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Failing to deliver
3 March 2009
Hardly a day goes by when one business failure or another is not
in the news. In the last quarter 5423 companies underwent a formal
insolvency procedure, over double the number in the same quarter in
2007. The Fire Service relies on the private sector for the supply
of many of its items from tenders to day to day consumables. Do you
know what to do if a supplier becomes insolvent?
Prevention is clearly better than cure. Due Diligence will have
been undertaken by Firebuy when they are negotiating framework
agreements on your behalf and at regular intervals during the life
of the framework agreements. However, a supplier’s financial
position can deteriorate very quickly over a short period of time.
It may have a full order book, the most up to date of premises and
posted record profits last year. That does not mean that they may
not run out of cash very quickly, for example because credit
insurance cover is reduced or bank support is withdrawn. Any
suppliers of fire vehicles and equipment the timing of supply of
which is critical to you should be monitored closely. Searches can
be undertaken with credit referencers such as Experian but the most
up to date information will often come through Firebuy, your key
contacts with the suppliers. Do not be afraid to ask questions,
based on these reports, about the businesses’ funding, arrangements
with their own suppliers and what steps they are taking to survive
the recession.
If possible, avoid making payment for items supplied until they
have been delivered and you have had an opportunity to check that
they meet your specification. If you are required to make advance
or stage payments because your supplier’s own suppliers are
insisting on payment then take steps to ensure that this payment is
ring fenced in favour of that supplier. Also ensure that your
payment is immediately passed on the supplier’s supplier and title
is passed to you immediately payment is made. Do not make payment
directly to your supplier’s supplier without obtaining advice as,
without the necessary safeguards in place, the payment does not
necessarily reduce your liability to your supplier.
If instalment payments are made then try to ensure that title to
an equivalent value of goods pass to you on payment (even though
delivery may not be made until some weeks later).
Weighting up the options
There are various different types of insolvency procedures. The
terms most commonly used are administrations and liquidations. The
primary purpose of an administration is to save the company,
affording it some protection from its creditors whilst the
insolvency practitioner looks to restructure or sell the company or
its business. Liquidation occurs when there is no future for the
company and it is, for all intense purposes “dead”. The liquidator
will arrange to sell-off the assets. In both cases funds realised
may be distributed to creditors in a set order of priority.
If an administrator is appointed it is important to make contact
as soon as possible with the Framework Awarding Agency if this is
not a direct contract with yourselves and establish what their
objectives are to assist you. The administrator, on behalf of the
supplier, is likely only to fulfil your order if it would result in
you making a further payment to it. If the administrator is
prepared to allow the supplier to fulfil the contract then they may
require an advance payment from you to fund the purchase of raw
materials. If so, advice should be sought in order to secure that
payment (see above). If the administrator is not going to allow the
company to perform the contract then the company is likely to be in
breach of it. Any claim for damages for breach of contract will lie
against the insolvent company and therefore it is unlikely you will
receive any compensation.
The administrator may wish to sell the business, and the burden
of your contract with it. If there is an interested buyer then the
contract may be able to be assigned. Care should be taken to ensure
that this does not trigger a separate procurement process or breach
any of the Framework/Contract Terms and Conditions.
So in summary what should the Fire Authority do if they believe
a supplier is about to become insolvent ?:
- Obtain an up to date credit reference search and then make
contact with the supplier to ask them to address your concerns.
Ensure that the Framework Awarding Authority knows what you are
intending to do
- Do not part with any significant payments without first taking
advice.
If the supplier has become insolvent you should:
- Identify who has been appointed as the insolvency practitioner
and whether he is acting as an administrator or liquidator and if
applicable contact the Framework Contract Management Agency
- Find out what the insolvency practitioner’s objectives
are.
If in administration:
- Be prepared to talk to possible buyers of the business or
alternative suppliers through and with the Contract Management
Agency
- Be aware that you may have to agree a commercial deal with the
administrator.
- If a new supplier is going to complete your order be aware this
may trigger a separate procurement process.
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