Checkmate – managing a counterparty’s insolvency

• 21 September 2026
• News
• Commercial and corporate disputes

Understanding your options when a customer, supplier or business partner fails

While businesses typically spend considerable time assessing the financial strength of customers, suppliers and contractual counterparties before entering into a relationship, insolvencies can occur unexpectedly. Even a seemingly stable trading partner can encounter financial difficulties with little warning.

When a key customer, supplier, contractor or joint venture partner enters insolvency proceedings, the commercial consequences are often both immediate and significant. Deliveries may stop, payments may be delayed, projects curtailed, and longstanding commercial relationships become rapidly contentious.

In such circumstances, businesses are often required to make important decisions before obtaining detailed legal advice. Understanding the issues likely to arise – and the potential options available – can help organisations respond quickly, protect their position and minimise disruption.

In this feature, we consider some of the most common disputes and strategic considerations that arise when a counterparty becomes insolvent.

This article forms part of our Checkmate Series – your essential guide to commercial disputes, a collection of practical insights designed to help businesses navigate common dispute scenarios with clarity and confidence. Explore the full guide here.

What does insolvency actually mean?

The term “insolvency” covers a range of formal procedures, each designed to deal with a company facing financial difficulties.

These include:

• Administration
• Liquidation
• Company Voluntary Arrangements (CVAs)
• Restructuring Plans
• Receivership

The implications for creditors, suppliers, customers and contractual counterparties can differ considerably depending on the process involved.

A common misconception is that an insolvent company automatically ceases trading. In reality, businesses often continue operating during certain insolvency processes, particularly administration or a restructuring exercise. Understanding the nature of the insolvency process frequently forms the first step in assessing your options.

The warning signs of financial distress

Formal insolvency proceedings are often preceded by signs of financial difficulty.

Potential indicators include:

• Persistent late payment of invoices
• Requests for extended payment terms
• Reduced communication from senior management
• Sudden changes in purchasing behaviour
• Delays in fulfilling contractual obligations
• Staff departures or operational disruption
• Reports of creditor pressure

Identifying warning signs early may allow for businesses to reduce exposure, secure outstanding payments or reassess ongoing contractual commitments before the situation deteriorates.

Can you terminate a contract?

One of the first questions organisations ask following a counterparty’s insolvency is whether they can bring the contractual relationship to an end.

The answer will often depend on the terms of the underlying agreement and the nature of the insolvency process involved.

Many commercial contracts contain provisions allowing termination where a party becomes insolvent. However, insolvency legislation has increasingly sought to restrict the operation of certain termination clauses in some circumstances, particularly where continued supply is considered important to a rescue or restructuring effort.

Businesses should therefore proceed cautiously before treating a contract as terminated. Acting too quickly may create additional risks and potentially expose a party to claims of its own.

Understanding what the contract says, and how insolvency law may affect those provisions, is often critical.

What happens to unpaid debts?

For many businesses, the immediate concern is recovering money owed by the insolvent company.

Unfortunately, insolvency often means there are insufficient assets available to satisfy all creditors in full. The likelihood of recovery can depend on several factors, including:

• The insolvency procedure involved
• The value of available assets
• Whether security exists
• The creditor’s legal status and priority
• Potential claims against directors or third parties

Businesses will often need to determine whether they fall into the category of secured creditors, preferential creditors or unsecured creditors, as this can significantly affect recovery prospects.

In some cases, pursuing immediate litigation may not be the most effective course of action. Understanding the insolvency process itself may provide a clearer route to recovery.

What if goods or assets are involved?

Disputes frequently arise where goods, equipment or other assets have been supplied shortly before the insolvency event.

Questions commonly include:

• Can supplied goods be reclaimed?
• Who owns stock that has not yet been paid for?
• What happens to goods held on-site?
• Can equipment be recovered?
• Are retention of title clauses enforceable?

The answers are often heavily fact-specific and can depend upon the contractual arrangements between the parties, how ownership was intended to pass and what has happened to the goods since delivery.

Where valuable assets are involved, swift action often proves a critical factor.

What should businesses do with ongoing projects?

Where insolvency affects a key supplier, contractor or project partner, immediate operational concerns frequently arise.

Organisations may need to consider:

• Whether work can continue
• Alternative suppliers or contractors
• Rights to project documentation or intellectual property
• Responsibility for delays
• Cost overruns and mitigation measures
• Insurance issues

These situations often give rise to disputes concerning contractual obligations, project milestones and responsibility for losses incurred following the insolvency. While legal rights will remain central, the commercial realities of maintaining business continuity often require careful balancing.

Are directors ever personally liable?

Although insolvency generally concerns the company rather than its directors, certain circumstances can give rise to personal liability risks.

Claims may arise where there are allegations of:

• Wrongful trading
• Fraudulent conduct
• Breaches of directors’ duties
• Transactions at an undervalue
• Preferential treatment of creditors

Insolvency office-holders are frequently tasked with investigating the circumstances leading up to a company’s failure, and disputes can emerge long after the insolvency process itself has commenced.

For businesses considering recovery options, understanding whether claims against individuals may exist can sometimes be an important part in assessing the broader strategic picture.

Practical steps when a counterparty becomes insolvent

While every situation is different, organisations at the outset may wish to consider the following:

• Identifying exactly which insolvency procedure has been commenced
• Reviewing relevant contracts and termination provisions
• Assessing outstanding debts and financial exposure
• Establishing whether goods, assets or intellectual property are affected
• Preserving key documentation and communications
• Evaluating alternative supply arrangements
• Obtaining legal advice before taking irreversible steps

Early action can often preserve options that may become significantly more difficult to pursue later.

Looking ahead

A counterparty’s insolvency can be disruptive, costly and uncertain. Understanding the legal and commercial landscape at an early stage however, offers businesses the ability to pursue more informed decisions, ultimately, allowing for them to better safeguard their position.

In circumstances where financial distress emerges, the most effective response is not always necessarily the fastest. Steps underpinned by a clear understanding of the legal options available – and the risks that lie ahead – are frequently the forge through which durable solutions are made. Whether the issue concerns unpaid debts, disrupted supply chains, asset recovery, contractual rights or potential claims against directors, a measured and strategic approach – more often than not – serves to define the contours which can most significantly shape the final outcome.

Key takeaways

• Insolvency does not always mean a business immediately ceases trading
• Understanding the insolvency process involved is critical
• Contractual rights may be affected by insolvency legislation
• Debt recovery options will depend on creditor status and available assets
• Asset ownership and retention of title disputes commonly arise
• Businesses should prioritise both legal protection and operational continuity
• Early strategic action can preserve valuable options and improve outcomes

This insight is one of a series of Checkmate articles exploring the core themes that underpin modern commercial disputes, from post-acquisition claims to shareholder conflicts and directors’ duties.

To access the full guide and build a broader understanding of the risks and strategic considerations across these areas, visit here.