British Steel – reducing your risk exposure in the supply chain

Whilst some early positive steps will no doubt be taken, at least in the short term, to stabilise British Steel’s supply chain, there will inevitably be contagion across its supply chain and beyond. The full impact of that contagion is hard to assess at this stage and it may take several months before the full impact is known.

Perhaps somewhat unusually for a business the size of British Steel, it has entered compulsory liquidation, with EY being appointed as Special Managers, rather than entering administration.  Administration creates a moratorium against creditors taking action and is generally used where a business can be traded on whilst a buyer is found or there is an orderly realisation of its assets. 

In light of British Steel’s liquidation, suppliers and creditors should be actively reviewing their contractual position to ascertain:

• Whose T&Cs are in play;
• What termination rights there are in the event of the insolvency of another contracting party and the contractual consequences of terminating;
• What liquidated damages clauses feature in the T&Cs;
• Whether the contract can be assigned and/or novated;
• Whether the T&Cs contain retention of title (“ROT”) terms and if so they ideally should be so called “all monies terms” i.e. title is retained over all stock supplied and not just unpaid for stock.

In the context of ROT business should ensure that not only are those terms incorporated into the contract between the parties but also that, as a supplier, you can identify your product as having been supplied by you as opposed to anyone else. 

If you believe you have ROT you need to act swiftly as once product has been incorporated into a product or changed identity, it is harder to recover it – this is of particular relevance in the manufacturing sector. We frequently find in insolvency scenarios that prompt action where there is valid ROT provides leverage for a supplier to come to a commercial deal regarding the ongoing use or onward sale of their product.

As well as reviewing your contractual position, you should also consider whether you have commercial leverage beyond having a strong contractual position. By way of example:

• Is your product bespoke/hard to source from elsewhere and critical to the supply chain such that you can exercise a “ransom” position?
• If you have already supplied product does it come with certificates of conformity or similar such that you can withhold those in return for payment? 
• Do you have intellectual property rights which you could look to enforce to get into the best negotiating position?

If you think a debtor is in financial difficulty, then you should consider acting quickly to put yourself in the best position possible. This may include:

• Exercising your ROT terms or at least ensuring your ROT terms are robust and you can identify your product;
• Reducing supply of product and credit terms as leverage to secure a guarantee or more favourable terms;
• Review your credit control function and processes;
• Consider presenting a winding up petition – this will concentrate a debtor’s mind to making payment and also makes it harder for a debtor to enter administration;
• Consider appointing an administrator over a debtor to ensure the supply chain is managed;
• Consider whether there’s an opportunity to acquire a debtor or part of its business and consolidate the supply chain.

If you have any concerns with the impact of the British Steel liquidation, or otherwise, we are happy to discuss your specific circumstances and you can contact one of our experienced team members.