Obviously, failure of a key customer, supplier or distributor will inevitably have a negative impact on your business. But there are some things that can be done to minimise the fall out. Here are some ideas to help you.
Make sure all important contracts clearly set out what happens in the event one of you goes bust. Many of them don’t, and many people don’t realise that a contract generally won’t terminate automatically in these circumstances. For example, if your distributor gets into trouble, it is important that you have the ability to immediately terminate the agreement and look for alternative distributors quickly. An inability to do this can be a disaster if your product is not hitting the market.
You should have clauses in your trade terms which keep you as the owner of all stock until you are paid in full (called retention of title clauses). It won’t get you paid, but it will help minimise the loss by getting your stock back.
You also want to control the sale of your stock in such situations to protect your brand and make sure a bunch of your stock is not sold at auction for fire-sale prices by a liquidator. A retention of title clause helps with this. It might also make commercial sense to include a right of first refusal to buy back stock in appropriate circumstances.
Finally, if at all possible, take some form of security for any debts you are owed. This allows you to jump ahead of other unsecured trade creditors and potentially get paid before they do. Personal guarantees from directors also come in handy, provided they are good for it.
The world of corporate insolvency can be confusing. To make things more complicated, there are a number of different types of external administration that a company can find itself in, and each one is different. Here are the key terms and what they mean:
• Liquidation – this is pretty much game over. A Liquidator is appointed to shut the business down, sell the assets and distribute anything recovered for the benefit of creditors. Usually there are secured creditors like banks and employees who get paid before ordinary trade creditors, which generally means trade creditors get a very small return, or nothing at all.
• Voluntary administration – this is an interim measure while creditors decide what should happen to the company. The administrator does a bunch of investigations and prepares a report for creditors setting out how things have ended up where they have and what the options are going forward. Creditors then get together for a formal meeting to vote on what should happen to the company. The two most common outcomes are liquidation or a deed of company arrangement.
• Deed of company arrangement – basically this is a deal with creditors. Often, this is as simple as creditors agreeing to accept a certain amount of cents in the dollar. In return, they release their claims against the company and allow it to continue trading. Equally, these arrangements can involve more complex restructures, the sale of all or part of the business and equity injections. There have recently been a number of high profile deals in this space in the fashion industry including Bettina Liano.
• Receivership – a receiver and manager is usually appointed by the bank that holds security over the assets of the company. The receiver’s main job is to get as much money back for the bank as possible. This usually involves the receiver selling the business for the best price that can be achieved. This is what has happened to Baubridge & Kay and the Colorado Group, amongst others.
Unfortunately, there are no perfect solutions when a key business partner gets into trouble. Hopefully the above ideas will help. Implementing some of the above is legally complex and shouldn’t be tried without professional advice. Proactively thinking about these potential issues and doing something to protect your business is the best advice in this current economic climate.
Michael Forrest is a senior associate at Middletons law firm. www.middletons.com.au
Bettina Liano: Still trading.