A Difficult Road ahead?

Market Position

According to research conducted by accountancy and consultancy firm Moore Stephens, the number of insolvencies among UK delivery and logistics companies has jumped by 20% in the last year (221 in 2014 compared to 184 in 2013) leading the firm to question the sustainability of the current logistics model.

Jeremy Willmont, Moore Stephens’ Head of Restructuring and Insolvency says: “The accelerated growth of e-commerce has boosted the fortunes of some logistics companies but left others struggling to keep up…smaller, weaker players are being forced out at a faster pace…”

Moore Stephens identify that there has been a generational shift in purchasing patterns with younger consumers ordering multiple items at any one time and expecting to be able to return any unwanted items without any extra costs. Such a change in patterns causes strain on any logistics business, but smaller companies are finding such practices virtually impossible with the costs of upgrading integrated IT systems being prohibitive.

The falling cost of fuel would be anticipated to result in reduced overheads for logistics companies which in turn would be anticipated to produce higher margins. However, Moore Stephens have identified that whilst fuel costs are falling, any saving is being passed onto the consumer by way of reduced delivery costs. Philip Bird, Logistics Specialist at Moore Stephens, states in relation to falling fuel prices that “The retailers have had the ‘whip hand’ due to excess capacity in the sector, and have been able to negotiate contracts that place more of the risk on the side of the delivery providers

Naturally, such news is of concern for the logistics sector. The administration, or other insolvency arrangements, of a large customer or client can significantly affect a haulier’s business operation and may even result in a domino effect. There are, however steps that logistic companies can take to prepare for and minimise any impact of an insolvent customer. Below we look in particular at the effect that a customer going into administration can have on a haulage company.

Administration

Gavin Jones, a Partner and the National Head of Business Restructuring at DWF LLP, comments: “the increase in administrations is, naturally, a worrying time for hauliers. As the outlook as forecast by Moore Stephens suggests, there may be more casualties to come, haulage firms may be asking themselves what, if anything, they can do to safeguard themselves in the event that a key customer or supplier enters into administration.”

Being well acquainted with the principles and effects of administration, Gavin sets out below some initial considerations and tips for those operators wishing to safeguard the effects of insolvency and, in particular, administration.

Key Principles

The modern administration process was introduced by the Enterprise Act 2002 and its primary focus is a rescue mechanism for a company which is, or is likely to become, unable to pay its debts. Administration allows such a company to benefit from a statutory moratorium which prevents creditors enforcing any security or bringing claims against the company without authority from the administrator or the court. The moratorium is important to administration as it gives the company some breathing space from creditor pressure in order to allow the administrators to achieve one of the three statutory purposes of administration, which are (in order of importance) to:

  1. rescue the company as a going concern;
  2. achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
  3. realise the company’s assets for the benefit of one or more secured or preferential creditors.

What can you do to minimise any impact of one of your biggest customers going into administration?

The best action to take is preventative.

A) Your contract

Ensuring a well drafted contract is in place to rely on at such time that your customer enters into administration is key. A major concern which you may have upon a customer’s administration (or indeed other insolvency event) would be for the recovery of any monies owed.

In the event of the collapse of a customer you would have a better chance of recovering monies owed if your contract incorporates a valid enforceable general lien and right of sale clause.

A lien is a legal right to retain goods in your possession against payment of a debt due. To be effective, a general lien should be linked with a right of sale, so that the goods can be sold in the event of the customer going into administration.

A properly drafted and incorporated retention of title clause also affords protection, enabling a supplier to retain title to the goods if the customer enters into administration.

Operators who have general lien over the goods should act swiftly to find out which insolvency procedure the customer is following as there is usually a time requirement. If the contractual right of sale has not been exercised before the start of the administration, then due to the moratorium, under the Insolvency Act 1986, approval of the administrator or the permission of the court will be required before steps are taken to enforce any security over any company property.

B) Credit risks

Operators can limit their exposure to credit risk through measures such as:

  • taking out credit insurance – although it can be expensive, it provides protection by setting credit limits for your customers and recognising the danger signs;
  • before taking on new customers carry out due diligence checks and if in doubt, ask for payment in advance;
  • maintaining a credit control system – keep an eye on longer payment periods and ensure late payments are swiftly chased;
  • spread the risk amongst a varied customer base so that not too much reliance is placed on any one customer.

What if the customer has already gone into administration?

If a customer does go into administration and this puts your business at risk then you should consider:

  • creating an action plan to limit the damage in the event of a customer collapse;
  • establish how much you are owed;
  • hold an emergency meeting with management;
  • talk to an insolvency practitioner/restructuring specialist;
  • arrange a meeting with the bank to establish how much financial support is available;
  • whether the administration is a pre-pack administration. If so, consider the value of an ongoing relationship with the new company as opposed to the unsecured debt;
  • exercising (with consent) any valid lien over the goods you have in your possession.

Should you fall into difficulty in this area, please do not hesitate to contact one of our specialists below.

Authors:

Gavin Jones and Amy Crighton

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