Overcoming turbulence: safeguarding against rising insolvencies

With UK insolvency levels remaining elevated, Nikki Whittle, corporate partner at independent law firm Brabners, discusses the steps businesses can take to shield themselves from the effects.

 The past few years have been challenging for businesses across the board – not least those in the aerospace sector, which has been impacted by surging input costs and shocks to global supply chains. Indeed, aerospace and its supply chain form part of a broader UK manufacturing sector which experienced an 18% increase in insolvencies in 2023, with this trend likely to have continued into the first quarter of this year.

Of course, there is reason for greater economic optimism in the coming months. In particular, the Bank of England has indicated that interest rates will begin to fall this summer while inflation continues to ease – having done so for two consecutive months now. That said, the cost of doing business remains significantly higher than it was a couple of years ago, so it’s important that management teams remain vigilant to signs of financial distress and insolvency within their direct supply chain.

 Ripple effect 

Much of the aerospace sector relies on the effective interworking of a delicate ecosystem of part suppliers, manufacturers and technology providers that are often operating using a just-in-time delivery model. This means that a single company entering administration can have a detrimental impact on numerous businesses within its supply chain – especially those without a suitable plan in place to deal with such events.

Those that are best placed to deal with supply chain failures are those who have developed a stringent approach when it comes to forming supplier relationships – carrying out thorough legal and financial due diligence to ensure the supplier’s viability as a partner. By identifying any potential pressure points around capacity and financial health ahead of entering into a supplier relationship, it’s possible not only to mitigate risk but also develop a roadmap for how the relationship can grow in the future.

As a matter of course – and with changes to a supplier’s financial health in mind – these assessments should be repeated throughout the relationship on at least a quarterly basis. Management teams would also be prudent to monitor for alerts from Companies House that could indicate a partner business is in distress, including frequent changes to the ownership structure.

Although no business partner likes to anticipate failure, it’s also important that any contractual agreement involves the necessary protections should one of the parties enter administration. For example, although common law doesn’t provide a right of termination in the event of insolvency or financial difficulty, by adding ipso facto clauses – or conditions that allow the termination of the contract due to bankruptcy, insolvency, or financial condition – a business can protect itself from the domino effect of insolvencies occurring in its supply chain.

To leave no stone unturned, it’s also advised that management teams prepare contingency plans to deal with insolvencies within the supply chain as and when they occur. A robust contingency plan will consider both a roster of alternative suppliers to pivot to and how a reserve of stock can be developed in case of a supply shortage.

Looking forward

 In the event that there are failures within the supply chain, it’s important that business leaders consider the challenges that have brought their suppliers to this point. Many firms have been weighed down by Covid debts or the exceptional geopolitical pressures of the past few years. As such, while terminating a contract in the case of a company entering administration is likely to be a necessary step, businesses should aim to be accommodating where possible and avoid kneejerk decisions that could jeopardise the future relationship with the affected party. As is often the case in specialist industries, firms that become insolvent may take a new form and return to the market as a strengthened entity.

At Brabners, we specialise in managing these situations – helping firms work alongside suppliers to ensure the best possible outcome for all involved despite a challenging market. Inaction can cause issues to worsen, and red flags within a should be addressed as soon as they become apparent to ensure the best chance of survival.

For more information on how Brabners can help, contact Nicola.Whittle@brabners.com