- Managing Me
- Big Ideas
- Managing People
Imagine if one of your customers had the legal power to reach into the corporate bank account and take back the past six months of payments they have made to you.
There is such a customer: an insolvent one. A liquidator, once appointed, can retract payments made, in some circumstances, to suppliers, says Middleton’s insolvency partner, Michael Forrest.
Some suppliers to the collapsed Retail Adventures discount chain are crying foul. Retail Adventures owes about $270 million, and some suppliers believe they were misled into supplying the company just months before it collapsed, according to a report in today’s Australian Financial Review.
But those suppliers that knew nothing of Retail Adventures’ insolvency problems might actually be in a better position to staunch the losses from the liquidation process than other better-informed ones, Forrest suggests.
The issues facing all leading companies when one of their customers gets into financial problems are more complex than most realise.
It is what you say (not what you know)
Logic has a habit of disappearing in times of crisis. If a supplier suspects their client is in trouble, logic dictates an honest conversation that starts between the two parties.
Forrest’s advice? Be very careful about that. The liquidator’s power to recover money from suppliers can be triggered by such a conversation. “The liquidator has the power to recover all payments back from suppliers before the key date of insolvency; a strong power.
“But there are defences that can be raised, including that you had no idea of your client’s insolvency. That is a defence.”
Leading companies are caught in a bind. Even internal memos or records of conversations between the CFO and CEO about a client’s solvency or ability to pay can be “discovered” by the liquidator and used against a company to prove they knew their client was insolvent.
Any verbal or written comment from a supplier that suggests the client’s inability to pay bills as and when they fall due can be used against the supplier to recover payments. Says Forest: “The awkwardness of this conversation, in my mind, is trying to get the answers without saying something. If you send a customer a letter saying you owe me $200,000 and I think you can’t pay, you are insolvent, you will have a tough time resisting paying that money back to the liquidator.” (This is because insolvency laws protect all creditors against some creditors getting “preferential” payment.)
The first mistake
Despite the very real dangers that a liquidator’s power might cost leading companies thousands (or millions) of hard-earned dollars, very few suppliers have an insolvency clause in the standard terms and conditions of their contracts.
“This is one thing we see a lot of – contractual arrangements between customers and suppliers won’t deal with insolvency,” Forrest says.
Typically, contracts are not reviewed over the years. “We often find that, especially in long-standing relationships, where contract documents were drawn up back in the day, they no longer describe and cover what is happening in the present,” says Forrest.
Suppliers can end up contractually obliged to their customers, even when they know things are going wrong, and can do nothing to extract themselves. If the contract is exclusive, the result can be devastating. “You need to find someone else, not haggling with this customer. You need the ability to exit quickly.”
The second mistake
Liquidator and turnaround specialist, Schon Condon, of Condon Associates, advises that suppliers treat their relationships with customers with the greatest care and attention. “This starts from the first day. Companies must have an intrinsic and detailed relationship with their customers. They should know as much about their customer as they do about their own suppliers. Approach it in a team manner, seeking to work to ensure their customers’ success, as well as their own.”
This means being intimately acquainted with their clients’ plans, their market share, their financial structure, their strengths and weaknesses. “And, as the market changes suppliers should be monitoring that market to ensure their customer is making changes to move with the market.”
The real problem
Condon says the problem is not [just] the money that will be lost should the customer collapse. “It is not the X dollars of stock that is catastrophic. If this business represented 10% of turnover, the largest amount of damage is from the loss of that revenue into the future,” he says.
Of course, leading companies are aware that if they act with too much haste, they may push their own customer from a cash squeeze into a collapse, and contribute to their own loss. “Sometimes they are your most important customer. You don’t bring this relationship to an end lightly or take action unless you have to. It is a very tough call.”
Forrest says that using lawyers to investigate the solvency of customers can be particularly useful in some cases because their investigations are covered by client privilege and the liquidator cannot see them. “It may be a self-serving point, but it is true,” he says.
If, despite all due care, a customer starts to become more trouble than they are worth, taking action can protect revenue. Reducing credit terms, even going as far as asking for cash on delivery, or requiring security or director’s guarantees might work against you in the event of liquidation, but will prevent throwing good money after bad.