What happens to my unpaid invoice if my customer goes into administration?
Your invoice becomes an unsecured debt. You are an unsecured creditor, so you are paid after the lenders with security and some other creditors, if there is money left. To get anything, you send the administrator a claim, called a proof of debt. R3, the insolvency trade body, says "it is very unusual for unsecured creditors to get back all the monies they are owed". If you used invoice finance, what happens next depends on whether your facility is recourse or non-recourse.
Where you stand in the queue
R3's guide to administration lists who gets paid, in this order:
- Lenders with a fixed charge over a specific asset, such as a mortgage.
- The costs of the administration, including the administrator's fee.
- Preferential creditors, usually staff owed wages, holiday pay or pension contributions.
- Lenders with a floating charge.
- Unsecured creditors, such as trade suppliers. An unpaid invoice puts you here.
- Shareholders and bond holders.
There is one help for unsecured creditors, called the prescribed part. When there is a floating charge, part of the money that would go to that lender is set aside for unsecured creditors. R3 describes it as 50% of the first £10,000 and 20% of the rest. Since 6 April 2020 the most that can be set aside is £800,000 (it was £600,000 before, and that lower cap still applies to some older floating charges).
What to do now
- Stop supplying on credit. Talk to the administrator before you deliver anything else.
- Find the administrator. GOV.UK says the administrator writes to creditors and Companies House and puts a notice in The Gazette. They then have 8 weeks to send out a statement of what they plan to do.
- Send a proof of debt. A creditor who wants to recover a debt must submit a proof to the administrator (Insolvency Rules, rule 14.3). Include the invoice, proof of delivery and the contract or order.
- Watch for the dividend notice. Before paying a dividend (a payout to creditors), the administrator must send a notice with a last date for claims, at least 21 days after the notice (rule 14.30). Claims after that date may not be paid in that round.
- Read the updates. R3 says administrators must update all creditors, including unsecured ones. The updates tell you whether a payout to unsecured creditors is likely.
If you used invoice finance
| Recourse facility | Non-recourse facility | |
|---|---|---|
| Who takes the loss | You | The lender, if the invoice was within the customer's credit limit |
| What happens to the advance | You buy the invoice back, so you repay the advance | You keep it, subject to the cover terms |
| Who claims from the administrator | You, once the invoice is back with you | Check your agreement |
With recourse, UK broker ABC Finance says you are "obliged to buy back any invoice the customer doesn't pay within an agreed period". Non-recourse "only covers customer insolvency, not disputes, returns, or invoices above the per-debtor credit limit". Tell your lender as soon as you hear the customer is in administration. See recourse vs non-recourse.
Get the VAT back
If you paid VAT on an invoice that is never paid, you may be able to claim it back from HMRC. Under VAT Notice 700/18, the debt must have been unpaid for 6 months after it was due, and you must have written it off in your VAT accounts. You must claim within 4 years and 6 months. If the invoice was sold to a lender, you can only claim once it has been handed back to you, and only if your agreement allows that.
Protecting yourself next time
Non-recourse invoice finance or trade credit insurance can cover a customer going bust. ABC Finance puts bad debt protection at 0.3% to 1.0% of invoice value. Compare the two in invoice finance vs trade credit insurance, and see what happens if a customer doesn't pay.
Common questions
Can I take the customer to court for the money?
Not without permission. R3, the insolvency trade body, says that once a company is in administration, creditors cannot take action against it except with the court's permission.
Can I fund an invoice to a customer already in administration?
Unlikely. Lenders set a credit limit for each customer based on how likely it is to pay. A customer in administration is a poor risk, so expect the lender to refuse that invoice.
Is administration the same as liquidation?
No. R3 says administration aims first to rescue the company, and if that is not possible, to get a better result for creditors than winding it up. Liquidation (winding up) closes the company.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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