Minimising Your Exposure and Maximising Your Recovery

Reviewing your use of standard documentation and the policies and procedures that govern your business relationships can often give you the best chance of minimising the level of bad debt, as well as assisting you in the debt recovery process, should you need to take that step.  The best course of action will vary from business to business and we would be happy to discuss your individual requirements and help put plans in place.  The following are a few examples of what you could do:

  • Credit checks prior to entering into a new business relationship.
  • Procedure for the follow-up of invoices which pass their due date for payment (use of appropriately worded standard debt recovery letters may be appropriate).
  • Imposition of maximum credit limits following which no more goods/services will be supplied.
  • Suitable terms and conditions to cover business relationships and to maximise your chance of recovery.  It is important to ensure that your terms and conditions are properly “incorporated” into the contract so that you can rely on them.
  • Appropriate record keeping to document your business relationships and any subsequent changes to it
  • Staff training to carry out the above tasks

Recovering Trade Debt - In the event that communications with the debtor do not result in payment, the following highlight the main options available to you when trying to recover a trade debt:

1. Court proceedings - Before starting court proceedings, you should:

  • Conduct a cost/benefit analysis before initiating proceedings. Make sure the cost of enforcement of a county court judgment is factored into the calculations.
  • Ensure that the other party is likely to be able to pay – there is no point in incurring the cost of litigation if the debtor is ultimately not able to pay the debt.
  • Consider whether or not the claim is likely to be defended, as this could lead to costly court proceedings.

2. Insolvency proceedings – winding up a company.

  • The threat of starting winding-up proceedings can put considerable pressure on a company debtor to pay an outstanding debt promptly.  However, these proceedings should generally be regarded as a last resort.
  • It is an abuse of process to issue a winding-up petition if a debt is genuinely disputed.
  • If a winding-up order is made, a liquidator will be appointed to collect the assets of the company and distribute whatever funds are available equally among the creditors. The creditor who issues the winding up petitioning does not get any priority in this process, unless they have security over any company asset or they are one of a small group of “preferential” creditors (e.g. employee wages).
  • You may receive only a small percentage of the debt claim, or perhaps nothing at all, at the end of the liquidation process.

3. Reaching a settlement - It almost always makes sense to consider informal methods of recovering a debt (for example, agreeing to a payment plan or using negotiation or mediation if the debt is disputed) as they can provide the quickest and simplest solutions. The court will expect the parties to have explored ways of settling the claim before they issue proceedings and may penalise a party in costs if they fail to do so.

The business should also think about the disadvantages associated with litigation, such as:

  • Litigation can be disproportionately expensive to the sums being argued about
  • The outcome of litigation is uncertain
  • The court is only able to offer a limited range of remedies
  • The litigation process will usually destroy any prospect of resuming a commercial relationship

4. Doing nothing - You can always simply write off the sum that it is owed. Before taking this step, you should consider:

  • Size of the debt
  • Likely cost of recovering the debt
  • Importance of the current relationship between the parties
  • Likelihood of maintaining an ongoing commercial relationship between parties