Out-Law News | 14 Oct 2014 | 9:58 am | 2 min. read
Insolvency law specialist Richard Williams of Pinsent Masons, the law firm behind Out-Law.com, said that a similar risk also arises with UK suppliers but is less likely to materialise.
"In the US, businesses can apply for 'Chapter 11' protection under the US Bankruptcy Code, which allows them to continue operating under a moratorium from individual creditor demands for payment of money owed while they prepare a restructuring or compromise package to distribute earnings or assets to those creditors," Williams said.
"However, creditors and/or the insolvent company can ask the court to order disclosure of documents they hold which are integral to the interests of creditors in the Chapter 11 process. The US courts are interventionist in insolvency proceedings and they can direct companies to disclose matters to creditors as part of those proceedings. There is a risk that businesses that contract with US-based suppliers could see details of confidential agreements, for example, made public as a result of this process should those suppliers file for bankruptcy," Williams said.
Williams was commenting after a US court ordered a supplier of technology giant Apple, GT Advanced Technologies, to disclose details of confidential agreements the company it has with Apple to creditors after the company filed for bankruptcy, according to a report by the Financial Times.
Williams said that there is a risk that a similar situation could arise in the UK, but said that UK insolvency laws make that risk more remote than it is in the US.
"In the UK, it is an administrator that runs a company when it seeks protection via an administration and creditors have less of a voice before the courts about the process the administrator follows," Williams said. "There remains a risk that UK administrators could, particularly under the order of a UK court, disclose confidentially sensitive information about a customer of the struggling UK supplier, but that risk is less significant than it is in the US."
Commercial contracts expert Samantha Livesey of Pinsent Masons said businesses should undertake financial and commercial due diligence on prospective suppliers to reduce the risk of sensitive commercial information making it into the public domain during insolvency proceedings.
"Companies should always undertake financial due diligence of suppliers, particularly those in the SME market," Livesey said. "It can be quite difficult to find financial information about small businesses if they don't file accounts, but customers can ask for details of a supplier’s company structure and if there is a parent company consider asking them for a guarantee of the supplier’s liabilities under the contract. It is a good idea to look into this at the beginning of a transaction rather than just before a deal is signed as before giving a guarantee a parent company will want to review the relevant contracts, potentially holding up the transaction."
"From a supplier perspective, showing that you have a good financial record can help appease concerns of prospective customers and attract new business. Whilst it is important for all customers to undertake commercial due diligence and take soundings in the market on prospective suppliers, SMEs can equally benefit by securing good references from their previous or existing customer-base to address any concerns from new customers about their reliability or durability," she said.