The introduction of the Enterprise Act heralds a major shift in the relationship between debtors, creditors and the other stakeholders affected by an insolvency situation. It is reasonable to say that trade creditors have usually fared badly when compared with secured creditors in terms of making a recovery in an insolvency. It may be that the Enterprise Act will improve their lot and certainly that is the intention.

How that may be achieved is outside the scope of this article, although it is clear that the emphasis on business rescue and turnaround will become even greater. But notwithstanding this significant change in approach, there remain certain fundamental rules for seeking to minimise your exposure to a trade debtor:

Avoid becoming a trade creditor
lKnow your customer: The best way to cope with an insolvent customer or supplier is not to have one in the first place. We have all heard stories about the signs of impending failure – flagpoles outside the new offices, personalised number plates, the Queen's award for industry and so on, but there are more rigorous ways of checking out your customer.

Credit searches, although possibly less useful than previously because of new restrictions on the kind of financial information that can be obtained, are still worth considering. Company searches can reveal issues of concern such as non-filing of accounts, constant changes of directors or numerous secured creditors. Late payment of any invoice is a sign that cash is short and should be picked up by your credit controllers straight away, and your exposure to the customer reviewed. Do not assume that a financially strong company will necessarily remain so. When dealing with new customers, especially those which approached you, find out as much as you can before trading with them.

lStructure your relationship advantageously: Ensure that it is your terms and conditions that will apply and that they are properly drafted and reflect the changes brought in by the Enterprise Act. If you are supplying goods, make sure that you have an enforceable retention of title clause, including an express licence to access the premises of the customer and recover your goods. Consider what happens to any licences, especially of intellectual property rights, in the event of insolvency.

Consider whether there is any security which you could take over the assets of the customer/supplier. Depending on the nature of your business this may not be an option, so consider whether any monies paid by you could be held under a trust or similar arrangement. Monies held on trust for a third party are usually excluded from most insolvency procedures.

If a client or a customer appears to be insolvent
lIdentify the kind of insolvency: Often the first you will hear of a problem is when you receive a letter from an insolvency practitioner. This should explain what the position is and will often give you notice of a meeting of creditors.

If the customer or supplier simply ceases to trade or will not return your calls, a search at Companies House will reveal if it is subject to a formal insolvency procedure. Alternatively, a telephone call to the Companies Court will confirm if there is a pending, winding-up or administration petition which has been presented against the debtor. If you are still in doubt, visit the premises, speak with your competitors or industry contacts and try to find out what has happened. However, be careful about making statements that could be deemed to be defamatory – many digital phone systems cease functioning temporarily!

If there is no formal insolvency procedure in place you might want to start the process yourself or take other legal action. It is all very well an insolvency practitioner operating for the collective benefit of creditors, but often if there is any cash to be had the person who pushes hardest has the best prospect of being paid.

lSeek professional advice early: Unless you are an expert in the field yourself, speak to your lawyers or your accountants if they have insolvency expertise. There may be steps available to you at an early stage which might be lost if not pursued immediately.

lConsider immediate actions: Review with your professional advisers what steps might be open to you instantly. Is there a retention of title (ROT) clause which you can enforce or a trust in place which you can rely on? If you have already obtained a judgment should you enforce this? If you hold security should you take steps to enforce your rights or await developments? Is there an agreement of any sort that you can threaten to terminate? If you are in the position of being a landlord, can you forfeit the lease or distrain for unpaid rent? Certain insolvency procedures such as administration seek to impose a moratorium on the enforcement of such rights and it is important to get advice on how this affects you.

lProtect your business: Review at an early stage how your customer's or supplier's insolvency might affect your own business. If there is a substantial sum involved consider whether you need to take advice from an insolvency practitioner about your own financial position. Remember that company directors have strict duties imposed on them in such situations and can be held personally liable if they do not act reasonably and in the interests of all creditors.

If the insolvent party is a sole supplier of crucial raw materials for your business, consider if you need to find a new supplier and, if there is not one available, how you will deal with this. Land Rover was effectively held to ransom by the administrators of an important supplier whose goods were crucial to keep the production line open. I recently advised administrators in a similar position, where the company in question was the only supplier of camshafts to a number of leading car manufacturers which were wholly dependent on it. If you are dependent in this way it is plainly sensible to have a contingency plan worked out in advance of the problem arising.

The formal insolvency process
lThe creditors meeting: If there is a formal insolvency procedure you will receive notice of a creditors meeting and various forms to fill in before this. One will be a proxy form which must be completed and returned to the insolvency practitioner if you wish to attend and vote at the meeting. There will also be a proof of debt form on which you will need to give details of your claim and any security that you hold for it.

Do not just throw these documents in the bin. Your vote could influence who is appointed to deal with the insolvency and how they do this. This could directly impact on how much money you recover from the insolvency.

lRepresentation at the creditors meeting: It is often possible to arrange free representation at the creditors meeting by an insolvency practitioner. This is because by obtaining your proxy, and thus your vote, the practitioner might be able to take over the appointment or at least support another appointee and thereby ensure their support at a later date. If your claim is an important one for your business consider attending the meeting yourself. Aside from the fact that you will be given the opportunity to question the directors in person, they can often be quite enlightening. There may also be the opportunity to become a member of a creditors committee that will oversee how the insolvency practitioner runs the insolvency.

In addition, under the Enterprise Act, the administrator now has a duty to act "quickly and efficiently" and can be challenged by creditors. The extent of creditors' rights and administrators duties under the Act remains to be seen. However, there appears to be an intention that there will be increased accountability expected from office holders.

Upside for your business?
lReview the opportunities for your business: For example, if the insolvent business is a sole supplier might it be worth buying its assets and goodwill, usually at a knock-down price, from the insolvency practitioner? Are there any particular assets that you might want to purchase or any intellectual property rights?

If you do have to write off large sums of money, consider the possible tax implications of this and how they can best be used to your advantage.

lLearn from your mistakes! There will always be something you could have done which would have minimised the effect of the insolvency on you. This could be through better credit control, redrafted terms and conditions, better structuring of the deal or some other relatively simple step which was overlooked. Speak to your lawyers or accountants about this as they may have some practical ideas relating to your particular type of business.

Ultimately, no matter what steps you take, you might still be badly affected by a customer or supplier's insolvency. It might even bring your own business down. However, by following the above guidelines you should at least be able to minimise the impact on your business where possible.

It is also important to remember that insolvency does not automatically mean that you will not get any of your money back. With new legislation such as the Enterprise Act about to come into force, the culture has shifted towards rescuing businesses rather than simply closing them down and selling off the assets piecemeal. Most law and accountancy firms no longer have 'insolvency' departments but now have 'business rescue', 'recovery' or 'restructuring' teams which reflect this shift.

In short, insolvency today is not always what it used to be, although by definition there is never enough money to go around. You may be able to minimise the impact of insolvency on you, and possibly under the new regimes, have a greater likelihood of recovering some of your money.

Duncan Graham is head of business rescue and insolvency at Mills & Reeve