Businesses are fighting fires on many fronts in the current economic climate. Banks withdrawing overdraft facilities and other funding is not helping and some suppliers have announced they will pay non-food suppliers within 60 days not 30 days to help fund the expensive Christmas period. Conversely, some suppliers are trying to tighten payment periods and demanding cash up front.
What can a business do to assist itself from a legal point of view in the current climate? Michael Foxford, a partner in Birchall Blackburn advises:
1. Investigate how watertight existing contracts are – can they be terminated at will or on long notice periods? Can prices be raised contractually or are they fixed? Are there any written terms and conditions, and if not, could new ones be put in place?
2. Look at getting out of onerous contracts which cannot be afforded. Check with lawyers if legally binding obligations have been formed or not. Consider the cost of terminating contracts which may be cheaper than continuing.
3. Do very thorough investigations into the credit worthiness of any one supplier or customer who is crucial to your business.
4. Ask for payment up front, in cash or by irrevocable Letter of Credit and also director or parent company guarantees of obligations and ensure they are drawn up by lawyers so that they are legally binding.
5. Every seller ought to have written conditions of sale which reserve ownership of the goods (or intellectual property where copyright such as computer software or designs is being written for a customer) until full payment is made. Ensure the written terms apply and are compliant with case law on retention of title. Then if a customer goes bust you can walk into their premises and take your goods back. If you do not do this, ownership passes on delivery even though payment has not been made!
6. Consider mergers. Although the competition rules have not been set aside, it is likely that a more understanding attitude will be taken by competition regulators to mergers even between competitors. Now is a good time to pick up cheap assets at fire sale prices but always take legal advice.
7. Avoid the dodgy dealings some businesses engage in during a recession such as price fixing with competitors, rigging of bids and other illegal business practices. The Office of Fair Trading has just issued a statement of objections against some recruitment companies which may lead to fines of up to 10% of worldwide group turnover in due course and, where there is dishonest horizontal price fixing and bid rigging, individuals can be jailed for breach of the Enterprise Act 2002.
8. Assess if contracts can be transferred. Some suppliers have been assigning contracts to new subsidiaries with very poor credit records. Sometimes the contract prohibits assignment of even its benefit without consent, so do check the legal position before accepting contracts can be moved around a group of companies.
9. Recover debt. Often he who proceeds first recovers money. Consider issuing statutory demands, starting legal action and pursuing other parties for breach of contract. When money is tight, every penny counts.
10. Do not let large debts build up with customers who may not be able to pay. Take action. Require payment up front, security or even an equity stake in their business. Refuse to provide goods or services if no payment is forthcoming.
Contact us for advice about debt recovery and general litigation or see our litigation & insolvency section for further information.
For business advice, contact our Commercial team by email.