Pre-contract Due Diligence - Checking a Company’s Financial Position
Prospect – Union for Life
Before entering into a contract to provide services on a self-employed basis or via a limited company, it is important to check the other company’s financial position. Can you risk not being paid for work done? Unlike employees who can seek certain monies from the redundancy payments service if a company goes into administration, you will have very little recourse to recover monies owed in these circumstances.
To check a company’s financial position, you need to undertake some pre-contract due diligence. This checklist sets out some steps you can take to check a company’s financial stability. This is not an exhaustive list. You should undertake any steps you deem necessary to satisfy yourself of any risks.
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1. COMPANIES HOUSE
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Check Companies House to see: * When was the company formed? Is it a new company or established? The longer a company has been trading the more stable it is likely to be. A new company that has just been formed, might not have funding or money in its accounts.
* Is the company up to date with filling their accounts? You can check the filling history to see if accounts are up to date. If accounts are overdue this could be a red flag.
* What do the last three years of accounts show? Is the company in debt? Is trading better or worse over that period? What assets do they have? Do they have any charges/loans which would be paid off before other debts? |
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2. FUNDING
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If you are being offered a role on a new project/with a new company, ask: * Where is funding coming from? You could ask to see evidence that funding arrangements are in place, but there is no obligation to provide it. Note that an offer in principle for funding is not a guarantee of funding and could be withdrawn. You would need to see a signed contract in respect of any funding arrangement or bank statement showing the funding has been paid. |
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3. COUNTY COURT JUDGMENTS
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You can search the court register to check for Judgments, Orders and Fines that may have been issued against the company. The link for this is here. There is a small fee to search depending on what you are searching for. |
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4. CREDIT AGENCIES
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If you have serious concerns about the company’s finances, you can pay for a credit check via a credit agency. This will give you a much more in-depth report than what can be obtained for free on Companies House. |
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5. PRE-PAYMENT/PAYMENT INTERVALS
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If you have concerns about finances, you could: * Ask for a pre-payment to be made before work begins. This may still not cover the whole project but would as least show willing on the other side’s part and cover some costs. Up to 25% might be a reasonable request. * Make it a contractual term that payment will be weekly/monthly. If the contract will be over a few months, ensure payment intervals are set up. Make sure you evaluate your position if any invoices are not paid. * Set timeframes for payment of invoices Again, make sure you evaluate your position if payment dates are missed. If you are considering stopping working, remember you contact BECTU for advice on whether you should stop working and whether you would be in breach of contract if you did. They can also give some initial advice on recovering any monies owed. |
If you have concerns about a company’s finances, consider seeking an employment contract. If you are an employee, and the company goes into liquidation, you can claim certain payments from the Redundancy Payments Service (RPS), including unpaid wages, holiday pay, notice pay and, where applicable, a statutory redundancy payment. Please note this service is not available to workers.
NB it is ultimately your decision as to whether to enter into any contract and the risk you are willing to take. This document is for guidance only to help you consider the potential risks; it should not be seen as a legal or financial advice.
Laura Pearce
Senior Solicitor