UK: How Can A Supplier Protect Itself From Insolvent Customers?

Last Updated: 28 April 2014
Article by Tim Speed

The last few years have seen a number of high profile high street retail casualties. Although we are told that the economy is recovering, we may not have seen the last and so how do electricity suppliers protect themselves against insolvent customers?

Clearly a supplier cannot protect itself completely, but it should take certain steps, for example, ensure that invoices are sent out on a regular basis. This way, monitoring a customer and their payment profile and spotting anomalies is easier. A regular review should be undertaken of the customers' circumstances. In particular:

(1) Is the customer paying in accordance with their usual contractual terms or not? If not, why not?

(2) Has the customer's credit reference been downgraded? Has there been a profits warning? Have any CCJ's been registered against the company?

(3) Have you heard rumours of their insolvency?

If any of these occur with one of your customers, you should monitor the account closely, ensure the account is brought up to date, review the contractual position with that customer making sure that such contracts are properly executed and identifying any possible issues, and consider seeking a security deposit or third party guarantees (if you are able). If the account is not brought up to date, consider taking steps to de-energise the site(s) and/or take some recovery action so as to minimise your losses.

If the customer does enter into some form of insolvency, what can you do to minimise your losses and avoid being an involuntary creditor?

There are several steps you can take to enhance your position:

(1) Act quickly.

(2) Get in touch with the insolvency practitioner as soon as possible and find out their intentions. Do they intend to trade the business and use electricity? Or mothball the site? Are they proposing to try and hand it back to the landlord? The intention will determine how you should proceed.

(3) With reference to your contractual terms and conditions consider whether you can and should terminate the contract (and trigger a deemed contract and therefore higher rates). This could assist your negotiating position, but ultimately this will depend on the type of insolvency, the intentions of the insolvency practitioner, and the funds available in the insolvency. In our experience of customers in administration, the administrators will want to agree contractual rates of supply (as opposed to higher deemed rates) if they intend to continue to run the business, but without giving the supplier the security of a substantive notice period which could leave the supplier significantly out of pocket if it then has to contact the landlord/de-energise the site(s) after the administrators vacate. These issues should be addressed in the terms of supply with the administrator.

(4) You should consider seeking a personal guarantee from the administrators as soon as possible and if they are not prepared to provide this, look to de-energise the site(s).

(5) If you have a security deposit you must consider how and when this should be used. Could it be used towards any outstanding balance? Or could it be used for the electricity consumed during the administration/insolvency process?

(6) Has a pre-pack been proposed? This is a process where a company is placed into administration and its assets are sold almost immediately to a third party. This is a common occurrence and often the same management run the new business with the same employees but through a new company. If this happens, consider terminating the old contract, find out details of the new company immediately and consider offering them a new contract. You will not be able to pursue the new company for the old company's debt and so you need to concentrate on regularising the supply going forward.

Remember the insolvency practitioner will have lots of issues to deal with at the start of any insolvency process and lots of disgruntled creditors. However, they will often need the ongoing supply of electricity, particularly where the business is going to continue to trade in administration, and therefore you should be in a strong negotiating position.

SGH Martineau LLP have acted for a number of electricity suppliers for a number of years and have experience in dealing with insolvency situations in order to maximise recoveries and minimise losses. If you are unlucky enough to have a customer enter into some form of insolvency please feel free to contact us.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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