In today’s uncertain economic climate, UK businesses must be prepared for the potential insolvency of critical suppliers. Whether triggered by economic downturns, inflation, Brexit-related challenges, or sector-specific issues, supplier insolvency can disrupt operations, lead to contract breaches, and damage customer relationships. A combination of legal awareness, supply chain strategy, and proactive risk management is essential to mitigating the impact.

Understanding Supplier Insolvency Under UK Law

In the UK when we talk about supplier insolvency, this typically means a formal insolvency procedure such as administration, liquidation, or a voluntary arrangement. These procedures can affect a supplier’s ability to fulfil contracts in different ways. For example:

• Administration is a process aiming to rescue the business as a going concern and administrators will often trade a business while a buyer is found, so supply may continue (possibly via a new company).
• Liquidation (winding up), by contrast, is a “terminal” procedure where the company’s business ceases and its assets are sold to repay creditors. Continuity of supply is therefore very unlikely.
• Voluntary arrangements such as Company Voluntary Arrangements (CVAs) and Part 26 Restructuring Plans are agreements between a company and its creditors to write off debts or pay them over time. If approved, the company will continue to trade, so supply should be unaffected.

You can find more information about administration and liquidation here: Another closing down sale? The roles of insolvency practitioners explained

Early Warning Signs

Once an insolvency procedure has commenced, the actions that a customer can take to protect its position are likely to be limited. It is therefore vital to be alert to early indicators of distress, which may include:

• Late deliveries or excuses for non-performance
• A sudden push for early payments
• Deterioration in product or service quality
• County Court Judgments or winding-up petitions
• Changes in directors or company structure
• Adverse reports from credit agencies (e.g., Creditsafe, Experian)

Monitoring these signs is crucial for triggering timely risk mitigation measures.

Strategies to Manage and Mitigate Risk

1. Pre-contract due diligence

Conduct checks via Companies House, credit checks, and supply chain audits before entering into agreements to understand the supplier’s financial health and corporate structure.

2. Contractual Protection

Include protective clauses in supply agreements, such as:

• Termination provisions which allow you to exit the contract at a suitable point – this may be before the supplier enters administration or liquidation.
• Step-in rights, which allow you to take over elements of performance, especially in outsourcing or IT contracts.
• Clauses allowing you to recover or access critical assets such as tooling or intellectual property.

3. Diversification of Suppliers

Avoid sole-supplier arrangements where possible. Where exclusivity is necessary, assess the supplier’s risk profile and develop contingency plans.

4. Maintaining a buffer stock of essential components

Particularly if lead times for switching suppliers are long.

5. Ongoing Supplier Monitoring

Services such as Companies House, statutory accounts, and credit monitoring tools can help to track changes in financial position or critical events.

6. Building strong relationships and communication channels

Frequent communication with suppliers can help you to pick up on “soft” information which may indicate a problem much earlier than publicly available sources.

If the worst happens

If a supplier does enter insolvency proceedings, swift action may be critical:

• Contact the appointed Insolvency Practitioner immediately to understand whether the supply will continue and to arrange for the recovery of critical assets.
• Review your rights under the contract and if necessary, seek legal advice to assess whether you can terminate, reclaim goods, or claim damages.
• Secure alternative supply: Activate business continuity plans to switch to alternative suppliers or in-house solutions.
• Submit a claim in the insolvency procedure: If you are owed money, file a proof of debt. Even if it does not result in you receiving any payment, it gives you the right to vote on how the insolvency procedure should be conducted and is a route to obtaining information.
• Document everything: Record communications, delivery failures, financial losses, and mitigation steps. This will assist in any insurance claims or legal proceedings.

Conclusion

Managing supplier insolvency in the UK requires a mixture of practical and legal steps, such as robust contract drafting and strategic supply chain management. Early warning systems, legal safeguards, and contingency planning are key to protecting your business from the operational and financial fallout of a supplier collapse in an unpredictable market.

How can we help?

If you have concerns about the insolvency of a supplier to your business and would like assistance, please do not hesitate to contact Ruth Thurland or Michael Evans.