Supplier Insolvency

Liquidation is the formal insolvency process to close a Supplier, whether voluntary or compulsory. It is primarily geared around realising Supplier assets for creditors and dissolving the Supplier from the Companies Register.

To enter into liquidation, a business must appoint a qualified Insolvency Practitioner as an appointed liquidator. There are primarily three types of liquidation:

• Creditors’ Voluntary Liquidation – Occurs when a Supplier can no longer pay its liabilities or continue trading and is insolvent. The directors must commence a decision-making process and instruct an insolvency practitioner to place the Supplier into liquidation before handing over Supplier control to a liquidator. Shareholders must hold a general meeting to vote for a resolution to wind up the Supplier.
• Members Voluntary Liquidation – This process applies to a Supplier that is still solvent and able to trade, but the directors need to close the Supplier down. There must be sufficient value left in the Supplier’s remaining assets to pay the debts owed to Supplier creditors with statutory interest.
• Compulsory Liquidation - This form of liquidation involves a Supplier being taken to court and occurs when a winding-up petition has been issued as a due debt that has not been satisfied and is owed to a creditor of the Supplier. The petition is heard at a hearing where a court judge can make a Winding-Up Order to place the Supplier into Compulsory Liquidation.

An Insolvency Practitioner (IP) is licensed in the UK to act on behalf of companies and individuals facing insolvency or acute financial distress. When an IP is appointed over a Supplier in Creditors’ Voluntary, Compulsory or Members’ Voluntary Liquidation, they are referred to as the Liquidator.

In a Creditors’ Voluntary or Compulsory Liquidation, a liquidator will take control of a Supplier when it enters liquidation, usually because a Supplier cannot pay its debts in full. A liquidator must be a qualified Insolvency Practitioner with the power to undertake any activities required to wind up a Supplier’s affairs.

When a Supplier enters liquidation, the Liquidator who has the appropriate powers and duties, will typically go through the following initial steps:

• Investigation – All Supplier information is collected and collated thoroughly, including all Supplier books and records, details of assets, cash and book debts, and non-physical assets.
• Compile a List of Creditors – Directors must provide a complete list of creditors detailing the money owed, with their names and addresses.
• Inform Creditors – The insolvency practitioner will inform the creditors listed of the Suppliers position, usually through a formal insolvency notice.
• Asset Valuation – The insolvency practitioner will value all Supplier assets that will be realised for the benefit of creditors.
• Staff Management – The insolvency practitioner has a legal duty and is responsible for making staff redundant and assisting with employee financial claims.

Within a month of the Supplier ceasing to trade, a creditors meeting will be held if the business cannot continue trading and liquidation has been decided as the best option. The appointment of an Insolvency Practitioner will be confirmed during the meeting. During a Supplier’s voluntary liquidation process, it is the legal duty of the Suppliers Directors to:

• Provide all Supplier information to the Liquidator.
• Attend any meeting requests with the Liquidator.
• Hand all Supplier assets to the Liquidator.
• Grant access to the Liquidator to Supplier trading records, books, records, bank statements, insurance policies, employee records, and all Supplier's assets and liabilities documents.

Shareholders and creditors are given eight weeks to object to the Liquidator's release once the Liquidator has circulated the final Supplier liquidation report.

When a Supplier becomes insolvent and is liquidated, a clearly defined order of payments must be legally followed, which is set out within the Insolvency Act 1986. Insolvency creditor payments are prioritised as follows:

• Liquidator Costs and Expenses.
• Secured Creditors (Fixed Charge), such as banks or other lenders holding asset titles.
• Preferential Creditors, including employees’ wage arrears and holiday pay.
• Prescribed Part Creditors to ensure that unsecured creditors have an increased chance of recovering some of their debt.
• Secured Creditors, including assets that are not subject to a fixed charge.
• Unsecured Creditors such as Suppliers, Contractors, Trade Creditors or HM Revenue and Customs

The implications for an organisation, when a Supplier goes into liquidation, can be many and varied; the following aspects must be considered:

• Security of confidential and sensitive customer data and information.
• Continuity of Supply.
• Warranty claims for products and services already purchased
• Recovery of products already paid for.
• Recovery of funds paid in advance for products and services still to be supplied.
• Loss in value of products being stored pending sale

A Suppliers liquidation is a significant cause for concern. Organisations must be quick to react to resolve any supply and warranty issues caused as a result of a Supplier no longer trading, the primary actions of which are to have a risk management process in place that highlights areas of supply concern before a Supplier ceases trading and business disaster recovery planning to deal with, and limit the impacts of supply shortages and warranty liabilities.

More articles can be found at Procurement and Supply Chain Management Made Simple. A look at procurement and supply chain management issues to assist organisations and people in increasing the quality, efficiency, and effectiveness in the supply of their products and services to customers' delight.  ©️ Simon Callier. All rights reserved.

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