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At least I got paid before the customer went bust...... oh!

There is a recent court decision which will have a significant impact on people who get paid for outstanding invoices before a company is wound up. It may mean that you, the supplier, gets paid by your customer, but then you have to give all of the money back!

S.127 of the Insolvency Act 1986 is a very brutal piece of legislation which means that once a company goes into liquidation, the liquidators may be able to recover money which has been paid to suppliers before the company was wound up.  

The general premise behind the legislation is that all of the creditors should be entitled to receive a proportion of whatever assets are held by the company. It should not be the case that, when a company is going into liquidation, only those who either shout loudest or have good “connections” with the distressed company, benefit.

  1. What does s.127 say and what does it mean?

In short, it says that after the liquidation process starts for a company any payment by the company can only be made with the permission of the court. If that permission is not granted, the liquidator can recover any sum paid to a supplier.

  1. How does a supplier get around it  and what steps should a supplier take in order to avoid problems?

If you do not get permission from the court at the time of payment there is not much that can be done because of recent tough case law. In short, you can try to apply for the court’s permission retrospectively but you have to be able to justify that payment to you , the supplier, benefited the creditors generally. That is not easy to do.

If you fear that your customers are facing financial problems then there are checks that you can do. However, taking steps to be either paid in advance, upon delivery or tightening credit limits are the best bet.

At Dawson Hart, we can advise on these types of issues which you may not be aware of.  Contact Nick Stockley for further information.