Cash Flow Killer: Debt Recovery

Big or small, established or start up, unpaid invoices are a cash flow killer to businesses but apart from repeatedly chasing payment, what can you, as the creditor, do?

Here are a few things to think about. 

1. Know who you are getting in to business with!

It’s important to check whether the arrangement between the parties is subject to any standard terms of business which are likely to include payment terms. If there are no standard terms, it is sensible to clarify the terms before engaging. If one party has an expectation of payment by return, and the other ninety days, this could quickly escalate in to a dispute. It is also advisable to ensure you are engaging with the person(s) authorised by the other party to negotiate and/or enter in to contractual arrangements on its behalf. If in doubt, this should be checked.

2.    Gather information about the debtor (before you chase).

So, an invoice hasn’t been paid and the debtor isn’t responding or they tell you they cannot afford to pay. Let’s focus on the plea of poverty, which can be for a whole host of reasons. Does the other party have the means to pay? Do your homework!

Carry out public searches (check Companies House, Land Registry, Central Registry of Winding up Petitions). Have a look at the statutory accounts or if you have a credit reference facility, use it. There are also asset tracing services. In the case of an individual debtor who claims they cannot afford to pay the debt, insist on them providing a sworn statement of assets including a schedule of income and expenditure.

Don’t neglect social media. It’s worth checking whether the debtors lifestyle is consistent with the claim that they cannot afford to pay.

3.    Have a face to face meeting with the debtor.

There is a temptation to email the debtor but it’s too easy to ignore an email. It’s advisable to have personal contact and use email to confirm what has been discussed or agreed. If the debtor makes excuses as to why they are not available to discuss the debt, this could be a red flag and a sign of things to come.

What if a debtor says they cannot pay because to do so would amount to a preferential treatment of a creditor?

In this case there has to be a 'desire' to prefer the creditor. It’s not enough to show that the debtor was aware that paying the debt would put the debtor in a better position than other creditors. They have to have a positive wish to prefer. A classic example is where a relative of the debtor is paid rather than the other creditors. Therefore, a payment to a creditor to prevent a winding up petition is not favouring a creditor because the purpose is to stop the petition, not prefer that particular creditor.

4.    Know what your red lines are.

Decide what you will accept in settlement of the debt before you embark on discussions. Is there any interest or costs to be added to the debt? If the debtor offers payment by instalments, unless the original agreement permits this, as the creditor you could impose additional terms such judgment debt interest, which is 8%.

5.      Negotiations.

Choose the correct time to negotiate. Know your onions about the debt and the debtors circumstances (as far as you can) and know what you will accept. As the creditor, control the process and the starting point should always be immediate payment of the full amount including any interest and costs.

Know when to walk away. If the debtor genuinely cannot afford to pay, be very cautious about issuing legal proceedings otherwise you may end up throwing good money after bad. 

6.      He who shouts loudest gets paid first.

It pays to be proactive. The more the creditor presses the debtor the more likely they are to get paid, although it’s advisable to consider whether any negative publicity could arise.

7.    Settlement agreement.

Prepare a robust settlement agreement to include payment terms such what is to be paid and when. This ought to include interests and costs. You could also insist of the debtor agreeing to judgment being entered if there is a default.

8.    Should you take security for the debt?

Yes, if possible, particularly if the debt is of a higher value.

A personal or corporate guarantee or a legal charge over the debtors property can be very effective. A guarantee, like a charge, must be in writing, and its best to avoid guarantees with complex terms. Keep it simple and consider whether the guarantor could satisfy the debts of the debtor.

9.    Non-payment. Litigation or the Insolvency Process?

The insolvency process is quicker but the court fees are usually higher. In corporate insolvency there is no requirement to present the debtor with a statutory demand before a petition for winding up although there should be a written demand beforehand, at least. This does not apply to individuals. The legal costs of the insolvency process are generally less than in litigation however if the debt is genuinely disputed then this is not a debt collection matter. It’s commercial litigation.

10.  Enforcement

In corporate cases, third party debt orders are a useful mechanism for enforcement and for individuals, an attachment to earnings order. Charging orders by which real estate or shares can be legally charged are also useful. Obtaining a court appointment so the court can enquire of the debtor as to their means can be daunting prospect and may encourage payment. Finally, the good old 'can't pay, we'll take it away' route through the bailiffs. 

If you require any support from Sewell Law, please feel free to reach out to us. We have your back.