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Alchemy and Credit Control: Turning Longstanding Debts into Gold

Commercial Law

“Cash is king”, or so the saying goes, but how do you make progress with clients who just won’t pay? If a significant amount of money is owed, legal proceedings are usually justified on a commercial basis, and will usually get the other party’s immediate attention.

But what if the amount owed is relatively modest, making court proceedings prohibitively expensive for that debt? These are our six golden tips to recovering your bad debts.

1. Personally visit the debtor and discuss the situation with them. Personal contact can be very powerful, especially if you can explain to the debtor, face-to-face, the negative impact their behaviour is having on your business. You can eyeball them and say that if they do not pay, you intend following legal procedures, including, if necessary, court action, because you will not accept non-payment.

2. Negotiate terms. Sometimes this may involve receiving payment in several tranches. Often the reason that a debtor won’t pay is because they do not currently have the full amount available to pay you. Invite them to pay off in 3 or 4 steps over several weeks or months. Avoid arrangements that are too complicated, or involve too long a time period, because the other party will almost inevitably reneg on the deal. Another negotiation strategy to consider is offering a reduction if the amount is paid in a very short period, such as 10% reduction if paid by the end of the week. Advise the debtor what the amount will be if they pay in that short period, and how much they will be saving.

3.         If the person who owes the money is a professional person, you may be entitled to report their behaviour to the professional body that registers that person. Most professionals are required to meet standards of behaviour that is exemplary, and financial misconduct such as failing to pay debts may be relevant to that person’s ongoing registration. Even cautioning the debtor that you are considering this course of action may be sufficient to get their full attention.

4.         Send correspondence about the debt to the household where the debtor lives, without identifying the name of the recipient of the letter. In many domestic situations one of the adults controls the finances, and the other will be completely unaware of the debt. With a bit of luck, your letter might be opened by the partner or spouse of the debtor, who may be shocked that monies are owed, and who may become your advocate in placing pressure on the debtor to pay.

5.         Have a lawyer or debt collection agent issue a letter of demand on your behalf. Having a third party write the demand for you can often change the dynamic – the recipient will open the letter for a start, as initially they will not recognise who it is from, and they will usually perceive a greater urgency to paying the debt because of the fear of the legal processes which may follow. Solicitors can expressly threaten court action. Debt collection agents can also make assertions about negative credit ratings if the amount is not paid.

6.         Issue a Creditor’s Statutory Demand. This form of demand requires payment within 21 days, on the threat that if it is not paid in that timeframe, the company will be presumed insolvent, entitling you to wind up the debtor company. To most companies this represents a very serious threat, and will almost always result in payment, or a clear statement from the other party of what the issues are (whether solvency or a dispute over the amount owed). Some caution is required with this strategy: if there is a genuine dispute as to the amount of debt, the Creditor’s Statutory Demand can be set aside and cost consequences may follow.  As a result, before you issue your own Creditor’s Statutory Demand, it is important to seek legal advice to ensure it complies with the proper form and to ensure it does not breach any legislative or common law requirements. A solicitor will need to help you prepare the Affidavit that must accompany the Demand, setting out the necessary particulars of the debt.

If you have any questions in relation to debt recovery members of our litigation team are always available to assist you.