TRADE CREDITORS are an apathetic bunch! When a company goes bust usually as a result of HMRC or bank pressure – and this will only increase when the government takes their foot off the brakes – trade suppliers and professional advisers are the next biggest losers. Yet they rarely do anything about it.
The insolvency legislation is designed to give unsecured creditors (i.e. everyone other than employees and the financiers) control over their own destiny when dealing with an insolvent debtor. They have control over the appointment of the officeholder, e.g. Liquidator or Trustee in Bankruptcy, and their fees. They are sent notices of meetings at which these things are decided and invited to vote – one vote for every £1 claimed. Yet, anecdotal evidence is that less than 3% of creditors entitled to vote actually bother to do so.
If unsecured creditors acted together they would have a stronger voice. In the past there were active “credit circles”. They were informal meetings of credit controllers of suppliers in various but specific sectors. They commonly had customers in common and compared credit histories and payment histories with each other. They clearly could not “black ball” proceedings nor collectively refuse to give credit but their collective experience and their sharing of best practice, e.g. of what to do when the company went to the wall and how to influence the appointment of insolvency practitioners or the insolvency committee, often meant that they maximised their recovery from an insolvency or even better reduced their exposure to a failing company before the inevitable happened.
Credit circles largely died away with the advent of electronic credit ratings and the availability of significantly more financial information available online, making it easier for credit managers to monitor their customers. They have also educated their sales people to keep their eyes and ears open and report back to the office if they see signs of failure at their customers. Some companies have even gone further and penalised salesmen by reducing their commission when bad debts are suffered in respect of any of their accounts. This certainly keeps them on their toes!
With the development of social media and social networks it is now much easier to keep in touch. Credit managers and company accountants can, for example through LinkedIn or Facebook, communicate with like-minded individuals. They can exchange information about their experiences of particular customers, e.g. if they are bad payers or defaulting. Such forums including blogs could be particularly useful in high risk sectors such as retail, hospitality and construction. They could be kept to closed groups inviting only “friends” to participate in the exchange of information. Of course it is essential that they do not disclose confidential information nor act in concert in such a way that would damage the business or their customer. However information is power.
The combination of shared information plus a more proactive response to formal notices about the insolvency of a customer with an invitation to vote at a meeting, may allow creditors to feel they are no longer powerless victims of an insolvency but, as the insolvency legislation was designed, ensures they have the final say as to who does what on their behalf.
John Alexander is a partner and insolvency practitioner at Carter Backer Winter LLP, and can be reached at email@example.com
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