October 8, 2007
Whatever you believe the long term outcome of the current “Credit Crunch” will be, right now cash is, as ever, king. It is probably too early to make accurate predictions about the final fall out of the US sub-prime mortgage debacle (and any of the other issues which are reported as being likely to follow), but some recent indicators point to more challenging times ahead.
In addition to the losses predicted by some of the large investment banks and the run on Northern Rock, Barratt Developments, Britain’s largest house builder, revealed a 10 percent slump in sales during September 2007. Thomson Financial’s Q3 Mergers & Acquisitions Review reported that September 2007’s US$192 billion in announced deals marked the lowest monthly total for mergers since August 2005 – a 66% decline from the figure just two months earlier and that European M&A activity was down 45% on the previous quarter. The UK Treasury is also expected to downgrade the Government’s forecast for UK economic growth in 2008. From a retail perspective, one only needs to consider the possible effect of Barclaycard’s recent announcement that it is reducing the credit limits of 500,000 of its customers on credit card spending in the run up to the key Christmas trading period to see the potential implications.
The combined uncertainty over interest rates and tougher lending criteria for both individuals, as well as businesses, may well lead to a contraction of personal and corporate confidence and spending in the short term. Whilst the fall out of the “Crunch” may prove to be only a short term “blip”, a tight credit control regime is as important now as it has ever been.
Good, robust credit and collection policies and procedures are a key part of any well run business. However, the current economic climate could quickly expose any lax practices which have developed whilst the economy has been buoyant. If you have not reviewed your credit control arrangements or your debtor book recently, now is definitely the time to do so.
Dealing with late payers can be difficult, especially when there are valuable commercial relationships to consider. However, the following points, which come from practical experience of helping companies recover and manage their debts may help:
Who deals with credit control?
It is more effective and efficient for a dedicated person or team to deal with credit control, rather than have ad hoc members of staff trying to do it piecemeal as and when they can. Whoever does it should receive adequate training.
Sort the “Can’t pays” from the “Won’t pays”
Keep your debtor book under constant review - targeting debts early increases the likelihood of a recovery. Carrying out searches for judgments which have been registered and/or insolvency proceedings allows you to prioritise debtors which are more likely to be able to pay. Searches for judgments can be made by post or via the internet at www.registry-trust.org.uk and should reveal qualifying county court judgments registered since 2001 and qualifying High Court judgments registered since April 2006.
Do not accept excuses for non payment at face value
If your client is asking for time to pay, they are asking you to finance their business at your expense. It is not unreasonable to expect a proper, substantiated explanation, preferably from a director.
Interest
If your terms of business allow you to charge interest, do so in appropriate cases. The right to charge interest can also be used creatively in negotiations for payment, for example by agreeing to waive it provided overdue sums are paid within a set period of time.
If your terms and conditions do not allow you to charge interest, you should review them, and in the meantime rely on the provisions of the Late Payment of Commercial Debts (Interest) Act 1998, which entitles business to compensation and interest at 8% over the Bank of England’s base rate on qualifying debts without the need to go to court.
Set short deadlines
If your client is in financial trouble, delaying recovery action may jeopardise your chances of recovering anything at all.
Keep your word
If you make a threat, for example, to instruct solicitors to commence recovery action - do it. If a debtor doubts your resolve, your threats lose their impact. Your demands for payment are probably not the only ones being received and traditionally those that “shout the loudest” get paid first. Diarise deadlines and keep the pressure on.
Consider reasonable instalments
Something is better than nothing - but timetables must be adhered to and any default acted on promptly. Any agreement to accept instalments should be recorded in writing. It should also be made clear that instalments are being accepted without prejudice to your right to sue for any outstanding balance if a payment is not received on its due date or if any cheque is not met on first presentation. Again, consider charging interest.
If you have serious doubts about your debtor’s solvency, consider taking legal advice to minimise the risk of any payments subsequently being challenged as a preference by a liquidator.
Can you recover possession of your goods?
Retention of title clauses create a contractual right to recover your goods if they are not paid for. If your terms of business contain such provisions, enforce them. If they do not, consider amending them. Because this type of clause is not always appropriate and care must be taken when drafting them to ensure that they are effective, it is worth taking legal advice before you change your terms and conditions.
Can any security be offered?
Consider whether your debtor client can offer you any meaningful security. Advice should be sought before concluding any agreement to ensure that the security is valid and enforceable.
Review your file
Have you kept your end of the bargain? Complete any outstanding matters that you have to deal with unless you can validly refuse to do so. If you do not, these points will almost certainly be raised as a defence to any claim you make for your money.
Prevention is better than cure
As well as reviewing your credit control procedures, consider what you do when you take on new clients:
- How do you vet them?
- Do you take references?
- Do you obtain credit reports?
- If you do allow credit, do you set a credit limit?
- Do you ask for guarantees?
- Do you always ensure your terms of business are signed or otherwise incorporated into your contracts? (and keep signed copies on file)?
Work with your lawyers?
Instruct your solicitors to review your standard debt recovery letters. The Civil Procedure Rules contain specific requirements for letters before action and pre-action conduct. If these are not observed additional letters may have to be sent to avoid adverse costs consequences if litigation ensues. A review need not be an expensive exercise and can lead to quicker collections and reduced costs.
If you instruct solicitors to recover bad debts after you have exhausted your own recovery efforts, ensure that you know exactly what information they will need to progress your case and when they will need it. Unclear and/or incomplete instructions will cause delays and increase costs.
Unless your company name has “bank” in it, you are probably not in business to fund your clients – taking action now should help you to minimise and manage whatever cash flow problems might materialise from the Credit Crunch.
Our Business Litigation Group has many years of experience of recovering commercial debts and resolving contractual issues as well as reviewing and advising on standard terms and conditions. We will be happy to discuss any specific cases you may have or your credit control arrangements with you. For further information, please contact Simon Walsh.