How To Respond When A Critical Supplier Goes Out Of Business

In some places around the world, the worst of the COVID-19 pandemic appears to be over. Lockdowns are ending, borders are reopening, and manufacturing is back up and running. For others, the crisis rages on.

Organizations might currently be fighting different battles, but there’s no question that the past six months have provided a stark reminder to all procurement professionals – major supply chain disruption is always just around the corner. Not only does this mean that risk mitigation must become a top business priority, but warnings of an imminent global recession make it all the more important for procurement to prepare for their critical suppliers going out of business.

Unfortunately, there will be times when you’re taken completely by surprise by a supplier bankruptcy. When the worst does happen, here’s what you do next:

1. Understand what it really means when a supplier “goes bust”

A supplier’s specific circumstances will dictate your legal rights, so it’s important to understand the difference between a company going into liquidation (voluntary or involuntary) and a company going into administration. Put simply:

When a company goes into administration, an independent third party assumes control with the aim of helping that company repay its debts and determine the right course of action. Liquidation finalises a company’s affairs and involves selling off all assets before dissolving a company entirely. In many cases, a company administration will end in liquidation.

Voluntary liquidation occurs when the company itself (typically the business owner) instigates the liquidation process upon recognising that the company has no future.

Involuntary liquidation occurs when an external party (typically a creditor) instigates the liquidation process.

During either liquidation processes, all litigation with the company will cease.

2. Understand your legal rights

Upon finding out that a supplier has gone out of business you might find yourself in one of the following situations:

• You’ve paid for goods and services that you have not yet received – To secure a refund, you’ll need to contact the supplier or liquidator with details of your contract and proof that you are waiting to receive goods or services that have already been paid for. If the company no longer has assets to pay you (after paying its employees and secured creditors), it’s possible that you may only receive a partial refund, or no refund at all.
• You owe the supplier money – Depending on the contractual payment terms you may still owe your supplier a significant amount of money. It’s advisable to halt further payments until you’ve received instruction from the liquidator or supplier.
• You’re awaiting critical goods or services – If you’re confident that the supplier has goods or services allocated to you, that have already been produced, you should be entitled to them. Get in touch with the supplier or liquidator to buy/claim them before they are sold somewhere else.
• Your organisation has received faulty goods – Unfortunately, it is not the liquidator’s responsibility to address this issue but if the company has sufficient insurance you might be covered.
• Your supplier has assets or property owned by you on their site – You should be fully entitled to any goods or property on your supplier’s site. Contact the liquidator providing details of these items and request that they are returned to you.

Before taking any action in response to these scenarios, be sure to consult with your organisation’s legal team and carefully review your original contract with the supplier.

3. Develop a contingency strategy

If you have failed to consistently monitor your suppliers’ financial stability or perform annual risk assessments, you may not have implemented contingency strategies for when a critical supplier lets you down.

When a supplier bankruptcy takes you by surprise, you’ll need to act quickly and effectively to minimise the disruption to your supply chain. This includes performing analyses to establish how long your business can continue to operate without this critical supplier and looking for alternatives.

Of course, you can expect the process of changing suppliers at short notice to be relatively pricey.

4. Plan ahead for next time

Going through this stressful process will drive you to do everything in your power to avoid it happening again. This includes:

• Working alongside your organisation’s legal team to address the worst-case scenarios and create a bullet-proof contract, which should address everything from supplier transparency to what happens in the event of a bankruptcy.
• Always having a back-up plan (or two) for your critical suppliers. Supplier consolidation is all very well, but not if it comes at the expense of adequate risk mitigation.
• Establishing complete transparency with your suppliers. As a supplier approaches a crisis situation, you can be sure there will be warning signs, which is why it’s so important to monitor financial (and other types of) risk. A supplier that is reluctant to share this information with you probably isn’t a supplier you want to be heavily reliant upon.

On 28th July, PASA Connect is hosting a virtual roundtable on What to do if your supplier goes bust .. or just technically insolvent. You can find more information on becoming a PASA Connect member here.