October 29th, 2012 / Insight posted in

How to recover if client goes bust

DB asks: My firm is doing some work for a building contractor that has gone bust part way through a job. What should I do?

If the contractor has gone into liquidation it is unlikely that the company will continue to trade, writes Jon Sutcliffe, partner at Kingston Smith LLP. If any of the contractor’s assets are bought by a new entity you may be able to negotiate a deal to go on supplying your services. This will allow you to recover some value, though your success will depend on whether there is much incentive for the new owner to complete the project.

In rare cases, the contractor may go into administration. In this case the business continues to trade but the administrator is not bound by the terms of the original contract so you will need to negotiate new terms. You may be able to negotiate payment of outstanding fees but you will need to be in a strong position to achieve this; again, it will depend on how attractive the rest of the project is to the administrator, and the administrator will need to have sufficient funds to pay you.

One important point to take away from this is that you should always seek prompt payment. Delays in payment may indicate potential problems before a company goes under and it is often the case that he who shouts loudest is paid first when a company is facing cashflow difficulties.

If there are clear signs that your client is struggling to adhere to payment terms, it is sensible to speak to your solicitors and get them to send a simple letter requesting immediate payment.

In practice, companies are more likely to pay up when a solicitor or other professional is involved rather than just your accounts department.

One bit of good news is that, if your client is bust and you are left with an invoice that is not paid, you will get tax relief on the bad debt.