Aug 21

Does a one size fits all approach to debt collection suit your business?

Written by Jonathan Mortimer
Partner

DDI: 01423 726608
M: 07850 993952
E: jonathan.mortimer@raworths.co.uk

It is understandable that businesses will frequently have a standardized internal procedure for collecting in debts.  Perhaps reminder letters to debtors after 14 days, followed by more serious letters making reference to having to take action and then, probably as a last resort, a referral to solicitors for debt collection proceedings.

But does a one size fits all approach achieve the best outcome for your business?

Getting paid was always problematic but during the last 18 months there have been two additional complexities impacting on the market place.  Primarily, the effect of Brexit which will benefit some businesses but hamper others putting stress on their finances.  Secondly, the unprecedented impact of the Coronavirus pandemic which has devastated many businesses in the hospitality and travel sector and touched every other business in some way.

Jonathan Mortimer, Consultant Partner at Raworths says: “Both Brexit and Coronavirus have highlighted the need more than ever to have a tailored approach to debt collection for businesses.  In particular, to be sensitive to the individual debtor’s circumstances, their risk profile and what can be realistically achieved by a debt collection process at the present time”.

What factors should businesses take into account ?

Among the many factors that businesses need to consider when developing an appropriate debt recovery strategy, are:

• whether the reason for non-payment of a debt is down to temporary problems from which the debtor can reasonably be expected to recover, or whether it is linked to ongoing financial difficulties that may prove to be terminal;
• whether you hold any security for the monies owed or could conceivably insist on security being provided as a pre-condition of tolerance or forbearance being shown;
• whether Coronavirus or Brexit considerations are likely to make the recovery of a debt more difficult; and
• the impact that non-payment of a debt will have on your own business interests and specifically on your cash flow and ongoing solvency.

Different strategies for different debtors

The Government has attempted to encourage creditors to avoid the temptation to pursue debtors as in previous years to allow a period of recovery for businesses.  Indeed, in some areas, the Government has even prevented any enforcement action being taken.

A possible strategy for businesses could include:

• for debtors with a previously unblemished payment record who can be expected to weather the Coronavirus and Brexit storm, creditors may exercise restraint where this can be achieved without jeopardising their own position;
• for debtors with financial difficulties which existed before Coronavirus took hold, and who look certain to be plunged into even deeper crisis over the coming months, then to take firm and forceful debt recovery action; and
• for debtors who are clearly on the brink of imminent collapse, the need for urgent steps to be taken to try to recover the monies that are owed, but only where there is a realistic prospect that this can be achieved.

It is also important to stress that the quality and possible preservation of the existing commercial relationship will be key.  In particular, how important is the customer to your business and do you trust them?

What are the possible debt collection options ?

Legal proceedings do not have to be the first option.

Among the possible debt recovery routes businesses might consider pursuing are:

• the negotiation of a repayment plan, which enables a debtor to settle what they owe at a rate that they can actually afford and which the business can commercially tolerate;
• the negotiation of a personal guarantee or property charge in order to provide security in respect of a corporate debt;
• the exercise of any contractual rights, for example under the terms of a retention of title clause which entitles the holder to reclaim goods in the debtor’s possession that have been supplied but which they have not yet paid for;
• the instigation of court proceedings, where recovery of the debt by other means has failed and the chances of securing eventual payment will be greatly boosted by a court judgment being obtained; and
• the issuing of a statutory demand where the amount outstanding is at least £750 and there is reason to believe that the debtor will do all they can to find the money that they owe rather than face the prospect of insolvency action being commenced.

We should also just provide a warning about debtors based in the EU.  There is uncertainty which exists around the continuation of reciprocal arrangements for enforcement of debt in the EU.  It should not be assumed that debt collection involving customers in the EU will be as straight forward as previously and consequently problem customers within the EU should be monitored carefully.

Using our in-depth understanding of the commercial debt recovery process and the various forms that this may take, our experienced lawyers can help you to come up with a workable and effective debt recovery plan that maximises your chances of recovery and which is also sensitive to your own commercial needs.

For further information, please contact Jonathan Mortimer in our Dispute Resolution team on 01423 566666

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

Published on 5 August 2021