What to do when a client goes into administration owing you money

It’s a moment every business owner dreads: an email lands in your inbox, not from your client's accounts payable team, but from a firm of insolvency practitioners. Your client, who owes you a significant amount of money, has gone into administration. The initial shock is quickly followed by a cascade of questions: What does this actually mean? Will I ever see my money? And what on earth do I do now?

This guide provides a realistic, no-nonsense look at your options when a UK client enters administration. We’ll cut through the jargon to explain what’s happening, where you stand in the queue to be paid, and the practical steps you must take to give yourself the best possible chance of recovering something from the situation. For most suppliers and freelancers, you will be an "unsecured creditor," and it's vital to understand what that means for your unpaid invoices.

Understanding Administration: It's Not Liquidation (Yet)

First, it’s crucial to understand what "administration" is under UK law. It is a formal insolvency procedure governed by the Insolvency Act 1986. When a company goes into administration, a licensed Insolvency Practitioner (the "Administrator") is appointed to take control of the company's affairs.

The primary objective of an administrator is to rescue the company as a "going concern." If that’s not possible, their goal is to achieve a better outcome for the creditors than if the company were simply wound up (liquidated) immediately. This might involve selling the business or its assets.

Crucially, the moment a company enters administration, a legal "moratorium" kicks in. This freezes most legal action against the company. You cannot start or continue with a court claim, send in the bailiffs, or issue a winding-up petition without the permission of the administrator or the court. This moratorium is designed to give the administrator breathing space to assess the situation and formulate a plan without being hounded by individual creditors.

The "Waterfall": Who Gets Paid First in Administration?

To manage your expectations, you need to understand the creditor hierarchy, often called the "payment waterfall." When the administrator eventually gathers any available funds from selling assets or the business itself, those funds are distributed in a strict order of priority. As an unsecured trade creditor, you are unfortunately near the bottom of this list.

This is the harsh reality of insolvency. The money flows down from the top, and if it runs out before it gets to your level, you receive nothing.

Priority	Creditor Type	Description & Typical Payout
1	Administrator's Fees & Expenses	The administrator's costs are paid first from the realised assets. Without this, no one would take on the job.
2	Secured Creditors (Fixed Charge)	A creditor with a charge over a specific, fixed asset (e.g., a bank with a mortgage on the company's property). They are paid from the sale of that specific asset.
3	Preferential Creditors	Primarily, this includes employees owed wages (up to a statutory limit) and holiday pay. Since December 2020, it also includes HMRC for certain taxes like VAT, PAYE, and employee National Insurance contributions.
4	Secured Creditors (Floating Charge)	A creditor with a charge over a class of assets that can change, like stock or debtors. They get paid from the remaining floating charge assets after preferential creditors.
5	Unsecured Creditors (You)	This is the category for most suppliers, freelancers, landlords, and customers. You are paid a share of any funds left over after everyone above has been paid in full. The payout is often expressed as "pence in the pound" and is frequently zero.
6	Shareholders	The owners of the company. They are last in line and only receive a return if every single creditor has been paid in full, which is exceptionally rare in an administration.

The re-introduction of HMRC as a preferential creditor in 2020 was a significant blow for unsecured creditors. It means that a large tax debt can now consume funds that might previously have been available for suppliers like you.

A Step-by-Step Guide When You Receive the Notice of Administration

Receiving the news is stressful, but acting quickly and methodically is vital. Here are the immediate steps you should take.

1. Stop All Work and Deliveries Immediately

As soon as you are aware of the administration, you must cease all work and stop any goods in transit if possible. Do not provide any further services or ship any more products. Any work you do or goods you supply after the date the administration began will likely not be paid for unless the administrator has specifically agreed, in writing, to pay for them.

2. Check for a Retention of Title Clause

This is your single most powerful tool. A Retention of Title (ROT) clause, sometimes called a "Romalpa clause," is a term in your contract or terms and conditions that states that you retain legal ownership of the goods you have supplied until you have been paid for them in full.

If you have a valid and well-drafted ROT clause, you may be entitled to recover your physical goods from the insolvent company.

• Action: Immediately find your contract or T&Cs. If you have an ROT clause, contact the administrator without delay. You will need to provide a copy of your T&Cs and a detailed list of the unpaid invoices and corresponding goods you believe are on-site. The administrator will need to verify your claim, so be prepared to identify your specific goods.

Be aware that ROT claims can be complex. The clause must be properly incorporated into your contract, and your goods must be identifiable and not have been sold on to a third party or irrevocably mixed with other products.

3. Gather All Your Paperwork

You need to get organised. The administrator will require proof of what you are owed. Create a file containing:

• Copies of all unpaid invoices.
• The signed contract or accepted terms and conditions.
• Any relevant purchase orders.
• Proof of delivery (delivery notes, courier confirmations).
• Any key email correspondence about the debt.

Having this ready will save you time and stress later.

4. Wait for and Read the Administrator's Communication

The administrator is legally required to write to all known creditors within a few days of their appointment. Shortly after, usually within eight weeks, they must send out their formal proposals. This document will outline:

• The background of the company's failure.
• The administrator's plan (e.g., to sell the business, break it up, or move to liquidation).
• An estimate of the company's financial position (a "Statement of Affairs").
• A form called a "Proof of Debt."

Read this document carefully. It will give you the first real indication of whether a return to unsecured creditors is likely.

5. Submit Your Proof of Debt Form

The Proof of Debt form is your formal claim in the administration. It's how you officially tell the administrator who you are and what you are owed.

• Fill it in accurately: Include your full company name, address, and the total amount of the debt.
• Include interest and compensation: For most UK B2B invoices, you are entitled to claim statutory late payment interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1998. The interest is calculated at 8% plus the Bank of England's base rate. You can also add the fixed compensation sum (£40, £70, or £100 depending on the invoice value). Add this to your claim amount up to the date of the administration. While this is also an unsecured claim, you are entitled to claim it.
• Attach your evidence: Include copies of the unpaid invoices as a minimum.
• Submit it on time: The administrator will set a deadline for submitting claims. Make sure you meet it.

Submitting this form is the only way to register your claim and be eligible for any potential dividend payment.

6. Attend the Creditors' Meeting

The administrator will call a meeting of creditors (or, more commonly now, a virtual meeting or decision by correspondence) to vote on their proposals. As an unsecured creditor, your vote is weighted by the value of your debt. While your individual vote may not be enough to change the outcome if there are large institutional creditors, it is your opportunity to ask the administrator direct questions about the failure of the company and the prospects of a return.

Managing Expectations: The Realistic Outcomes

It is essential to be realistic about the chances of getting paid. A full recovery is almost unheard of for an unsecured creditor. Here are the common scenarios and what they mean for you.

• Company Rescue: In the best-case scenario, the administrator restructures the business, and it continues to trade. Often this involves a subsequent Company Voluntary Arrangement (CVA), where a deal is made for the company to pay a percentage of its debts over a period of time. You might receive a partial payment over several months or years.
• Pre-Pack Administration: This is common. The administrator arranges a sale of the business and its assets before they are formally appointed, and the sale is completed the moment the administration begins. Often, the buyer is a new company set up by the previous directors (a "phoenix" company). The money from the sale goes to the administrator to be distributed to creditors of the old company. You have no claim against the new company unless they explicitly took on the liability.
• Sale of the Business/Assets: The administrator markets the business and assets for sale and sells them to the highest bidder. The proceeds go into the pot for distribution according to the waterfall.
• Liquidation: If no rescue or sale is viable, the administrator's job will be to simply sell off any remaining assets, and the company will then be placed into liquidation to finalise the process and distribute any funds.

In most of these outcomes, the return to unsecured creditors is small. It's often referred to in "pence in the pound." A return of 10p in the pound means for every £1,000 you are owed, you would receive £100. It is not uncommon for the return to be 1-2p in the pound, or, in many cases, nothing at all.

Protecting Your Business Going Forward

While you can’t turn back the clock on a client's insolvency, you can learn from the experience and strengthen your own business's financial resilience.

Write Off the Bad Debt for Tax Purposes

Once it’s clear you won’t be paid, you should write the debt off in your accounts. This has two key benefits:

1. Corporation Tax/Income Tax: The bad debt becomes an allowable expense, reducing your profit and therefore your tax bill.
2. VAT: If you are VAT registered and use standard accounting (not cash accounting), you will have already paid the VAT on the invoice to HMRC. You can reclaim this VAT once the debt is more than six months old and you have written it off in your accounts. Speak to your accountant to ensure you follow the correct procedure.

Review Your Credit Control Processes

Proactive credit control is your best defence. While it can't prevent a client's insolvency, it can dramatically reduce your exposure when it happens. The faster you get paid, the less money you have at risk with any single client at any given time. A client that owes you for one 30-day invoice is a much smaller problem than one who owes you for three 90-day invoices.

This is where automation can be a game-changer. Manually chasing every late invoice is time-consuming and easy to neglect when you're busy. Tools like InvoiceReminder can systematise this process, automatically sending a sequence of polite-but-firm reminder emails for you. This discipline shortens your payment cycles and reduces the overall size of your debtor book, making your business less vulnerable to a single customer failure.

Strengthen Your Terms and Conditions

• Implement a Retention of Title clause: If you sell goods, speak to a commercial solicitor about drafting a robust ROT clause for your T&Cs. It is your best security in an insolvency situation.
• Shorten payment terms: Don't offer 60 or 90-day terms by default. Make 30 days your standard, and consider 14 days or even payment upfront for new or smaller clients.
• Enforce your terms: Consistently charge late payment interest and compensation. It signals that you are serious about being paid on time.

Frequently Asked Questions

What's the difference between administration and liquidation?

Administration is a procedure designed to try and rescue a company, or at least achieve a better result for creditors than an immediate shutdown. Liquidation (or 'winding-up') is the process of closing a company, selling all its assets, and distributing the proceeds to creditors before the company is dissolved. Administration can end in liquidation if a rescue or sale isn't possible.

Can I charge interest on the debt after the company enters administration?

You can and should include any statutory interest and fixed-sum compensation that accrued up to the date of the administration on your Proof of Debt form. However, any interest that builds up after the administration begins is considered a deferred, unsecured claim that ranks behind all other creditors and is almost never paid.

The directors of the insolvent company have started a new company. Can I chase them for the old debt?

Generally, no. A limited company is a separate legal entity from its directors. The new company (the "phoenix") is also a separate entity and has no legal obligation to pay the debts of the old company unless it formally agreed to take on those liabilities as part of the business purchase. Directors are only personally liable in specific circumstances, such as if they gave a personal guarantee or have been found guilty of wrongful trading or fraud.

How long does the administration process take?

An administration is appointed for an initial period of one year. This can be extended by the creditors or the court if more time is needed. It is not a quick process. Any potential dividend payment to unsecured creditors is usually not made until the very end of the process, which could be 12-18 months or even longer.

Do I need a solicitor to file a Proof of Debt?

For most straightforward trade debts, you do not need a solicitor. The Proof of Debt form is designed to be completed by creditors themselves. However, if your claim is particularly large or complex—for example, if you are pursuing a difficult Retention of Title claim or there is a dispute over the amount owed—seeking professional legal advice is a sensible precaution.

Will I get my £40/£70/£100 fixed compensation for late payment?

You are entitled to add the statutory fixed compensation sum to your total claim on the Proof of Debt form. However, like the rest of your invoice total and any interest, it is part of your overall unsecured claim. You will only receive the same "pence in the pound" percentage of it as you do for the rest of your debt.

Automate Your Credit Control to Reduce Your Risk

Chasing invoices is a time-consuming but critical task. While proactive credit control can't stop a customer from becoming insolvent, it can drastically reduce your financial exposure by ensuring you're paid faster. A smaller aged debtor book means less money is at risk if a client fails. InvoiceReminder helps UK small businesses, freelancers, and accountants automate their invoice chasing. It connects to Xero, Sage, QuickBooks, and FreeAgent to send scheduled reminders based on your rules, helping you get paid on time without the manual effort. For accountancy practices, it also automates chasing clients for missing documents. The Free plan currently includes unlimited email reminders at no cost, so you can strengthen your credit control process right away. InvoiceReminder is built by the team behind WeCovr, a UK company authorised and regulated by the Financial Conduct Authority, which has arranged over one million insurance policies.