Carillion case emphasises the importance of vigilance and sound legal advice
24 January 2018
One of the biggest business stories of 2018 so far has been the collapse of construction giant Carillion, which we’re told has put thousands of jobs at risk across the UK and left many suppliers facing the prospect of losing significant amounts of money.
Sometimes there is very little a company can do to avoid being hit when a big customer or supplier in its supply chain gets into difficulty.
But the benefits of robust terms and conditions were brought home to one of Carson McDowell’s clients who is a local supplier of Carillion during the Christmas period, when considerable financial losses were narrowly avoided.
Our client was a long term supplier of goods to Carillion before it entered liquidation and in November, through their own vigilance, became severely worried about the liquidity of Carillion, which despite being one of UK’s biggest construction firms had been carrying high levels of debt for some time.
Our client contacted us to discuss the enforcement of Retention of Title clauses which had been written into their supply of goods contract. Following threats of exercising this clause and additional threats over a potential injunctive action, we were able to ensure that losses of approximately £500,000 were avoided.
The vigilance of our client’s internal financial team, combined with strong and robust terms and conditions of their contracts made sure they didn’t become a victim to Carillion’s woes and provides a good lesson for other suppliers.
Even if you don’t have concerns about a customer or supplier, the case provides a good opportunity to review your own practices and ask the following questions:
- Are your terms and conditions right at the outset – do you have an appropriate contract with the necessary protections?
- Do you have robust internal credit controls, with particular red flags that will act as a prompt to contact your solicitors?
- Do you have your “ears to the ground” about what’s happening in your industry?
- Do you get references before you enter into a deal with a business as to their credit worthiness? Not just from providers such as Equifax or Experian, but from other local suppliers who have worked with them.
- If you are not 100% satisfied by references, do you want to ask for a personal guarantee or would it perhaps be wise to do the first few deals on a cash on delivery basis before offering credit?
- Does the customer and person you are dealing with match up? Is who you are dealing with the same as the legal entity? Also check who is paying you. If names and addresses don’t match up on invoices, this can make enforcement more difficult.
- Do you really know who you are working with, the legal entity on the other side of the contract or if an individual their position or post within the entity and their position?
- Do you really know who you are paying, and who exactly is making payments to you?
- Are they sticking to the credit limit originally agreed or have you let these limits slip over time?
- If you have any concerns, have you run them past your solicitors? They will know a different side of your industry, for example keeping an eye on the bankruptcy list, and so may already know who is a risk, either personally or as a company, or if someone has any judgments against them.
- Has the company gone from being too small to being too big too quickly? You should beware a sudden increase in demand for credit from a fast growing business.
- Are you prioritising sales over creditworthiness? It is important to be careful that your salesmen are not overselling to improve their own and the company’s figures at the expense of being vigilant.
Making sure you have answered these questions will give you a fighting chance if a supplier or customer gets into trouble.
If your solicitor is engaged early in the process it can make a big difference - sometimes it is just a case of sending a letter to get a party to engage rather than a more formal process of enforcement.
But as our client’s experience with Carillion shows good business practices and habits can help you avoid a situation where the collapse of a customer results in financial loss to you.