In the current economic context, some businesses are facing an increasingly significant risk, namely the insolvency of a key client.
What Can You Do to Protect Business Against a Client’s Potential Insolvency?
Review the Company’s Internal Policies and Procedures
The new year can be a good opportunity to reassess your credit management practices and mitigate risks associated with a potential insolvency situation.
Here are examples of good credit management practices for SMEs:
- Effectively manage accounts receivable by assessing clients’ creditworthiness before granting credit, setting clear and appropriate limits for each client, and closely monitoring overdue accounts.
- Implement a clear credit policy that defines credit approval criteria and communicate this policy to both clients and your teams.
- Use guarantees or consider credit insurance to protect your business against payment defaults.
- Train and raise awareness among your staff and regularly review accounts receivable to identify at-risk or financially distressed clients, adjusting credit limits and terms as their situation evolves. Stay informed about your clients’ financial condition, including long-standing ones.
Review Contracts and Guarantees to Prevent Insolvency Risks
Certain clauses may be included in your client contracts to help protect your business, such as retention of title clauses or personal guarantees from company directors acting as sureties , as well as mortgage security. Make sure you comply with the publicity and registration requirements applicable to your securities before your clients become insolvent. Consult a lawyer to assist you in drafting your contracts, as failure to comply with certain formalities could be costly.
Exercise Your Right of Repossession as a Supplier
If you have delivered goods to your client within the 30 days preceding their application for protection and those goods have not been paid for, you may be entitled to a specific right, namely the right to repossess the goods. Exercising this right is subject to strict deadlines and formal requirements, and failure to comply may result in the loss of your rights.
File a Proof of Claim in the Prescribed Form
You must file a proof of claim within the required time limits, even if you have little hope of receiving a dividend through the distribution.
This step is mandatory and essential to be eligible to participate in the distribution.
Note, however, that when a person is both a creditor and a debtor of another party, set-off may be invoked. This rule reciprocal mutual debts to be extinguished without payment, and the Bankruptcy and Insolvency Act provides that the principles of set-off continue to apply in bankruptcy proceedings. The debts must exist as of the date of bankruptcy for set-off to be possible.
If you are in a set-off situation, you are not required to file a proof of claim with the trustee unless your claim exceeds the amount of your debt to the bankrupt party. In all cases, it is strongly recommended that you obtain written confirmation from the trustee acknowledging the set-off. If there is any uncertainty, filing a proof of claim is advisable to preserve your rights.
Become Actively Involved in the Insolvency Process as a Creditor
Read the trustee’s reports, attend creditors’ meetings, and vote on settlement proposals. If necessary, you may consider joining forces with other creditors whose interests align with yours. The lawyers in our Bankruptcy, Insolvency, and Restructuring group can assist you or represent you at meetings and in discussions with the trustee or other representatives.
Have you learned that your client made payments to another creditor shortly before its bankruptcy? Have assets recently been transferred to another company related to your client? It may be advisable to inform the trustee, who will examine whether such transactions can be set aside if they contravene the provisions set out in the Bankruptcy and Insolvency Act.
Accordingly, whether you need advice on drafting your contracts, preparing your credit policies, assisting you in the event of a client’s insolvency, or reviewing your risk management strategies, our legal team is at your disposal.
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