The economy’s vital signs are starting to pick up, but the process industry is not out of danger yet. Peter Snaith at Chemical sector law firm Bond Dickinson explains how to stay on track until the upturn.
It was encouraging to see a good deal of optimism in the air at the recent Chemicals North West Awards Dinner in Manchester. However, the economic position for many in the chemical industry is likely to remain challenging for a few years yet.
During the downturn businesses had to adapt to the deteriorating economic position. However, it is just as important to address the challenges which can be posed as we emerge from recession.
Guard against supply chain insolvency
Business failure rates can actually rise as the economy recovers, particularly as the position of banks improves and they become more willing to pull the plug on and realise their security in respect of businesses that may have been teetering for some time.
It is important to spot troubled companies as early as possible and keep a close eye on the financial well-being of your key suppliers, customers and contractors.
Obtain the best contractual protection possible
Before the recession, many businesses in the industry were very relaxed about documenting their commercial relationships. When orders started to dry up and customers became very demanding on pricing, people started to realise just how valuable a robust contract (with purchasing commitments and fixed pricing) could be. As the economic position improves, can you negotiate and document price increases, shorter payment terms or minimum purchase quantities?
Your contracts can also give you valuable protection against customer and supplier insolvency. Many contracts allow a supplier to terminate when its customer becomes insolvent, but this may mean that you are contractually obliged to continue supplying until the insolvency event actually occurs, knowing that you are unlikely to receive payment for these supplies. Ideally you should have “early trigger” termination rights, which apply much earlier in the insolvency process.
Businesses often think they have a right to suspend supplies when payment is overdue. In actual fact, unless you have an express right in your contract to do so, under many supply arrangements you will be legally obliged to continue supplying until the customer’s failure to pay is serious enough to allow you to terminate the contract.
Retention of title provisions can also give you vital protection, allowing you to take back goods which have not been paid for, rather than having to settle for recovery on a ‘pence in the pound’ basis.
Turnaround support
If you are worried about your own business, it is crucial to seek help as soon as possible through the engagement of specialist consultants who will follow a process that banks will typically support. The track record when the right turnaround person is in office is formidable. They are also lower cost than many external advisers.
