Given the ongoing economic impact of the pandemic, it is more important than ever to consider counterparty risk. Whilst your own business might be in a healthy position, you should consider the impact that the insolvency of key clients or suppliers might have on your organisation.

Warning Signs

An obvious warning sign that your counterparty is in difficulty is non-payment of invoices, or longer payment cycles. A struggling counterparty may fail to commit resources to a project or suddenly disengage with you. It might also start communicating with you more formally than before. Watch out for signs of legal input in their communications and be aware of unfamiliar names appearing on email chains – as cash flow becomes more restricted, senior management may become more heavily involved in the day-to-day running of the business. Selling assets or downsizing resources or personnel is also consistent with a company in distress.

Spotting the Signs

Check Companies House if you have concerns about a counterparty, particularly whether its accounts were filed on time and whether there have been any material changes within the company. In normal circumstances, the Court Rolls can be a great source of information in respect of who is being sued for payment or those against whom a petition for liquidation is being made. However, due to the pandemic, courts are running a limited service and therefore the Court Rolls are unlikely to be as useful an information source as they would otherwise be.

Consider instructing a credit check on the business, to search for red flags, and keep an eye on local media as often events such as the refinancing of a business or redundancies will be reported. Keep lines of communication open with your usual contacts in the company – staff at the “front line” of a business will often pick up on unease and decline long before any official statement is made.

Finally, maintain good internal records – consistently tracking the payment profiles or delivery schedules of your counterparties may allow you to pick up on a counterparty in difficulty earlier than you would have otherwise done.

Acting on the Signs

If the signs point towards counterparty trouble, the first thing you should do is check your contract – confirm payment dates, any contractual right to interest on late payment, termination options and the dispute resolution provisions. Engage with your counterparty – having a conversation might provide early insight into the business and the struggles that it faces.

Of course, if you are concerned, you should seek legal advice. This issue was addressed in more detail in our recent webinar on “Managing Contract Risk and the COVID-19 Outbreak”, which can be found here.