Back to basics briefing: 6. Supply chain insolvency

Unless you work closely with a supplier, it is easy to miss a pattern of missed deadlines, requests for upfront payments or word of mouth from the staff on the shop floor. It is also more difficult to conduct ongoing financial and commercial due diligence.

But even in an integrated supply chain, a supplier can go bust. Lawyers therefore need to ensure there are robust contract terms in place, particularly as regards to the passing of title, set-off, payment, termination and performance security. These are all important issues in the event of insolvency, especially if you have paid for materials but not yet received delivery of them on site and you are now dealing with an insolvency practitioner.

It is also important to take action to reduce your exposure early on. For example, do you have an alternative supplier in place? Do you need some security in the form of a bond or parent company guarantees?

Recent proposed amendments to the Construction Act principally favour subcontractors and those further down the contractual chain. For example, they would be allowed to demand a guarantee of payment after they had entered into a contract, if the contractor became insolvent. If the contractor then failed to provide ‘adequate security’, the subcontractor – and presumably those further down the supply chain – would be able to suspend performance of the contract.

One way to prevent insolvencies is to ensure that subcontractors and others in the supply chain are paid on time. Businesses that work together and invest time and effort in the relationship are more likely to ensure better cash flow and avoid the root cause of insolvencies.