Alex Jay, Head of Insolvency and Asset Recovery, discusses how companies can protect themselves from rising insolvency risks as businesses begin to emerge from the pandemic and commercial pressure increases.

Insolvency risk can affect businesses and individuals in a number of ways.  Markets can turn rapidly – think for example of the recent spate of energy company failures – and can catch you off guard.

As we head into uncharted waters in terms of the multiple pressures facing the global and local economies and businesses becoming more exposed to the after effects of the pandemic with the furlough scheme and temporary ban on winding up petitions ending last month, insolvency risk is going to grow significantly.

Preventative measures

Even if it is not your business that is at risk of insolvency, you could have customers, suppliers, asset managers or other stakeholders who are at risk and this could still affect your company.

Supply chain issues have been making headlines at present, and these issues are likely to persist. But those who have relationships, or assets of any kind (particularly financial products) with, or held by, seemingly stable third parties, can still be at risk.

One of the best ways to mitigate against third party insolvency risk is to be alive to those issues before they happen.  Things to look out will vary depending on the business you need to scrutinise.  A key supplier of goods, for example, will have different issues to an asset manager. Nonetheless, some key red flags to watch out for include:

• Late payment of invoices
• Late delivery of goods
• Failing to honour deadlines
• Re-negotiating agreed terms such as price
• Changes in leadership team
• Unusually high turnover of staff
• Deteriorating service levels or quality standards

There are also subscription services that monitor companies for other less evident signs of insolvency, such as court claims, and even winding up petitions, which can be useful and, if utilised in the right way, are effective at monitoring third parties for insolvency risk.

Dealing with insolvency issues

Of course, none of the methods above are a complete solution. There may be little that can be done if a third party is facing insolvency. However, there several points to bear in mind that may help:

• Engage early with any suspected insolvency issues affecting relevant third parties
• Sometimes, in the case of key customers, suppliers or other stakeholders, an early discussion with them to see if there is anything that might be done to assist avoiding a formal insolvency may be commercially worthwhile.
• Act fast to review the likely impact of a formal insolvency event on your own business and consider steps that can be taken to mitigate the damage.
• If any sort of restructuring is proposed that affects you, understand the implications and your rights in relation to the process.
• If a formal insolvency process commences (such as a CVA, administration, or liquidation), engage with it urgently – you may have rights that can impact the end result.

The final thing to remember, is that insolvency, and any pre-cursor to it such as a restructuring, is a highly specialist area in legal terms. The rules and regulations that govern what is – and what is not – acceptable are complex and often subject to grey areas and interpretation.

The earlier you seek professional advice the better, so that you can protect your position, preserve value, and maximise your changes of avoiding significant damage from an insolvency event that affects your business.

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This communication has been authorised by Arthur J Gallagher Insurance Brokers Limited for the purpose of s21 of the Financial Services and Markets Act 2000