Six due diligence checks to help verify credibility of a counterparty

What can be done to reduce these risks?

Due diligence is the easiest way to safeguard your or your company’s money. It involves gathering information to verify the credibility and trustworthiness of the party you are looking to contract with, reducing the likelihood of financial losses, reputational and regulatory risk.

Due diligence checklist
Set out below is a list of the checks we recommend that consumers and businesses carry out before engaging a third party to carry out work or entering a contractual arrangement with a counterparty.

1. ‘Find a Company’ search at Companies House
Companies House is a Government agency that maintains the register of companies in the UK. We recommend searching the register of companies for your trader or contractual counter party’s name/company number, if they are a registered company or an LLP. Consider:

• Are they a company or an LLP that is registered at Companies House? An incorporated company, or an LLP, is an indicator (though not proof) of credibility. Registered companies and LLPs are required to comply with company law and to file accounts and ownership information.
• The ‘Overview’ tab. How long they have been incorporated? The longer the better. Are any of their filings overdue? These will show as red text. Overdue filings might suggest poor company administration/management. What is the status? If it is in liquidation be very careful before entering into any agreements with them or making any payments to them – those you are dealing with may no longer be in control of the company and may be unable to perform the contract What is the nature of the business? Does this reflect your understanding? Has it been listed as a dormant company? Why?
• The ‘Filing History’ tab. Have applications been made to wind up/strike off the company? Or for it to enter into administration? That indicates poor financial management. Check their latest accounts. Do they make good profits? Group structure. Can you see who owns them from the ‘confirmation statement’? Is it another entity? Who are they owned by? Is it so complicated that you cannot see who is really in charge?
• The ‘People’ Tab. Have there been lots of director resignations or changes? Why? Who is named under the Persons with Significant Control tab? Is it another entity and if so who owns them?

2. Internet search
It is always worth Googling a company (other search engines are available!). Check:

• Reviews on Google or other sites. Are they positive? Can they produce written and verbal testimonials?
• Whether they have a business profile and experience in the area.
• The news. You can run a specific ‘google news’ search, is there any negative press? A suggestion of litigation/investigations? A history of solvency issues? Might any association reflect negatively?
• Their website. Is it well put together and up to date? Check the legal information, are there terms of business, cookies notice, details about the entity?

3. Social media
Consider whether any complaints have been made about the company or potential its goods or services.

4. Licenses
Verify that the company has the registrations, licenses, accreditation, ISO standards, etc. needed to carry out the work for or with you. Ask for copies if necessary. These give a degree of credibility to the company.

5.Payment method
Being asked to pay the entire amount due for the goods/services in advance is a big red flag. Payment by instalments or on production of invoices is more customary and safeguards your money.

6. ‘Find case law’ search
Consider searching for any court judgments which might point to untrustworthiness. The National Archives has judgments of The Supreme Court, Court of Appeal, High Court, and Upper Tribunals from 2003 onwards. The British and Irish Legal Information Institute (BAILII) has materials from the UK, England and Wales, Scotland, Northern Ireland, Ireland, Europe and other jurisdictions.

Depending on the nature of the arrangement between the parties, you may wish to engage accountants or lawyers to carry out deeper due diligence on a third party/counterpart.

Comment
This article was prompted by a discussion between corporate and disputes team members about a couple who had contacted us having been quoted a figure to carry out building work on their house, and ended up paying for work never carried out.  The construction company ended up going into liquidation, as a result, the money which was a lot for the couple, was unrecoverable. This helpline query got us talking about the due diligence we as lawyers would carry out on a trader, which then turned into this article. We hope you found it helpful.

If you need more information on how to safeguard your company, please get in touch with our Corporate & Commercial or Risk & Compliance teams.