DEBT AVOIDANCE: Limiting exposure

Nobody wants to provide goods or services and not get paid for them but unfortunately not all customers pay on time and in full when payment is due.  This problem is not restricted to any one industry sector or type of business but bad debtors are more prevalent now than for many years as traders continue to feel the squeeze brought about by the current state of the British economy.

The question must be “how can I make sure my company isn’t one of those affected?”  Of course the short answer is that immunity is all but impossible, but certainly there are a number of steps that can be taken to limit exposure, some of which are outlined below.

1. Are all your business relationships documented? : Debt takes many forms, it may not be a buyer who is late settling an invoice; perhaps it is a tenant not paying rent.  Occasionally tenants may occupy commercial premises on a ‘rolling’ contract, or perhaps the reason they are there in the first place is due to some connection with the Landlord’s company or someone involved in it.  Do not be afraid to ask for this to be documented.  The modest amount of money required to do is likely to pale into comparison if the tenant defaults on payment of several months rent.

2. Engaging New Customers : When approached by new buyers, as credible as they may appear, take a moment to give some thought to the terms on which they are to be engaged.  It may be sensible, for example, to set a credit limit or to make the payment terms for the first few invoices more onerous than for established paying customers.  If you have reservations, and if the buyer is a registered company, then a quick, free, check of the Companies House website will give you a snapshot of the company’s insolvency history, if any.

3. Know who you are contracting with : It sounds simple but what is the correct name of your customer and are they a limited company, a partnership, sole trader or a limited liability partnership? If, failing all else, proceedings are issued and a judgment obtained against the wrong name it will be unenforceable. If, during proceedings, an application needs to be made to change the name of the defendant this will mean wasted time and costs.

4. Business Terms : Are the terms on which you engage buyers as preferable as the law will permit and are they up to date?  Where do your business Terms and Conditions (T&Cs) appear? They will be of no use if they are on the back of your invoice; they have to be incorporated into the contract for them to be effective.  Do you sell overseas?  Perhaps you did not when your T&Cs were drafted, but if the business has grown it is now quite possible you do.  If so, do your business terms consider jurisdiction? 

5. Document any changes to orders/contracts : A contract does not have to be in writing but experience shows that if it is it is easier to prove and rely on. If a contract changes during the course of dealing make a note or better still write to the buyer confirming the changes.  Your standard contract may have evolved over time from the one you signed five years ago with a buyer but this doesn’t mean those new terms apply to them.  If you want to vary the terms, this needs to be done in writing and may require their consent.

6. Act early : What happens when a buyer fails to pay within your designated period?  The best approach is to be proactive: why not put in place a procedure for contacting debtors promptly to discuss the problem with them?  There may be a perfectly legitimate reason but be aware it may be if they are not paying you, they are not paying others either and you don’t want to wait another month only to find that what little money there was now has disappeared together with your chances of getting paid.

7. Pre-empting ADR options? : Alternative Dispute Resolution (“ADR”) is the umbrella term used to describe a number of processes, including mediation and arbitration, that are alternatives to litigation. The courts, regardless of the value and nature of a dispute, will expect parties to attempt to settle matters before turning to them to do so.  This being the case do your T&Cs provide for this and stipulate who will bear the cost? 

8. Know your rights : Finally, if proceedings are issued, are you clear about where you stand? For example, do you know what legal costs you may recover?  Currently the answer is nominal sums for claims under £5000, and there is discussion of fixing recoverable costs for claims up to £25,000.  What happens if your buyer accuses you of harassing them for the payment?  Case law has shown that damages may be awarded if it can be shown that a debtor has been harassed while a debt is being secured. And, perhaps worst of all, what happens if my debtor goes into liquidation? 

Knowing the answers to all these questions and others is likely to save you time and money when it comes to trying to recover a debt so the best advice is to seek legal advice well before things go awry so you are aware of your rights and how to pursue them should you need to.

For further information please contact Liz Philpott