Effective Cash Collection in Challenging Economic Times

We are, at present, living in a prolonged period of challenging economic times. The issue of cash flow is very dear to the heart of all businesses (including law firms!) and requires constant attention during most periods of trading. However in the last few years, this issue has become essential to the very survival of many businesses across all industry sectors. Therefore, it is absolutely essential that businesses are paid on a timely basis for the products or services they have provided to their customers or clients.

If payment is not made, then the non-paying party is implicitly calling into question the continuation of the trading relationship – assuming of course that the supplier is not closing its eyes to the problem (in long-standing relationships, this occurs quite often).  Where the parties agree terms for payment, whether immediately following a period of default, staged or even instalment payments, then the relationship can be preserved. Non payment inevitably leads to a termination of that trading relationship and the parties will then need to resolve the issue of payment.

If there is no real dispute with regard to the products or services supplied, then it may be necessary to introduce an appropriate debt recovery process, to obtain payment and ensure the continued existence and survival of the business of the debtor and sometimes the creditor too. For uncontested debt payment issues, it may be preferable to adopt the insolvency route to obtain payment.

No brief article will be complete without mention of the English insolvency procedure. The steps that can be taken are as follows:-

Stage 1. Letter before action/claim; this letter gives brief details of the indebtedness and a request for payment within a time limit of, say, seven or fourteen days. If the matter cannot be agreed, then you will need to move to the next stage;

Stage 2. If there is no dispute on the products or services, then issue proceedings for bankruptcy (individuals or a partnership) or a winding up (companies) by serving a   Statutory Demand, followed (after about 21 days in most cases, not earlier) by a Bankruptcy Petition or Winding Up Petition if no challenge has been made to the Demand within the relevant time limits. This insolvency route assumes that the debtor cannot pay an amount of £750 or more as and when a payment is requested, or when a Statutory Demand is served.

Stage 3. Deal with the Trustee in Bankruptcy (individuals and partnership) or the Liquidator (companies) to obtain payment of the debt from the assets realised. This will include the most important asset for both individuals and companies namely, the residential house or commercial property owned by the company.  There are of course priority rules affecting creditors, with unsecured creditors at the back of the queue for a so-called dividend.

Legal Proceedings
Proceedings are only appropriate where there is a dispute between the parties on, for example, trading terms, quantum of the products or services supplied, defective goods/products, bad service or negligence in the supply of services. Proceedings in English Courts tend to take several months, sometimes up to 18 months. They can be protracted and expensive. The unpredictable nature of proceedings may have an impact on the legal costs ultimately payable to the legal adviser.

A potential Claimant who supplied goods should always consider the commerciality of relying on any reservation of title clause to recover goods and minimise losses, before embarking on the above steps.  For suppliers of goods which do not rapidly devalue, then such a clause can be tremendously valuable.  But time is always of the essence and such clauses typically meet resistance from liquidators; it is often better to enforce such clauses against the debtor before insolvency, rather than against a tactically astute insolvency practitioner.

Advice
Given the legal expense involved in taking the above steps, it is always worthwhile carrying out appropriate searches and enquiries about assets owned by the debtor. There is no point in having a pyrrhic victory where the Bankruptcy or Winding Up Order is not worth the paper it is written on. The same applies to legal proceedings. There is no point in undertaking a speculative exercise without appropriate due diligence. The risk of litigation (that the debtor will not have the money to satisfy a Judgment) is equally applicable in the insolvency context.

If a client doubts the chances of success of the insolvency route and instead asks:-

“If we should fail?” (Macbeth)

You can respond by quoting Lady Macbeth:

“We fail! But screw your courage to the sticking-place, And we’ll not fail…”
Shakespeare, Macbeth: Act 1, Scene 7

We, as a firm of European Business Lawyers, are familiar with the above issues including the Shakespeare play! Please do not hesitate to contact us if you would wish to have a preliminary no obligation discussion.

The material contained in this profile is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© March 2012

Please contact:

John Kenneally - Partner

DD +44 (0)20 7553 6001

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