When a major business goes insolvent, it can have far-reaching effects beyond its operations and create a domino effect throughout the supply chain. Amid financial pressures and the lingering effects of COVID-19, companies should be alert to the risk of insolvency in their supply chain.
Getting your Trinity Audio player ready...
null

An insolvency can come as a surprise, as firms might not have complete visibility into the financials of all the companies they trade with. As such, firms should seek to monitor the financial health of their trading partners and stay attuned to broader market signals that could indicate trouble ahead.

That was the central message of the recent "Anatomy of an Insolvency" webinar hosted by Gallagher, featuring specialist insights from Tim Chance, Head of Trade Credit at Gallagher, and Tracey McIntyre and Joel Williams from Atradius UK.

The session offered a look at:

  • How an insolvency unfolds
  • How business leaders can spot early warning signs
  • Steps to take to protect your business

The tide of insolvencies

Key insights

  • Insolvency trends: Current company insolvency levels in the UK hover around 12,000, marking a continuation of the upward trend that began during the post-COVID recovery. These historically high figures reflect the sustained economic pressure facing businesses across sectors.
  • Sectoral impact: Construction, wholesale and retail trade, and hospitality remain the most affected. Tech startups and electric vehicle manufacturers are also seeing increased insolvency rates.

Early warning signs: What firms should watch out for

“Businesses can look strong on paper but still be pulled down by the domino effect of another company’s insolvency.”
Tim Chance, Head of Trade Credit at Gallagher

The domino effect: What happens after a high-profile insolvency?

  • Supply chain disruption: The collapse of a major business can trigger widespread financial distress across its supplier network. For instance, in 2018, the failure of a UK construction giant left over 30,000 suppliers unpaid and resulted in £2 billion in outstanding debts, creating a domino effect across industries.
  • Market sentiment and payment behaviour: A large insolvency creates a lot of negative noise. Trade partners may chase payments aggressively or slow down their own payments, creating liquidity issues for others.
  • Lender caution: A high-profile insolvency can prompt banks and investors to reassess their exposure to the affected sector. This often leads to reduced lending appetite, forcing businesses to seek financing from boutique lenders — typically at higher interest rates and under stricter governance.
“An insolvency makes everyone look at the sector with a magnifying glass to find out if there are any underlying issues within the industry that could be affecting other businesses.”
Joel Williams, senior underwriter, Special Risks at Atradius

Steps a business should take to reduce disruption when an insolvency occurs

  • Establish exposures: Assess your exposure to customers or suppliers that may pose an issue. Early detection allows you to diversify your supplier base and avoid costly downtime.
  • Invoke retention of title clauses: A retention clause in your contract allows you to retain ownership of goods until full payment is received. With this clause, you may assert rights to either reclaim goods or force payment before being grouped with unsecured creditors.
  • Contact the administrator or insolvency practitioners: Register as a creditor and provide proof of debt, as a secured creditor is generally given priority during an administration. An unsecured creditor may not be considered during the redistribution of funds or may have a claim overlooked. Understanding your position in the creditor hierarchy is crucial.
  • Stock inspection and potential resale: If retention clauses apply, inspect the insolvent company's premises for reclaimable stock.
  • Monitor dividend distribution: Stay informed about post-insolvency payouts. Insurers and creditors often pursue claims aggressively.
  • Remain in contact with the broker and insurer: Ensure active participation in restructuring or debt arrangements and stay informed of developments.

Building resilience: Best practices for future preparedness

Key insights
Strengthen credit control Implement robust credit control systems and monitor payment behaviour in real time. Credit insurers offer sector-specific insights to help identify emerging risks.
Foster strong relationships Maintain close ties with customers and ensure insurers have access to up-to-date supplier information. This will help you to better detect early signs of financial distress and facilitate collaborative problem-solving.
Stay informed on sector trends Leverage underwriters and industry experts to stay ahead of market developments. Understanding sector-specific risks allows for more informed decision-making and strategic planning.
Diversify risks Avoid over-reliance on a single customer or supplier. While not always feasible, spreading risk reduces vulnerability and enhances operational resilience.

Credit insurance is more than a safety net — it’s a strategic tool. It provides assessments of creditworthiness, payment behaviour, and sector risk, enabling confident trading decisions and tailored policy design.

Even Credit well-performing businesses can face sudden challenges. A proactive mindset, supported by strong partnerships, ensures readiness for unforeseen disruptions. This is key to making the shift from reactive to proactive risk management.

“The true value of trade credit insurance lies not just in the coverage it provides, but in the access to timely, comprehensive information that sets up better trading decisions.”
Tim Chance, Head of Trade Credit at Gallagher
Disclaimer

The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.

Stay connected with the company that’s connecting the dots with what’s happening in the industry and around the world
Related Articles