Dealing with non-payers can be like ‘pulling teeth’. Cash, however, is the lifeblood of business and most business owners cannot afford to sit back and not take action. We cover our top tips for taking control of your debtors...
The good news is that you can take steps (with Court proceedings often a last resort) to improve your cash flow and disincentivise your clients from treating you like a bank. We all know court can be an expensive and time consuming process and can spell the end of a business relationship. A formal demand can also damage your relationship with your customer and, if you suspect insolvency, potentially place you in a difficult position with the liquidator seeking to ‘claw back’ that payment down the track.
In this article we cover our top tips for taking control of your debtors: putting in place credit control processes, using your debt collection processes, resolving disputes through the relevant Court/Tribunal. We also set out the liquidation (companies) and bankruptcy (individuals) processes.
Tip 1: Have strong in-house credit control
When you are deciding whether to start a new business relationship, you should make an informed decision. If you are going to be supplying goods or services on credit, you should have the customer complete a credit application form and provide a copy of your terms of trade. You should also consider running a credit check and speaking to the customer’s credit references.
Once in a business relationship, you should set and enforce customer credit limits and have clear terms of trade in place that include (amongst other things) payment terms and default provisions in the event of non payment. If your terms include PPSR provisions entitling you to register a security interest on the PPSR then do it. Also consider obtaining personal guarantees.
Including a clause in your terms of trade allowing you to charge interest on overdue invoices (and adding interest to overdue invoices) will encourage customers to pay on time. It is also a good idea to include a term allowing you to pass on debt collection fees and/or legal costs you incur to your customer, in the event of non-payment.
Actively monitor your debtors and take steps when payments are missed. This makes it harder for your debtors to ignore you, which increases your chance of being paid.
It is important that you act in accordance with your terms of trade, rely on your credit policies (such as stop credit limits), and have a clear record of treating all customers in the same way. By having robust credit control processes, you help protect your business from exposure to bad debts. If you do not take any steps until you suspect that a customer is insolvent, if that customer company later faces liquidation/bankruptcy and your debt was paid in the period leading up to liquidation, there is a risk the liquidator/assignee may have the ability to claw back that payment.
Tip 2: Use lawyers letters and debt collection agencies
If your internal debt collection process has not resulted in payment, you should consider sending the debt to your lawyers or a debt collection agency. Because this increases the “seriousness” of the unpaid debt, referring the debt to an independent party for collection will be successful even though your internal processes have not resulted in payment.
Often, a letter of demand on your solicitors’ letterhead or a visit from a debt collection agent will prompt payment. If there is a dispute relating to the debt, contact from your lawyer or debt collection agent may elicit a response, even if the debtor has been ignoring you.
Once you have engaged your lawyers / a debt collection agent, you can leave them to deal with the communications and legal process (although some input from you will still be required). This means that you can spend your time adding value to your business instead of following up late payers.
There is a cost associated with engaging outside help to recover your debt. Lawyers generally charge for work undertaken whereas debt collectors generally charge a fee based on a percentage of the debt owing. Some debt collection agencies work on a success fee basis, that is, no fee if no reward. There are benefits and drawbacks to both approaches so you will need to decide which option is best for you in relation to the debt in question.
If you want to recover these outside legal / debt recovery costs, you need to ensure there is provision for passing on these costs included in your terms of trade.
Tip 3: Address disputed debt
Dealing with a disputed debt is not enjoyable. However, if your customer has a genuine concern / grievance, they are unlikely to pay you until the debt is resolved. In addition, the earlier the dispute is addressed, the more likely you are to save your business relationship.
The best “self help” remedy for a disputed debt is to reach a compromise or informal settlement. This is also generally the most cost effective option, in the long run.
If the dispute cannot be resolved, you will need to consider issuing legal proceedings. Which Court or Tribunal is the most appropriate will depend on the amount owing to you.
Disputes Tribunal – up to $30,000
If there is a dispute and the debt up to $30,000 then a claim can be filed in the Disputes Tribunal. The Disputes Tribunal only has jurisdiction to deal with disputed debts – it is not for obtaining judgment on undisputed debts. The filing fees in the Disputes Tribunal are low and solicitors cannot represent you at the hearing, which also keeps costs down. At the hearing, the referee will make an order or approve an agreed settlement. Once the order is made, it can be enforced against the debtor in the same way that a District Court judgment could.
District Court - up to $350,000 / High Court - $350,000 or more
If the debt is less than $350,000, the claim will fall within the jurisdiction of the District Court. If the debt is greater than $350,000, the claim falls within jurisdiction of the High Court. While there are some differences, the processes followed in the District Court and the High Court are similar.
The District Court and High Court can be used to resolve claims over disputed debts. This is done by issuing ordinary proceedings. These applications are more complex, costly, and time consuming than claims in the Disputes Tribunal. For this reason, we recommend that you obtain legal advice before issuing proceedings in the District Court or High Court.
Once judgment has been obtained, it can be enforced.
Tip 4: Get in early
If the debt is owed by a company and there is no dispute but payment is not forthcoming, you can issue a statutory demand demanding payment. If the customer takes no steps to compromise, or pay, or offer some form of security, then following the expiry of 15 working days after the service of that statutory demand, winding up proceedings can be advanced within the next 30 working days.
Unless the company is genuinely insolvent, service of a statutory demand or a bankruptcy notice will often lead to payment (or an arrangement for payment). For a company that is genuinely insolvent, it will inevitably lead to liquidation (company) either by a company creditor or by the company’s shareholders. In our experience, debts generally continue to mount while insolvent companies are left to their own devices. This means that, the longer the period of insolvency, the less creditors are likely to recover. During the liquidation process you will need to gain the consent of a Licensed Insolvency Practitioner at an insolvency/recovery specialist firm such as McDonald Vague Limited to consent to act as liquidators of the company. If you want to choose the company’s liquidators, the liquidators’ consent to act needs to be with the Court before the liquidation order is made.
The consent of an Licensed Insolvency Practitioner, who will have the requisite skills and experience necessary to carry out the liquidation and who has a governing body they report to, is now a requirement.
If the liquidator does not realise a recovery for creditors (i.e. there are no realisable assets before or after taking into account secured and preferential claims) or is only able to realise a partial recovery for creditors, the only recovery option still available may be to pursue a personal guarantee, if this was gained during the business relationship or as part of a compromise or settlement.
Claims for payment of undisputed debts against individuals (e.g. sole traders and guarantors) can be made by way of ordinary proceedings or summary judgment proceedings in the District Court or High Court. We recommend that you get legal advice before issuing proceedings against a guarantor.
Once judgment is obtained against an individual, a bankruptcy notice can be issued requiring the debtor to make payment within 10 working days of service. If the bankruptcy notice is not complied with, adjudication proceedings can be brought within 3 months of the bankruptcy notice expiring.
There are, of course, other enforcement options available. These options include financial assessment hearings, attachment orders, warrant to seize property, charging orders, garnishee orders, and
community work. Further information is available from your solicitors or from www.communitylaw.org.nz.
There are a range of steps you can take to minimise your unpaid debtors. If you take positive steps to manage your debtors and to deal with your disputed debts, you increase the likelihood of being paid. While implementing new policies and systems can seem daunting, we are here to help. At McDonald Vague Limited we provide advice and assistance to companies seeking to advance statutory demands and winding up proceedings. We are a firm of Licensed Insolvency Practitioners.
We also advise the recipient of a demand who is seeking to offer a settlement, enter into a compromise, or to advance liquidation by shareholder resolution. We also advise the insolvent individual who seeks to compromise with creditors (Part 5 Proposals) following a formal demand and who may be facing bankruptcy proceedings.We specialise in liquidations, company compromises, restructuring, turnaround (including hive down) and personal proposals. We provide positive solutions to businesses and have a wealth of experience in helping businesses to turn around.