Desperate Times; Careful Measures

Posted on April 24, 2020

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These are strange times indeed and whilst the focus for all of us is keeping fit and well, many will be understandably be concerned about the long term economic impact and the financial legacy which COVID-19 will leave. Small businesses feel the pinch of economic downturn more than most. Tardy satisfaction of invoices or worse, non satisfaction, can have a devastating effect on cash flow and ultimately sustainability. It is therefore important in the current circumstances to try and deal with bad debtors as efficiently and quickly as possible to ensure the best possible chance of recovery. There are a number of areas which can be addressed.

First check your terms of business. Are they adequate? In light of the global crisis and likely subsequent economic downturn it is unlikely they are or will be. Requests for extended credit terms, or for renegotiation of existing terms might be expected and businesses may wish to grasp the nettle and amend existing terms, asking new and existing clients to sign up to them to reflect the current conditions. This could pay dividends for a number of reasons. In terms of existing clients it shows that the business is cognisant of the issues which they are facing in these troubled times and is at least taking some action to try and make life easier for their clients. That should engender loyalty in the long term. Second, amending existing terms to provide for (say) regular payment of a lump sum owed over longer repayment periods but with interest (or increased interest) payable, allows a business to plan and provides some security at least that some money is coming in, compared with the worst case scenario alternative of a flat refusal to pay. It may allow a business to plan better for the future and may also benefit in terms of any discussions needed with banks etc to cover short term liquidity problems.

Even in normal times many terms of business are inadequate as to recovering debts due. It is something which is often overlooked but normally easy to put right. The terms upon which you offer business, provide services etc need not be complicated. Once they are formulated they can be put in place fairly easily and should not need too much alteration over time. They should deal with all aspects of the service you provide but equally the expectations which you place upon your clients for payment. For example how clients have to pay, interest penalties for non-payment, recovery of legal costs for non-payment (if it is necessary to instruct advocates to recover the debt for you) are all points your terms should cover.

Once the terms are in place then stick to them rigidly. If they provide that accounts become overdue if unsatisfied after 14 days then send the first letter to chase for payment on day 15. This is where computers, or even the humble mobile phone, come into their own and can help enormously. Diarising with reminders for day 15 after each invoice is sent will help ensure that your terms are enforced without delay. The reminder should be by letter. A standard, one size fits all letter can be used to cut down on the time spent chasing. It can be tailored for each debtor accordingly. Ideally it should have the invoice number as the title, and/or date referred to and the amount of the debt outstanding. The content of the letter need not be heavy handed just a polite reminder that the invoice referenced remains outstanding and seeking payment within a given timeframe, usually seven days. At this juncture you could of course enforce any clause in the terms of business which allows for the addition of interest on the overdue amount. Usually, as a carrot with which to entice the debtor, it is however better to make mention of the amount of interest which is technically due under the terms, but to agree to waive the right to claim this as long as payment of the invoice amount is made in full within the timeframe specified.

You could also mention that if the debt remains unpaid after the given timeframe you intend to obtain legal advice. If your terms contain a clause to the effect that you may seek to recover the cost of legal advice, then it is timely to highlight that as well.

The benefit of having clear terms of business and enforcing those terms promptly is obvious. Unfortunately it is often the case that people or companies who are struggling to pay debts satisfy those first in respect of which the most noise is made. If a debtor knows that you have a no nonsense approach to outstanding debts then yours are likely to be paid before others. This is a case of those who shout the loudest getting the best results.

In the current environment a continued dialogue with debtors is key. Try and talk to them and find out what their position is. You may be one of many clamouring for payment but showing some sympathy and, for example agreeing to enter into new terms allowing more time to repay, could engender some loyalty so that your debt is prioritised over others. There will always be occasions where that approach will not work however and so, regrettably, in order to protect your business you may have to take further action. Broadly speaking there are three options.

1.Do nothing and write the debt off;

2.Continue with correspondence which can take up a lot of time and effort;

3.Take immediate legal action.

Whilst the third option is not to be undertaken lightly it can often be the only action which forces a long standing debtor to take notice. It may involve the instruction of an Advocate and usually they would write to the debtor affording one final opportunity to satisfy the debt. This simple act often has the desired effect. A letter on an Advocate’s headed paper lets the debtor know that you really do mean business and even in circumstances where chasers have been ignored up to that point it often, at the very least, gets the debtor talking.

If court action does become necessary (whether brought by yourself or via an Advocate) then this need not be daunting. Again the trick is to be organised and file your claim as soon as possible so that momentum is not lost and the debtor knows that you are serious. If you take the step of filing the claim yourself then again it is recommended that you put a system in place. Rules of Court (available to view on the Isle of Man Courts website) place strict time limits on acts to be completed by a claimant and the onus is placed upon them to pursue any claim with diligence.

If you do find yourself issuing proceedings which are successful then you may find it difficult to enforce the judgment in your favour. Usually an Isle of Man Coroner is responsible for enforcement of Manx judgments but there are also steps you can take to smooth or expedite the process. For example:

  • Do you have bank details for debtor? If so give them to the local Coroner. He/She has the power here to enter into a bank and withdraw money from a debtor's account to satisfy a local judgment debt.
  • If a debt claim results in a debtor agreeing payment of instalments then formalise that agreement by way of court order. If the agreement is subsequently broken by the debtor this task could make it simpler to collect the outstanding sum.
  • Think about the nature of the debt owed and if the debtor is a company, think about accelerating conduct to issue proceedings as soon as possible so that there is a judgment which will be a good way of proving a debt in any subsequent liquidation of the debtor company.
  • If instalments are agreed then be rigorous in checking for payments which have been promised and chase them immediately.
  • Consider asking the coroner responsible for enforcing any judgment obtained, to conduct an inquiry into assets/means of the debtor as soon as possible. This is a power granted to coroners under local legislation by which a debtor can be compelled to answer questions about finances and provide documentary proof.

There is no doubt that the results of COVID-19 will be felt for some time, including financially. Planning now will help militate the financial effects at least.

The author is a Director and Advocate at M&P Legal.

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