Flooring businesses can fail, so prepare for this by putting in place robust processes. Adam Bernstein explains.
NEWS came mid-July that Carpetright, a firm founded in 1988 with its first store in London’s Canning Town, had gone into administration. With some 270-odd stores and more than 1800 employees, it’s a blow for the flooring sector – and, of course, its customers. ‘Luckily’ some 308 jobs and 54 sites have been saved.
But this isn’t the first time the firm has been in trouble. In May 2018, it secured a £15m loan for working capital. And then in November 2019, its largest shareholder, Meditor, agreed to purchase the company for £15.2m – there were fears it couldn’t pay off its debt which was thought to be around £56m.
Carpetright may be a high-profile casualty, but it isn’t the only flooring firm to hit the buffers.
In August 2022, Karl Thomas Flooring, a domestic and commercial flooring contractor, went into liquidation with debts of £64,857 and just £200 in the bank; trade creditors lost £7,3071.
In November 2022, floor and wallcoverings supplier Urbane Living was placed into liquidation with creditors owed just over £1m2. It owed £202,000 to HMRC, £542,000 to unsecured creditors, £252,000 to Funding Circle, £12,500 to trade creditors, and £71,000 to NatWest Bank.
And in February 2024, flooring specialist Axiom Group filed for administration3. Big projects such as screed and flooring work at Alder Hay Children’s Hospital, and flooring work at Manchester and Heathrow Airports, couldn’t save the company. It owed £831,298 to unsecured creditors.
Firms, like those in other sectors, need to learn how to protect themselves.
Warning signs
Paul Taylor, a partner in the corporate department of Fox Williams, makes a key – and very obvious – observation – that companies do not go from being in rude financial health one minute to insolvency the next. There is, in other words, often a slow period of decline.
As he says, ‘taking a long time to pay an invoice may in fact be a sign of a well-run company which is prudently managing cash flow. Negotiating longer credit terms to pay suppliers is an approach infamously deployed by certain UK supermarkets’.
But he warns that for other companies, without such clout, delays in making payments should set alarm bells ringing.
Other tell-tale signs he recommends looking for include a change in staff because of unpaid wages, failure to file accounts at Companies House maybe because of an unpaid auditor, or a notice that debt has been factored as an attempt to improve cashflow.
Regardless, Taylor says to apply common-sense and put in measures to protect the business.
Credit control
It’s an elementary principle of business that to avoid unpaid debts in the first place requires the implementation of what Taylor terms ‘a robust credit control policy’.
In outlining what it should contain, he says that it involves taking out credit insurance which pays out if customers default; setting credit limits for individual customers with discounts for early settlement and interest for late payment; registering at Companies House for its Follow service in order to monitor filings from key suppliers and customers.
He also recommends chasing down unpaid debts and ‘making sure commercial partners know you will not be fobbed off by repeated promises to pay. Remember – if you are in a hole, don’t keep digging and don’t be afraid to call their bluff by putting them on a stop list.’
Other options are to insist on payment for the remainder of the goods if a customer questions part of an order; and getting to know the payment run dates – ‘ring them up the day before and make sure your invoice is included’.
Retention of title
Next on Taylor’s list of tools to deploy, for those involved in the supply of goods, is Retention of Title – RoT.
However, he says that a well drafted RoT clause will be of little use unless it is properly incorporated into commercial dealings. This is why ‘at the very onset of a commercial relationship make sure that your customer signs a copy of your terms. Make sure your terms are then included on your purchase forms/invoices’.
But being a contractual term, Taylor says it’s essential that firms take advice on specific wording. By way of example, he says that there should be ‘sub-clauses which oblige the customer to store the goods separately and also to label them as belonging to the supplier. There should also be a right to enter the customer’s premises to check that RoT provisions have been complied with and/or to recover goods’.
Importantly, suppliers cannot use force to enter premises. Even so, Taylor says clauses ‘should be enforceable on non-payment and without having to wait for a formal insolvency event’.
However, suppliers should be realistic and it’s important to remember that materials used in a manufacturing process may be impossible to identify or separate out.
Regardless, as proven in the Axiom case, RoT works. Directors of the company valued the stock in the warehouse at £250,000. However, after RoT was taken into account, that shrank to £20,000. In other words, suppliers had reclaimed £230,000 of goods because they’d properly incorporated RoT terms into their contracts.
Know your rights
Once a firm has hit the buffers, the insolvency process takes over. From a practical perspective, Taylor has seen insolvency officials reject claims that are lodged with them. In response he says to ‘not be afraid to fight your corner and take legal advice as to the validity of your claim.’
Equally, he says to remember that directors may not always be able to hide behind the corporate veil of a limited liability company; if a director has traded past the point where the company couldn’t have avoided insolvency or made personal promises, he says that they may be personally liable for the company’s debts.
Taylor says it should be noted that ‘those that have extracted security or the like out of a distressed company, should be aware that an insolvency official has the right to challenge actions taken by an insolvent company during the period of up to two years prior to its demise’.
In practical terms, this means that transactions including asset sales must not be at an undervalue (too cheap) or unfairly improve the position of one creditor over another – particularly when dealing with a connected party such as a relative or fellow director.
Administration and a company’s creditors
An administrator of a failed firm owes duties to all of the company’s creditors, not to a single creditor. Furthermore, as Taylor notes, ‘regardless of who has appointed them, the administrator is an officer of the court, and acts as an agent for the company. This means that they do not assume personal liability for any contracts they enter into while acting as administrator’.
Indeed, most contracts they do enter into will include wording which specifically excludes any personal liability of the administrators.
Taylor says that it’s worth remembering that when dealing with payments out of the company’s assets to its creditors, the category of creditor will impact on when (if) any payment is received from the administration. ‘Broadly,’ he says, ‘payments from the realised assets of the company are made in a defined order of priority.’
He lists them:
‘First come secured creditors with a fixed charge who are followed by the expenses of the administration such as paying the administrator for their own work, and paying any third party costs incurred by the administrator including fees of professional advisors such as valuers and lawyers.
‘Then are unsecured creditors whose claims are given a special statutory priority – knowns as preferential creditors, secured creditors with a floating charge, unsecured creditors, and lastly, shareholders.
‘Each category is paid in full before proceeding to the category below. The administrator may make payments to secured and preferential creditors without receiving the prior permission of the court, but for payments to all other creditors the court’s permission is required.’
Knowing this ranking should, hopes Taylor, reinforce the message that firms need to not only be wary about who they do business with but also, ensure that they not only have solid contracts in place but also take advice to understand their rights.
Summary
It’s a sad fact of business life that firms do fail. Whether dealing with large firms such as Carpetright, or smaller concerns like Karl Thomas Flooring, the best advice is to prepare for potential failures by putting in place robust processes.
Adam Bernstein is an independent columnist
- www.plymouthherald.co.uk/news/plymouth-news/
plymouth-flooring-firm-goes-bust-7504473 - www.bigfurnituregroup.com/flooring-firm-leaves-debts-of-1m-as-it-enters-liquidation/
- www.pbctoday.co.uk/news/planning-construction-news/
flooring-specialist-axiom-group-files-administration-
notice/136711/
