Trade credit insurance

What happens if a customer goes bust owing you money

Reviewed by the Apex broking team · Last reviewed 2026-10-29

If a customer becomes insolvent, your unpaid invoices usually become an unsecured claim in the insolvency, and unsecured creditors often recover only a small part. That gap is the loss trade credit insurance is designed to replace, subject to the policy terms.

Part of: Trade credit insurance

In short

When a UK company enters administration or liquidation, a supplier owed money is normally an unsecured creditor. Secured lenders, insolvency costs, preferential creditors (including HMRC for VAT and PAYE since 1 December 2020) are paid ahead of you, and unsecured creditors share what is left, plus a ring-fenced prescribed part capped at £800,000. You usually cannot use the insolvency itself to stop supplying, or demand arrears before supplying again. Trade credit insurance commonly pays a percentage of insured debts lost to insolvency or prolonged non-payment, provided you kept within your credit limits and reported overdue accounts on time.

Where you stand when a customer becomes insolvent

Once a customer enters administration or liquidation, an insolvency practitioner takes control and you submit a claim (a proof of debt) to the office-holder.

What you get back depends on where your debt ranks under the Insolvency Act 1986. The table is simplified; the exact order depends on the procedure and the security given.

Who is paid	Broad position	What it means for a supplier
Fixed charge holders	Paid from the assets their charge covers, such as property	Those assets are usually not available to you
Costs and expenses of the insolvency	Paid before most creditors	Reduces the pot further
Ordinary preferential debts	Listed in Schedule 6, mainly certain amounts owed to employees	Ranks ahead of you
Secondary preferential debts	Includes VAT, PAYE income tax, employee National Insurance and CIS deductions owed to HMRC	Ranks ahead of you since 1 December 2020
Prescribed part	A ring-fenced share of floating charge realisations kept for unsecured creditors	Your main hope of a dividend where there is a floating charge
Floating charge holders	Usually the company's lender	Takes the rest of the floating charge assets
Unsecured creditors	Trade suppliers, landlords for arrears, HMRC for corporation tax	You share pro rata in what is left

Section 386 of the Act points to Schedule 6 for the list of preferential debts.

Why unsecured creditors often recover little

Two changes have made the position of trade suppliers harder. First, HMRC became a secondary preferential creditor for taxes a business collects on behalf of others: VAT, PAYE income tax, employee National Insurance, student loan deductions and Construction Industry Scheme deductions. HMRC's guidance gives the start date as 1 December 2020. Corporation tax and employer National Insurance remain unsecured.

Second, the prescribed part under section 176A helps, but it is limited. Where a company has given a floating charge, the office-holder must set aside a share of the net floating charge property for unsecured creditors. The Prescribed Part Order 2003 sets it at 50% of the first £10,000 and 20% of the rest. The 2020 amendment raised the maximum from £600,000 to £800,000 from 6 April 2020; the old cap still applies where an earlier floating charge ranks first.

Illustrative: a distributor goes into administration owing its lender, HMRC and 200 trade suppliers. After costs, preferential claims and the lender, the prescribed part is shared across all unsecured claims. A supplier owed £80,000 may receive a few pence in the pound, months later.

What you can and cannot do once a customer is insolvent

Suppliers want to stop deliveries, recover goods and chase arrears. The law limits all three.

Termination clauses. Under section 233B of the Insolvency Act 1986, added by the Corporate Insolvency and Governance Act 2020 from 26 June 2020, a term allowing you to end a supply contract because the customer has entered administration, liquidation, a voluntary arrangement or a moratorium stops having effect. You can still end it with the office-holder's consent, or with the court's permission if continuing would cause you hardship. Some contracts and suppliers are excluded.
Arrears. The same section stops you making payment of pre-insolvency charges a condition of continuing to supply. Agree terms for any new supplies with the office-holder; the old debt stays unsecured.
Retention of title. The Sale of Goods Act 1979, section 19 lets a seller reserve ownership until conditions, such as payment, are met. A well-drafted retention of title clause can let you reclaim unpaid goods that are still identifiable and unmixed. Contact the office-holder before collecting anything, as insolvency procedures restrict what creditors may do.
VAT. If you have paid output VAT on an invoice that is never paid, VAT Notice 700/18 allows bad debt relief once the debt is at least six months overdue (from the later of the due date and the supply date) and written off in your accounts. HMRC says payment under a bad debt insurance policy does not affect your entitlement.

How trade credit insurance responds

Trade credit insurance covers loss from debtors' insolvency or failure to pay when due, listed as "Credit" in Schedule 1 to the Regulated Activities Order. A policy usually works like this:

Insured events. Insolvency of the buyer and protracted default (the buyer simply not paying for a set period after the due date) are the usual triggers. Disputed debts are commonly excluded until the dispute is resolved.
Credit limits. The insurer sets a limit for each buyer, or lets you set limits up to a level using credit information. Sales above the limit are usually uninsured.
Reporting. Policies commonly require you to report overdue accounts within a fixed period and stop further credit. Late reporting often reduces claims.
Indemnity. The policy normally pays a percentage of the insured loss, after any waiting period.
Recoveries. After paying, the insurer usually takes over the insolvency claim and shares any dividend as the policy sets out.

Our trade credit insurance guide explains how policies are structured, and whole turnover vs single buyer cover compares the main policy types. Cover always depends on the wording.

Illustrative: a wholesaler's largest customer enters administration

A food wholesaler sells on 60-day terms to a regional chain worth a quarter of its sales. The chain enters administration owing £240,000. The administrators keep trading, so the wholesaler cannot rely on its termination clause and agrees terms for new orders with them.

Without cover: the wholesaler waits for a dividend that may be small and slow.

With a credit policy: if the chain was within its credit limit and overdue amounts were reported on time, the insurer would usually pay the insured percentage and pursue the insolvency claim itself. Any excess over the limit stays with the wholesaler.

See also our distribution and wholesale and manufacturing insurance guides.

Steps to take when a customer becomes insolvent

Notify your credit insurer within the policy's time limit, even if you hope to be paid.
Agree terms for any continuing supply with the office-holder, bearing section 233B in mind.
Write to the office-holder about any goods under retention of title, with invoices and delivery records.
Submit your proof of debt and diarise VAT bad debt relief for the six-month point.

For the directors' side, see wrongful trading and D&O insurance and insolvency.

How Apex helps

Apex arranges trade credit insurance for UK businesses selling on credit terms, including export credit insurance and cover for construction subcontractors. A broker reads each enquiry and comes back with options; there is no fee for a quote, and cover is subject to the insurer's acceptance and the policy terms. To quote we need your business activities, turnover, location and bad debt history, plus your credit sales, payment terms, an aged debtor list and your largest buyers with the limits you need. See also our trade credit and domestic credit insurance definitions.

Sources

Frequently asked

What happens to my unpaid invoices if a customer goes into administration?

They normally become an unsecured claim. You submit a proof of debt to the administrator, and unsecured creditors are paid only after secured lenders, insolvency costs and preferential creditors such as HMRC for VAT and PAYE. Any dividend may be small and slow.

Can I stop supplying a customer that has gone into administration?

Not simply because of the insolvency. Section 233B of the Insolvency Act 1986 stops termination clauses triggered by administration, liquidation and similar procedures from working, and bars you from demanding pre-insolvency arrears as a condition of supply. You can end the contract with the office-holder's consent or the court's permission on hardship grounds.

Does trade credit insurance pay out if a customer just stops paying?

Usually yes, if the policy covers protracted default. That means the buyer has not paid for a set period after the due date, even without formal insolvency. You normally need to have reported the overdue account on time and kept within the credit limit. Disputed debts are commonly excluded until resolved.

Can I claim back VAT on an invoice a bust customer never paid?

Usually, through VAT bad debt relief. HMRC's VAT Notice 700/18 requires the debt to be at least six months overdue from the later of the due date and the supply date, written off in your accounts, and claimed within four years and six months. A payment from a bad debt insurer does not affect your entitlement.

Does a retention of title clause protect me if a customer goes bust?

It can, for goods still identifiable and unpaid for. The Sale of Goods Act 1979 lets a seller keep ownership until conditions are met. It rarely helps once goods are sold on, used or mixed, and you should deal through the office-holder.

Talk to a broker about this cover

Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.

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Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.