The recent demise of the Conviviality Group has been spectacular and well documented. The acquisition by C&C of the “Conviviality Direct” bundle of wholesale businesses – comprising Matthew Clark, Bibendum and others – was swiftly followed by assurances that all necessary funding for the operation of those businesses was in place. Suppliers were assured that there was no reason for not reverting to business as usual, and it seems that on the whole they are doing so.
All’s well that ends well for those suppliers, but that’s not usually the outcome of a customer insolvency. Let’s take a look at the risks suppliers are exposed to in situations like this, and what they can do to protect themselves.
The position of unsecured creditors
When a UK company becomes insolvent, creditors who have no security over the company’s assets can only claim a pro rata share of whatever surplus, if any, is left in the pot on the formal conclusion of the insolvency. It takes time, and in most cases they will get nothing, or very little, because there will be nothing or very little left after the expenses of the insolvency have been paid.
Credit insurance will substantially reduce the exposure, provided the premium isn’t prohibitively expensive. But insurers won’t usually cover the full amount of each invoice debt. The maximum percentage might be 90%, and there could be an excess payable for each separate debt as well. Even where credit insurance is in place, therefore, the supplier could still have a potential uninsured loss.
If insurers decline cover for the customer in question, what then? The glib response would be: don’t allow credit. But a huge amount of wine and spirits business is done in the context of ongoing relationships to which supplies on credit are fundamental. Personal guarantees are rarely sought, or might not be worth having. Rather than not do the business, suppliers take the risk of the buyer going bump. So what can a supplier do if that happens?
Stoppage in Transit
Where wine is “on the water” or in transit in some other way to the buyer, and the buyer becomes insolvent, an unpaid seller may be able to effect stoppage in transit. By exercising the right of stoppage the seller becomes entitled to possession of the goods until they are paid for: and, failing that, to resell them.
Exercising a right of stoppage doesn’t literally bring the transit to a stop. The ship or other means of carriage will usually continue on its way. But the carrier must now deliver the goods to the seller or its order, rather than to the buyer.
Like many legal concepts, it sounds simple but can get more complicated when you start looking at the detail. Where it is available as an option, however, it can save the day.
Retention of Title
Once the goods are in the possession of the buyer or its nominated agent for delivery, the transit is complete and the right of stoppage is lost. The supplier’s only hope now depends on having made sure that the relevant sale contracts included an effective retention of title (ROT) clause. If they did, there may be a chance of recovering the wine supplied under the contract, or its value. Where ROT applies, the administrators will either have to hand over, or pay for, any stock you have supplied which (a) has not been paid for, and (b) was still in the buyer’s possession or control when they were appointed.
Depending on the wording of the ROT clause, and on the factual circumstances, it may also be possible to claim the return of other stock you have supplied which is still in the buyer’s possession, even if it has been paid for.
Without an effective ROT clause, or if you can’t prove that the clause was a incorporated in the relevant contracts, the administrators will be free to sell the stock and add the proceeds to the pot.
Although suppliers have been able to breathe a sigh of relief on this occasion*, this wasn’t the first big insolvency to hit the UK trade, and it won’t be the last. Those who were potentially exposed should consider what they can do to reduce that exposure in any future insolvencies.
* Those supplying Conviviality’s Retail businesses may not be so fortunate. Unsecured creditors of those businesses may be looking at a substantial deficiency.
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