short of cash and making decisions about who to pay, then you want to be at the top of the list, not the bottom. Have a system and process for following up outstanding invoices, record the details of conversations so you can refer back to them, and always do what you said you were going to do when you said you were going to do it. Be courteous and professional, and don’t be afraid to spell out the consequences for your business of not being paid. If you’re getting the run around or inadequate responses then escalate either within the customer’s business to someone more senior, or externally using an organisation like Top Service that has a range of solutions from simple chasing emails that are strengthened by the use of a third-party name, through to full-blown legal debt recovery action. 

The tips in this article are derived from the Philip King Five-Step Model: Business Survival by Getting Paid: https://philipking.net/five-step-model

The ISG Construction Ltd’s statement of affairs has been filed. Here are some key points:

❗ The total amount of un-secured creditors is listed at around the £90,000,000 mark.

❗ISG Central Services Ltd is listed as the creditor with the highest value owed at £48,344,934.83.

❗The next, in order of value is HMRC at £24,245,968.82

❗Owed to employees (inc former employees) is listed as £27,049,390.

❗The statement shows a total estimated deficiency of £333,463,315

Insolvency figures for September 2024 reflect both monthly and yearly changes, alongside significant developments in the construction sector.

Total Company Insolvencies:
1,973 cases, marking a 2% increase from August 2024 with 30 more cases, but a 7% decrease compared to September 2023.

Breakdown by Insolvency Type:

Creditors’ Voluntary Liquidations (CVLs):
1,575 cases, up 2% from last month.

Compulsory Liquidations:
226 cases, reflecting a 18% drop from August and down 13% year-on-year.

Administrations:
155 cases, showing a sharp 40% increase from August, as more businesses seek recovery solutions.

Company Voluntary Arrangements (CVAs):
17 cases, down 15% from August, though CVAs have risen 55% over the past year.

Month-on-Month Changes (August to September 2024):

• Compulsory Liquidations: Down 18%
• Creditors’ Voluntary Liquidations: Up 2%
• Administrations: Up 40%
• CVAs: Down 15%

Recent Developments in the Construction Industry
The construction industry continues to be disproportionately affected, experiencing 4,310 insolvencies in the 12 months leading to August 2024, making up 17% of all insolvency cases. 

A key event in September 2024 was the collapse of ISG, a major construction firm that entered administration. The insolvency of ISG, likened to the Carillion collapse of 2018, has underscored the fragility of the sector.

Contributing Factors Affecting the Construction Industry:

• Tight Funding: Businesses face limited access to working capital, exacerbated by high interest rates.
• Rising Costs: Increased labour costs are squeezing already thin profit margins

• Supply Chain Pressures: Extended payment terms are straining suppliers.
• Labour Shortages: The industry continues to grapple with a lack of skilled workers.

Year-on-Year Trends:
Compared to September 2023, overall insolvencies are down 7%, with compulsory liquidations falling 13%. However, administrations have risen by 19%, signalling a shift in how companies are handling financial distress.

Staying Ahead of Early Warning Signs
At times like these, it’s crucial to remain proactive. We encourage all credit management teams across industry to stay vigilant and monitor early warning signs of financial distress. Having the right tools and insights can help minimise debt and maximise cash flow.

Get in Touch
To learn how we can help your business, call us today to speak with one of our experts on 01527 503990. Let’s work together to navigate these uncertain times.

When a company faces insolvency, administration can offer salvation – a chance to reorganise and breathe. This legal process, introduced by the Insolvency Act 1986, aims to rehabilitate struggling companies, giving them some much-needed “breathing space” from creditors while they work towards recovery.

What is Administration?

Administration allows an insolvent company to be restructured and refinanced under the guidance of an appointed Administrator. This process temporarily halts any legal action from creditors, providing the company time to develop a recovery plan.

How Does a Company Enter Administration?

An Administrator can be appointed by a court petition, which may be filed by either the company’s officers or its creditors. Typically, it’s the company’s officers who apply, as they possess the most up-to-date financial information needed for the petition.

The Role of the Administrator

A court-appointed Licensed Insolvency Practitioner serves as the Administrator. Once in place, the Administrator takes control of the company’s operations and assets, stepping into a powerful role that includes the authority to replace directors if necessary. Their primary duty is to manage the company while devising a plan to rescue it.

The Administrator must also keep all stakeholders informed. This includes notifying creditors and shareholders of their appointment and outlining their intended course of action.

Creditors’ Rights and Meetings

Within three months of the Administrator’s appointment, a Meeting of Creditors must be held. During this meeting, creditors can form a committee to represent their interests and request any necessary information from the Administrator. This ensures transparency and keeps creditors involved in the process.

Legal Protection During Administration

While a company is in administration, it is protected from further legal actions. Creditors cannot appoint a Liquidator or Receiver, nor can they initiate any legal proceedings without the consent of the Administrator or the court. This protection allows the Administrator to focus on rescuing the company without constant legal threats.

What Happens When Administration Ends?

Once the Administrator’s work is complete, they must apply to the court to lift the Administration Order. If the company has been successfully stabilised, control may be returned to the company officers. Alternatively, if the aim was to facilitate a Voluntary Arrangement, everything is handed over to the new supervisor. If these efforts fail, a Winding-up Order may be issued, leading to the appointment of a Liquidator to sell off assets and dissolve the company. Notably, all costs incurred by the Administrator are paid before any creditor claims, assuming there are funds remaining.

The Rise of Pre-Pack Administration

In recent years, a new approach known as ‘Pre-Pack Administration’ has gained traction. This involves negotiating the sale of the company or its assets before the formal administration process begins. Once an Administrator is appointed, the pre-negotiated deal is swiftly formalised.

Supporters of Pre-Pack Administration argue that it helps secure the best possible price for the company, as news of formal administration often causes a drop in value. However, this method has faced criticism, particularly from unsecured creditors, especially when the company is sold back to its existing shareholders or directors.

Administration offers a way for companies to find their footing again amidst financial turmoil. For more information on administration procedures, visit  www.insolvency.gov.uk.

Compulsory liquidation is a legal process where a court orders the winding-up of an insolvent company, typically at the request of a creditor, because the company cannot pay its debts. Once the order is made, the company ceases trading, and an appointed liquidator will sell the company’s assets to repay creditors.

Key Facts:

Petition to the Court: A creditor can petition the court to liquidate a company if it is owed more than £750 (UK) or a similar threshold in other jurisdictions, and the company cannot repay the debt. The petition proves the company is insolvent.

Grounds for Petition: The most common reason for filing is that the company has failed to pay its debts when due. Evidence may include unpaid invoices, dishonoured checks, or a statutory demand for payment that remains unmet after 21 days.

Court Involvement: After reviewing the petition, the court decides whether to issue a winding-up order. If approved, the court appoints an official receiver, who initially acts as liquidator.

Effect of the Winding-Up Order:

The company must stop trading immediately.

The directors lose all control over the company’s affairs.

The company’s bank accounts are typically frozen.

Liquidator’s Role: The liquidator is responsible for:

Selling company assets to repay creditors.

Investigating the company’s financial affairs and the conduct of its directors.

Distributing funds to creditors according to the legal hierarchy.

The Liquidation Process

1. Filing the Petition:

A creditor files a petition, often after issuing a statutory demand for payment, which the company has failed to address within 21 days.

The creditor must demonstrate the company’s inability to pay its debts.

2. Court Hearing:

The petition is reviewed in a court hearing. If successful, the judge issues a winding-up order.

Once the order is issued, the process of liquidation begins immediately.

3. Appointment of Official Receiver:

The official receiver is appointed as the provisional liquidator. In some cases, creditors can appoint a different liquidator later.

4. Investigating the Company:

The liquidator assesses the company’s financial position, identifies assets, and investigates whether the directors acted improperly or negligently.

If misconduct is found, directors can face legal action, including disqualification.

5. Asset Realisation:

The liquidator collects and sells company assets, including property, stock, and intellectual property, to generate funds for repayment.

6. Distribution to Creditors:

Creditors are paid based on a legal hierarchy:

1. Secured creditors (those with security, such as a mortgage) are paid first.
2. Preferential creditors, including employees (for wages) and certain tax authorities, follow.
3. Unsecured creditors receive payments last, from any remaining funds.

Dividends are paid to creditors based on the available funds and the amount owed.

Rights and Responsibilities of Creditors

• Attend Creditors’ Meetings: After liquidation begins, creditors may be invited to attend meetings to discuss the company’s affairs and vote on the appointment of a liquidator.

• Submit Proof of Debt: Creditors must submit a proof of debt form to the liquidator to claim their portion of any funds recovered from the liquidation process.

• Request Updates: Creditors are entitled to receive updates from the liquidator on the progress of the liquidation, including details on asset sales and anticipated distributions.

Potential Outcomes for Creditors

Repayment: Creditors may receive part of the money they are owed, depending on the company’s remaining assets and the priority of their claims.

No Recovery: In cases where the company has few or no assets, unsecured creditors may receive little to no repayment.

Directors’ Misconduct: If the liquidator discovers wrongdoing by directors (e.g., fraudulent trading), creditors may benefit from potential legal action against those directors.

How to Petition for Compulsory Liquidation

To start the compulsory liquidation process, a creditor should:

1. Issue a Statutory Demand: A formal request for payment, giving the company 21 days to pay or settle the debt.

2. File a Winding-Up Petition: If the debt remains unpaid, file a petition at the court, detailing the company’s inability to meet its obligations.

3. Attend the Court Hearing: Present evidence of the debt and the company’s failure to pay. If the court agrees, a winding-up order will be issued.

Costs Involved

Filing Fees: Creditors must pay court fees and a deposit to initiate the petition, which may vary by jurisdiction.

Cost Recovery: Creditors may be able to recover these costs from the liquidated assets if enough funds are available.

Frequently Asked Questions

Can I recover my full debt?

It depends on the value of the company’s assets and your status as a creditor (secured vs. unsecured). Full repayment is unlikely if the company is deeply insolvent.

What happens if the company has no assets?

If the company has no significant assets, unsecured creditors may receive little or nothing.

Can I stop the liquidation process?

Only the court can stop the process once a winding-up order is made, typically if a mistake or repayment agreement is reached before the final hearing.

N.B: Submitting a proof of debt form when receiving notice of an insolvency is important as this will not only mean your claim is submitted for dividend purposes, but it will also allow a creditor the chance to have their say on the outcome of the pre-appointment process, and later on in the insolvency as it progresses.

The Creditor Services team at PKF offer a free service to all Top Service members and can assist with the following:

• Advice and support regarding any formal or non-formal insolvency process.
• A bespoke lodging and proxy management service which alleviates the administrative burden for creditors and reports back on all insolvencies in a simplified format.
• Representation at creditor meetings.
• Seeking the appointment of licensed insolvency practitioners of PKF to investigate insolvent entities and creditor concerns.

If you would like to more about the services offered to Top Service members by PKF Creditor Services, please get in touch via creditorservices@pkfgm.co.uk

Creditors’ Voluntary Liquidation (CVL) is a formal insolvency process initiated by the company’s directors when they realise the company is insolvent and can no longer pay its debts. In this process, the company voluntarily chooses to wind up its affairs and liquidate its assets, with creditors having the right to appoint a liquidator to oversee the process.

Key Facts for Creditors

Initiation: Unlike compulsory liquidation, which is initiated by a creditor through the courts, CVL is initiated by the company’s directors. They propose winding up the company because it is no longer financially viable.

Creditors’ Role: Creditors are invited to a meeting (often virtual) to confirm the appointment of a liquidator and to discuss the company’s financial situation.

Liquidation Process: Once the liquidator is appointed, they take control of the company’s assets, sell them, and distribute the proceeds to creditors based on legal priority.

The CVL Process

1. Directors’ Decision to Liquidate:

The company’s directors decide that the business is insolvent (unable to pay its debts) and propose liquidation.

A resolution is passed by the shareholders agreeing to wind up the company voluntarily.

2. Meeting of Creditors:

A meeting of creditors is called (usually within 14 days of the shareholders’ decision).

Creditors receive notice of the meeting, along with a statement of affairs, showing the company’s assets and liabilities.

Creditors can ask questions, review the company’s financial status, and vote on the appointment of the liquidator.

3. Appointment of Liquidator:

At the creditors’ meeting, the liquidator is appointed. While the directors can nominate a liquidator, creditors have the final say on who is appointed.

4. Liquidator’s Role:

The liquidator takes control of the company, collects and sells the company’s assets, investigates its affairs, and distributes any available funds to creditors.

They also investigated the directors’ conduct to ensure they did not act improperly while the company was trading insolvent.

5. Asset Realisation:

The liquidator liquidates (sells) the company’s assets, such as property, stock, or equipment, to raise funds.

The proceeds are then used to pay creditors according to the legal priority of claims.

6. Distribution of Funds to Creditors:

Secured creditors are paid first if they have security (such as a mortgage or charge) over the company’s assets.

Preferential creditors—including employees owed wages and certain taxes—are paid next.

Unsecured creditors receive payments from any remaining funds. They typically receive only a portion of what they are owed, depending on the available funds.

Rights and Responsibilities of Creditors

• Voting at Creditors’ Meeting:

Creditors can vote on the appointment of the liquidator, typically either agreeing with or rejecting the directors’ choice.

• Submit Proof of Debt:

Creditors must submit a proof of debt form to the liquidator in order to claim their share of any funds that are recovered from the liquidation.

• Updates from Liquidator:

Creditors are entitled to receive updates from the liquidator on the liquidator’s progress, including how much money is expected to be recovered and distributed.

• Challenge Liquidator’s Decisions:

If creditors believe the liquidator is not acting in their best interests, they can challenge certain decisions, though this typically requires legal advice.

Potential Outcomes for Creditors

Full or Partial Repayment:

Creditors may receive a portion of what they are owed, depending on the company’s available assets and their status (secured, preferential, or unsecured). Full repayment is unlikely in insolvency cases.

No Recovery:

If the company has few or no assets, unsecured creditors may receive little to no repayment. The amount creditors receive is based on the sale of the company’s assets.

Investigation into Directors’ Conduct:

The liquidator will review the conduct of the company’s directors prior to the liquidation. If they are found guilty of wrongful trading or misconduct, creditors may benefit from actions taken against the directors (e.g., personal claims).

Advantages of CVL for Creditors

More Control: Creditors are involved in the process and have a say in the appointment of the liquidator.

Quicker Resolution: CVL tends to be faster than compulsory liquidation as it avoids lengthy court proceedings.

Asset Recovery: The liquidator’s role is to maximise the recovery from the company’s assets and distribute them fairly to creditors.

Disadvantages of CVL for Creditors

Limited Asset Recovery: The company’s assets may not cover all debts, especially for unsecured creditors.

Ongoing Trading Losses: If the directors delayed the decision to liquidate, the company might have incurred additional losses, reducing what’s available to creditors.

Potential for Limited Control: While creditors vote on the liquidator’s appointment, the day-to-day decisions in the liquidation process are made by the liquidator.

Costs Involved for Creditors

No Direct Costs for Creditors: Unlike compulsory liquidation, creditors do not need to pay court fees to initiate the process. However, the costs of the liquidation are paid from the company’s assets, reducing the funds available to distribute to creditors.

How to Submit a Claim

Receive Notice:

Once the liquidation process starts, creditors will receive notice of the liquidation and the creditors’ meeting.

Submit Proof of Debt:

Creditors need to fill out and submit a proof of debt form to the liquidator, outlining the amount owed and supporting documents (e.g., unpaid invoices).

Attend Creditors’ Meeting:

Creditors can attend the meeting to discuss the liquidation and vote on the liquidator.

Creditors’ Legal Rights

Right to Information: Creditors can request information about the liquidation process and the company’s financial status from the liquidator.

Right to Challenge: If creditors believe the liquidator is not acting properly or is mishandling the process, they can apply to the court to challenge the liquidator’s actions.

Right to a Fair Distribution: Creditors are entitled to receive distributions based on the company’s available assets and the legal priority of their claims.

Frequently Asked Questions

What is the difference between CVL and compulsory liquidation?

CVL is initiated by the company’s directors voluntarily, while compulsory liquidation is forced by creditors through a court order.

How much will I get back?

This depends on the value of the company’s assets and where you rank in the creditor hierarchy (secured, preferential, or unsecured). Unsecured creditors often receive only a portion of their claims.

Can I stop the liquidation?

No, once the company’s shareholders and creditors approve the liquidation, it cannot be stopped unless all debts are settled.

NB: The Creditor Services team at PKF offer a free service to all Top Service members and can assist with the following:

• Advice and support regarding any formal or non-formal insolvency process.
• A bespoke lodging and proxy management service which alleviates the administrative burden for creditors and reports back on all insolvencies in a simplified format.
• Representation at creditor meetings.
• Seeking the appointment of licensed insolvency practitioners of PKF to investigate insolvent entities and creditor concerns.

If you would like to more about the services offered to Top Service members by PKF Creditor Services, please get in touch via creditorservices@pkfgm.co.uk

Understanding the CVA

When a limited company is struggling financially, the directors might consider a Company or Corporate Voluntary Arrangement (CVA) as an alternative to liquidation. This option is specifically available to limited companies. Sole traders and partnerships would need to explore different avenues, such as an Individual Voluntary Arrangement (IVA).

What is a CVA?

A CVA is a legally binding agreement between a company and its creditors, aimed at allowing the company to continue trading while repaying a portion of its debts over time, typically at a fixed rate. However, for creditors, a CVA often means that only a certain percentage of the debt will be recovered, if anything at all. While CVAs are generally seen as a way to avoid a company becoming completely insolvent, they are not always viewed positively by creditors due to the potential for limited returns.

The Proposal Process

The terms of a CVA are outlined in what is known as the “proposal.” This proposal is usually drafted by a Licensed Insolvency Practitioner, who charges a fee for their services – a fee that is paid by the company itself. 

The Insolvency Practitioner will then call a meeting of the company’s creditors. For the CVA to be approved, 75% of the creditors (by value of the debt) must agree to it. This means that a single large creditor could have a decisive vote in the process.

Impact on Creditors

If the CVA is approved, it legally binds all creditors who were notified of the meeting, whether or not they chose to vote. The Insolvency Practitioner is then responsible for ensuring the company makes repayments according to the proposal terms, for which they charge an additional fee – again paid by the company. 

During the CVA, creditors are prevented from taking independent action to recover their debts.

However, it is important to note that while CVAs are generally agreed upon by creditors to avoid the total insolvency of the company, they do not guarantee full repayment. Creditors are often left with only a fraction of what they are owed.

Public Record and Perceptions

Details of the CVA are made public and recorded at Companies House. This information is subsequently picked up by credit reference agencies and included in credit reports on the company. While a CVA might provide a company with an opportunity to reorganise and continue trading, it can also negatively impact its reputation. Many businesses are reluctant to engage with companies under a CVA, viewing them as high-risk. Customers might be hesitant to buy from them, and new suppliers could be wary of extending credit. This can make it challenging for companies to trade “normally,” contributing to a high failure rate for CVAs.

Summary

For creditors, a CVA is often a less-than-ideal outcome but can be a practical alternative to a company becoming insolvent. While it may result in only partial repayment, it can sometimes be the best available option. Understanding the terms, implications, and potential outcomes of a CVA is crucial for creditors navigating these challenging situations.

For more information, please contact helpdesk@top-service.co.uk.

Celebrating our Impressive Debt Recovery Results – £100 Million (& Counting)

Our chasing letters and emails boast a remarkable 90% success rate for our members, proving to be an effective tool for prompting slow payers to settle their debts. Members benefit from up to 10 free chasing letters per month and unlimited free chasing emails.

In cases where slow payers and bad debtors require external intervention, our agency—well-regarded within the construction industry—is ideally positioned to provide the necessary push. Our chasing letters, with their impressive success rate, remain a popular choice for initiating the recovery process.

We have a choice of two chasing letters:

• Overdue Invoices Reminder Letter
• Notice of 3rd Party Action

Sent on our letterhead from our office it is the ideal way of reminding your customer payment is due or informing them of potential 3rd party action.

Our popular and effective chasing letters can also be sent out by email with no restrictions to the number you can send.  Send emails to your debtors through our website at the touch of a button.

Celebrating our Impressive Debt Recovery Results – £100 Million (& Counting)

We are delighted to announce a major milestone in our journey—our debt recovery services have successfully collected over £100 million for our members in the construction industry in the last 12 months.

 One of the most common questions we get asked is Can I claim costs I incur Using a debt collector, Our Commercial Collections Supervisor and Debt Recovery Specialist, Bethany Gresswell explains all in this video.

Celebrating our Impressive Debt Recovery Results – £100 Million (& Counting)

We understand that trading relationships can be delicate and the subject of debt recovery can be a sensitive topic, this is why our approach in collecting your overdue balance will change depending on your trading relationship.  When further intervention is needed, our agency is well-regarded in the construction industry for delivering results.

One of the most common questions we get is Will using a debt collection agency ruin business Our Commercial Collections Manager and Debt Recovery Specialist, Charlie Barrett – Meade explains all in this video.

 Our no collection, no fee policy ensures you have nothing to lose and everything to gain

 Our no collection, no fee policy ensures you have nothing to lose and everything to gain. Call 01527 50990 to speak with one of our team members to find out more today.