The importance of cash flow is a cold
hard fact which concerns all business people. Yet despite the well
known mantra that "cash is king" many businesses suffer serious,
and often fatal consequences from allowing bad debts to accrue and
failing to take action to recover cash that is sat on their balance
sheet as debt.
Credit Control Strategy
Recent statistics have highlighted the problem of bad payers,
demonstrating that 73% of small to medium sized businesses
experience problems with cash flow and the majority of these cite
late payers as the reason. In the short term it may be possible for
a business to continue trading in order to "ride it out" until its
cash flow situation improves, but over a sustained period of time
constant battling with late payers can hinder a business' ability
to thrive, grow or even survive. It is therefore imperative that
you implement a credit control strategy to deal with bad payers as
soon as the invoice becomes overdue.
The initial stage of your strategy can be as straight
forward as a series of emails which escalate in severity, with the
final one stating that legal action will commence unless payment is
received. Once this series of emails has been exhausted you will
need to ensure a properly drafted letter of claim is sent in order
to ensure that that any court action progresses efficiently. If a
valid letter of claim is not sent this can lead to delays in any
court action and may even have adverse cost consequences once the
matter is determined so it is always advisable to ensure your final
letter before you take court action is compliant with all
requirements under the Civil Procedure Rules. Ultimately if no
payment is received after all your efforts to recover it and you
issue a claim, providing the debtor has no valid defence, for
example that you did not provide the goods or services, it is
likely that you will obtain a judgment for the sums owing. However,
a judgment is essentially a piece of paper saying "you win".
It does not guarantee that you will get paid and certainly does not
in itself improve your cash flow. In order to ensure the best
chance of recovering the money you are owed you must ensure that
part of your credit control strategy is early consideration of how
you can enforce against a debtor.
Enforcement
Enforcement is simply taking action against a debtor once you
have a judgment that remains unpaid. There are numerous ways in
which you can enforce a judgment debt but in order to enforce
effectively it is important to know the debtor's circumstances. It
is also worth noting that there have been significant recent
changes in the law of enforcement, particularly in the realm of
seizing a debtor's goods and possessions, which are somewhat
favourable to the debtor who is an individual rather than a
corporate entity. Creditors now need to cater for so called
"vulnerable debtors" and can only enter a debtor's premises at
certain times. That said, the reforms provide some much needed
clarification in relation to enforcement and limit the fees for
some methods of enforcement, so ensuring you have a good credit
control strategy could enable you to take advantage of some of the
recent changes.
The choice of enforcement method will largely depend on the
debtor's circumstances. One option is to seek a charging order
which secures the debt against the debtor's property. This can be
land, securities or certain other assets and can be a very
effective way of ensuring your debt is paid. The downside of this
is that obtaining an order does not in itself result in payment and
you may need to wait for a sale, or otherwise force a sale by
seeking an order for sale from the court, in order to realise the
funds. Furthermore any creditors who have secured their debts
against the property prior to you will have to be paid first.
However, if you are aware of a substantial asset belonging to the
debtor and you are able to assess whether there is sufficient value
in the asset to secure your debt this is a good enforcement option.
The existence of a charging order does not prevent you from seeking
other methods of enforcement and in certain circumstances the
Charging Orders Act 1979 allows you to accrue interest on the
debt.
If you know that the debtor is employed you may seek an
attachment of earnings order. This is an inexpensive and easy way
to ensure monthly payments and because the payments come directly
from the debtor's employer you do not need to rely on the debtor.
This method of enforcement is effective for smaller debts, however
it can take a long time to pay of larger debts with this method.
Furthermore, the rate of payments is set based on the level of
income of the debtor and so if he or she is in a low paying job you
may not receive a significant monthly sum. You can obtain an
attachment of earnings order after you have secured the debt with a
charging order and so this may be an effective way to ensure you
receive at least some payments while knowing your debt is secured
against a valuable asset and will be paid in full if this is
sold.
You may be able to freeze money due to the debtor which is in
the hands of a third party, for example a bank or a customer of the
debtor. This money can then be seized to repay the judgment debt
owed to you. This is known as a third party debt order and can be a
very effective way of enforcing a judgment if you have the relevant
information, for example the debtor's bank details. Often creditors
do not enforce in this manner because they do not have enough
information, however something as simple as retaining the bank
details of a customer who has previously made a payment to
you could provide you with an effective enforcement tool.
It is possible to take possession of certain goods belonging to
a debtor by obtaining a warrant or writ of control. Warrants and
writs have the same basic effect of giving a creditor the right to
take control of the debtor's possessions and the only difference is
that a writ of control is obtained where the debt is above
£5,000.00 and must be sought in the High Court. The recent reforms
mentioned above have made the process for taking possession of
goods a lot clearer and provide a simpler fee structure which is
beneficial to creditors. If you know that a debtor has goods you
can obtain a warrant or a writ relatively quickly and this will
command an enforcement officer to attend the debtor's property,
seize the goods and sell them to pay off the debt. Certain goods
are exempt, for example goods used in the course of business and
other basic household goods such as fridges, cookers and washing
machines.
These enforcement methods are a few options available to a
creditor with a unpaid judgment, however there are others. There is
of course the option of making a debtor bankrupt if he or she is an
individual and the debt is greater than £750.00. If the debtor is a
company you can also seek to wind up the company. However, these
are costly routes and may result in you receiving a fraction of the
amount you are owed or, in some cases, nothing at all. What is
important to bear in mind is having a strategy from the outset and
an idea of which enforcement method is best suited to the debtor.
Information about the debtor is crucial and in order to formulate a
strategy it is advisable to collate as much information about the
debtor as possible. This can be done from a very early stage. For
example, simply ensuring you have a home address for an individual
debtor will enable investigation into whether or not he or she is a
home owner. Obtaining this information, details about their
employment status and their bank details can, in some
circumstances, be done at the beginning of the customer
relationship under the guise of creating an "engagement record".
Alternatively, something we routinely recommend in debt recovery
matters is a pre-action investigation. However, if you have not
collated much information about your debtors from an early stage
all is not lost, you can still obtain an order from the court
compelling the debtor to attend court and answer questions about
his or her finances. In the case of a company debtor you can compel
a director to attend and give information about the company's
finances.
Encountering bad payers is an inevitability of business but that
does not mean your company should suffer. Implement a clear and
effective credit control policy with strategies tailored to your
debtors and you will minimise the bad debt on your books, improve
your cash flow and in the long term may transform your business
from one that simply survives to one that thrives.