Sick of being treated like a bank?

Unpaid debtors causing you grief? Peri Finnigan and Marisa Brugeyroux share four top tips for better debt control.

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. The good news is that you can take steps to improve your cashflow and disincentivise your clients from treating you like a bank.  

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, get the customer to 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, make sure you set and enforce customer credit limits and have clear terms of trade in place that include payment terms and default provisions in the event of non-payment. If your terms include PPSR (Personal Property Securities Register) 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. 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.

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.

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 or 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.

Your options are:

• The Disputes Tribunal – up to $15,000 (or $20,000 by consent).
• The District Court – up to $200,000 / High Court – $200,000 or more.

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.  

Liquidation
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 an insolvency/recovery specialist firm 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.

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 (eg 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. 

Think positive    
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, an accredited insolvency practitioner such as McDonald Vague can help.