Customer Gone Into Liquidation? What To Do Next
Register your claim, check whether retention of title lets you recover your goods, reclaim the VAT you already paid over, and stop supplying on credit. Then deal with the part most suppliers ignore: what the shortfall does to your own cashflow over the next ninety days.
The first 48 hours
Almost everything that can still be salvaged is decided in the first two days, before stock is sold and before the trail goes cold. Work through this list in order.
1. Stop the account, today
Put the account on immediate hold. No further deliveries, no further work on site, no further credit. Cancel any direct debits or standing orders running the other way. Every pound of value you hand over after the appointment without written protection is a pound you are unlikely to see again.
2. Confirm what has actually happened
Liquidation, administration, a CVA and a winding-up petition are different events with different consequences for you. The notice in The London Gazette will name the procedure, the date, and the insolvency practitioner appointed. Get that detail before you act on rumour — a company in administration may still trade on and pay you for new supplies, whereas a company in liquidation is closing for good.
3. Assemble the paperwork while it is easy
Pull together every unpaid invoice, your signed terms and conditions, purchase orders, delivery notes with signatures, statements, and any correspondence about payment. You will need this for your claim, and you will need it fast if you intend to assert retention of title. Save it in one place rather than leaving it scattered across inboxes.
4. Write to the office holder
Notify the insolvency practitioner in writing of the amount you are owed and, critically, of any retention of title claim or goods on site that belong to you. Do this by email the same day. A retention of title claim raised three weeks later, after the stock has been sold, is worth nothing.
5. Check your credit insurance
If you have credit insurance or invoice finance with bad debt protection, policies almost always impose a short notification window measured in days. Miss it and the claim can be refused on a technicality even where the debt is plainly covered.
What you can realistically recover
This is the part suppliers most often get wrong, usually by being too optimistic for too long. Unsecured creditors sit near the bottom of the queue. Money is applied in a statutory order: the costs of the insolvency, then preferential creditors such as employees and HMRC for the taxes the company collected on its behalf, then the ring-fenced prescribed part, then any floating charge holder, and only then ordinary unsecured creditors like you.
Plan on nothing. A great many liquidations return nothing at all to unsecured creditors, and where a dividend is paid it is often a few pence in the pound and arrives a year or more later. Submit your claim — it costs almost nothing and preserves your position — but do not build your own forecast around it.
The recoveries that are actually worth chasing are the ones that do not depend on the liquidation paying out at all:
- Your goods back, if you have a valid retention of title clause and the stock is still identifiable.
- The VAT you already paid over to HMRC on the unpaid invoices.
- Corporation tax relief on the debt once it is written off in your accounts.
- An insurance claim, if the debt was covered.
- A personal guarantee, if a director gave one — check your original credit application.
- A set-off, if you also owe the company money on another account.
Retention of title: getting your goods back
A retention of title clause says that legal ownership of the goods you supply stays with you until you have been paid for them. Where it works, it is by far the most valuable right an unsecured supplier has, because it takes your stock out of the insolvent estate entirely rather than leaving you queuing for a dividend.
In practice, four things have to line up:
The clause was incorporated
It has to have been part of the contract before or at the point of sale. Terms printed on the back of an invoice sent after delivery frequently fail this test, which is the single most common reason retention of title claims collapse.
The goods are identifiable
You must be able to point at specific items and show they are yours — batch numbers, serial numbers or distinctive labelling. Generic stock mixed in with the same product from three other suppliers is a much harder claim.
They are unsold and unaltered
Once goods have been sold on to a third party, or worked into a finished product so that they have lost their separate identity, the claim to those goods is generally lost.
You act immediately
Notify the office holder in writing and request an inspection. Do not go to the premises and remove goods yourself without written consent — doing so can turn a good claim into a claim against you.
If this has happened to you once, it will happen again. Whatever the outcome this time, get your terms of sale reviewed so the clause is properly incorporated into every order from now on. It is a cheap fix that pays for itself the first time a customer fails.
Reclaiming the VAT you already paid
If you invoiced the customer and accounted for the VAT, you paid that VAT to HMRC out of your own pocket for money you never received. VAT bad debt relief gets it back, and it does not depend on the liquidation paying anything.
You can claim where the debt is at least six months overdue, measured from the later of the payment due date and the date of supply, is no more than four years and six months old, and has been written off in your VAT accounts. The claim goes in Box 4 of your VAT return — you do not need the liquidator's agreement and you do not have to wait for the case to conclude.
Separately, the written-off debt is deductible for corporation tax, so the real cost of the bad debt to your business is lower than the invoice face value. On a £60,000 invoice inclusive of VAT, recovering the VAT and getting tax relief on the balance can take the true cost down substantially. That is worth modelling properly before you decide how big the hole really is.
Thresholds and time limits are set by HMRC and change from time to time. Confirm the current rules with your accountant or on GOV.UK before you file.
Should you keep supplying?
If the company is in administration and still trading, the administrator may want you to keep supplying. That can be a genuine opportunity — supplies made after the appointment at the administrator's request are generally treated as an expense of the administration and rank ahead of unsecured creditors, which means you have a realistic prospect of being paid for new work even though your old debt is stuck.
Three rules protect you:
- Get the payment arrangement for ongoing supplies in writing from the administrator, before you deliver anything. A verbal assurance from a member of staff is worth nothing.
- Supply on pro forma or payment on delivery terms wherever you can.
- Keep the new account completely separate from the old debt, so there is no argument later about which payment settled what.
Be aware that you may not be free simply to walk away. For many contracts, clauses that let a supplier terminate purely because the customer has entered an insolvency procedure are restricted, and you can be required to continue supplying if you are paid for it. If you supply something the business cannot easily replace, take advice before issuing a termination notice.
When the liquidator comes after you
An unwelcome surprise for some suppliers is a letter from the liquidator asking them to repay money the failing customer paid them shortly before the collapse. This is a preference claim.
A liquidator can apply to court to unwind a payment that put one creditor in a better position than the others, where the company was insolvent at the time or was made insolvent by the payment, and where the company was influenced by a desire to prefer that creditor. The look-back period is six months for an ordinary supplier and two years for a connected party such as a director or an associated company.
The desire to prefer is the crux. If you were paid because you chased hard, threatened to stop supplies, or put the account on stop until the invoice cleared, the company was acting under commercial pressure rather than out of any wish to favour you — and that is a much weaker case for the liquidator. Keep the emails that show the pressure you applied. They are your defence.
If you receive a preference letter, do not ignore it and do not reply off the cuff. Get advice on the specific facts before you respond.
The part most suppliers miss: your own business
In thirty-five years of turnaround work, one pattern comes up again and again. A company does not fail because of the bad debt itself. It fails because of what the bad debt did to its cashflow three months later, while everyone was still busy chasing the claim.
The mechanics are unforgiving. You have already paid for the materials and the labour that went into that order. You may have paid the VAT. Meanwhile your own suppliers still want paying on their normal terms, the wage bill does not move, and HMRC expects its quarter on time. A profitable business with a full order book can run out of cash on the back of one failed customer, and by the time that becomes obvious the easy options have gone.
Three questions are worth answering this week rather than next quarter:
Concentration
What percentage of your turnover did that customer represent? Anything over 20% and the revenue gap is a bigger problem than the debt.
Contagion
Do you supply others in the same sector or supply chain? One failure is rarely isolated. Review credit limits across the whole book, not just this account.
Runway
Rebuild your thirteen-week cash forecast with the money removed. Where is the tightest week, and how far away is it?
If that forecast looks uncomfortable, the worst thing you can do is wait and hope. Options narrow fast as cash runs down: the choices available to a director with ten weeks of runway are far better than those available with two. Managing cashflow problems sets out what to do first.
Frequently asked questions
Will I get paid if my customer goes into liquidation?
As an ordinary unsecured creditor, usually not in full and often not at all. Unsecured creditors sit near the bottom of the statutory order of priority, behind the costs of the insolvency, preferential creditors such as employees and HMRC for taxes collected on its behalf, and any floating charge holder. Many liquidations return nothing to unsecured creditors. Submit your claim regardless — it costs little and preserves your position — but plan your own cashflow on the assumption that the money is gone.
Can I take back goods I supplied?
Possibly, if your terms include a valid retention of title clause. The goods must still be identifiable as yours, in the customer's possession, unsold, and not mixed or incorporated into something else. Notify the insolvency practitioner in writing straight away and ask for an inspection — do not remove goods yourself without consent.
Can I reclaim the VAT on an unpaid invoice?
Yes. VAT bad debt relief lets you reclaim VAT already accounted for on an unpaid invoice where the debt is at least six months overdue, no more than four years and six months old, and written off in your VAT accounts. Claim it in Box 4 of your VAT return. You do not need the liquidator's permission or the conclusion of the case.
Should I keep supplying a customer in administration?
Only on terms that protect you, and only with written confirmation from the administrator about how ongoing supplies will be paid. Post-appointment supplies made at the administrator's request generally rank as an expense of the administration, ahead of unsecured creditors. Insist on that in writing and consider pro forma terms. Note that insolvency-triggered termination clauses are restricted for many contracts, so you may not be free simply to walk away.
Can the liquidator ask me to repay money I was already paid?
In some circumstances, yes — as a preference. The look-back is six months for an unconnected creditor and two years for a connected party, the company must have been insolvent at the time or made insolvent by the payment, and it must have been influenced by a desire to prefer you. Payments extracted under commercial pressure are much harder to attack than payments made to favour a friendly creditor.
What if I also owe the insolvent company money?
Insolvency set-off applies automatically. Mutual debts are netted off and only the balance is owed one way or the other. If you owe more than you are owed, you must pay the difference to the office holder. Set-off is mandatory, so set out both sides of the account clearly when you submit your claim.
Worried about what the shortfall does to you?
A bad debt is one of the most common triggers of the next insolvency in a supply chain. If losing this money leaves your own cashflow exposed, it is worth an honest conversation now rather than in three months. K2 has worked with UK directors since 1990 and will tell you straight whether you have a problem.
30+ years turnaround experience · Confidential consultation · Honest about viability
Related Guides
More on recovering what you are owed — and protecting your own position.
How to Claim Money You Are Owed
Submitting a proof of debt, the deadlines, and what happens to your claim
Who Gets Paid First?
The statutory order of priority, and where an unsecured supplier really sits
Managing Cashflow Problems
What to do first when the cash stops working, and in what order
What Is Liquidation?
The three types of liquidation and what each one means in practice