While it is often difficult to say no to a debtor wanting to pay at least part of their debt, the potential downsides involved in doing so are in the form of a subsequent “preference claim”. These are claims by liquidators of companies which may be made against a person who has received payments from a company that have been made in the 6 months prior to what is known as the “relation-back day”.
As this date can be very different to the date of the appointment of the liquidator, the relevant preference period for a company can sometimes stretch back a significant period longer than 6 months prior to the date the debtor company actually ceased trading.
One of the best ways to get paid is to make sure that the debt is “front of mind”. That means having a considered, clear and consistent system for the management of debtors and following them up. Ultimately this does not need to be particularly complicated or involve enormous amounts of work. Indeed, some of the best systems are the simplest, and often include the following common features:
- a clearly identified payment period set out on all invoices;
- upon the expiry of the payment period, and in the absence of payment being received in full, issuing a “reminder letter” noting that the invoice is now overdue and requesting payment within, for example, half of the period of the original trading terms;
- the day following expiry of the reminder period, a final notice letter being issued, being a demand for immediate (ie within 7 days) payment and confirmation that absent receipt of payment within that final demand period being received, immediate enforcement action be taken for the purposes of recovery of the outstanding amount and no further supplies will be undertaken.
Consistency in applying these steps also can be useful in defending a preference claim.
While these steps will often assist in getting to the front of the queue for payment, experienced creditors may simply choose to ignore these warnings and therefore require the next step in enforcement/recovery action to be undertaken in order to ensure that payment is in fact received. That means that you must be prepared to immediately stop supply in circumstances where payment in full is not received following receipt of the final demand and to progress the matter to further enforcement steps.
Those enforcement steps commonly include:
- the issuance of a Creditor’s Statutory Demand for Payment – this is a particular form of demand that can be issued on corporate debtors in relation to debts of $2,000 or more in respect of which there is no genuine dispute about whether the debt is due and payable; and
- commencing legal proceedings – while ultimately the commencement of legal proceedings will, if the Court is satisfied of your claim, result in a judgment debt in your favour, the Court process can be costly, time consuming and ultimately futile in circumstances where the judgment debtor does not have enough money to pay the judgment in any case.
How then might you go about best minimising the likelihood that you will need to endure a long and potentially frustrating Court process for the recovery of an outstanding debt? Much of the work in this regard can, and should, happen well prior to any enforcement process.
The best thing which can be done is to take, and maintain, written records of communications with debtors. While evidence of conversations is “good” evidence in legal proceedings, it is inevitably more open to argument (and therefore delay and expense) than written communications.
The following are a list of examples of key matters to work on getting in writing which will be particularly useful in circumstances where a customer is facing financial difficulties and is making decisions about who it “needs” to pay.
- Clarify with certainty as to who you are dealing with. A common issue asserted by debtors is that they did not enter into any contract of agreement with the creditor/supplier. In this regard, it becomes crucial to identify who you are dealing with – an individual, a company, a company in its capacity as trustee of a Trust, a partnership? This issue then leads to a further step that ought be undertaken, which is a review of any contract documents which might run for some time. It is common to see trading terms which are more than 12 months old being sought to be relied on in circumstances where the same individuals may be dealing with each other, but are doing so through new legal entities and therefore the old trading terms may no longer apply.
- Have clarity as to what was provided and when. Often, debtors will seek to argue that they did not order the good or service the subject of a subsequent invoice, and so in this regard written records in relation to purchase orders are extremely useful. To the extent that orders are placed over the phone, it is a good habit to be in to send a confirmation email or other written acknowledgement of the order and to keep a written note of the time, date and person making the order. Other key aspects that should be on that confirmation are price and payment terms.
- Another typical response by a debtor to an outstanding invoice is an assertion that they did not receive the goods or services, or otherwise that the goods or services were not “fit for purpose” or otherwise somehow faulty. Again, written (ideally counter-signed by the debtor) delivery receipts and/or proof of delivery will assist in being able to defeat such an assertion. In addition, not only is it good customer service, but it is useful evidence for any subsequent enforcement steps, for a follow up communication to be issued to the debtor confirming delivery and that no issue was raised with respect to the goods upon their delivery. You could also indicate that absent hearing from the customer as to any issues within a nominated time frame, you understand that they are satisfied with the goods that have been delivered.
- It is very common for debtors, particularly in the early stages of an outstanding invoice, to be more open in their communications with you and often they may acknowledge that they are required to make the relevant payment, but they just need some time to do so. To the extent possible, you should seek to record those sorts of conversations and confirm a summary of the conversation to the debtor in writing.
- Consider whether your payment terms can involve some form of deposit or upfront payment being made, or equally whether you can make arrangements for cash on delivery terms. This often can be achieved more easily given the number of portable options available now for electronic payments to be made by customers.
- If you need to operate on a credit basis, seek to have as many other people liable for the debt as you can. The most common method is by way of guarantee. A key thing to remember with guarantees is that they must be executed by the guarantor (in their capacity as guarantor, and not as representative for the debtor) in order to be enforceable. It is recommended to have any guarantee signatures witnessed by a third party. The provision of a guarantee also makes it critical to ensure clarity as to who you are contracting with, as a guarantee will only apply to the obligations of the customer identified in the relevant agreement. If you are in fact subsequently trading with a different customer, the guarantee will not cover liabilities owed by that new customer.
- Get some security. There is a reason why the bank always gets paid. Banks will almost always require that they are provided with security over hard assets for payment of debts owing to them. Provision of security is required to be by way of written agreement and will entitle you to a priority in getting paid, if your security is upheld. There are many different types of security, but a common factor with most of them is the importance of registering the security to ensure that you have a priority as against other creditors.
While none of the above are bullet-proof steps which will absolutely achieve 100% payment by debtors, undertaking at least some of these in a regular, consistent and well managed fashion will in our experience improve your prospects of avoiding not getting paid and, often, if a debtor suffers an insolvency event, getting at least some recovery. These sorts of steps are, while not complex, are best undertaken with the assistance and input of a professional adviser to ensure that precedent documents and/or systems are “fit for purpose”.
