Legal/Finance
Overcoming the increasing worry of bad debt
28th May 2008
The recent downturn in the capital markets has triggered an increasing sensitivity in relation to cashflow and liquidity whatever the size of your business. Where large losses are suffered, litigation inevitably follows, particularly where businesses are
I own an engineering business and one of my main customers has failed to pay for goods I have supplied. I have a good working relationship with them, and don’t want to “go legal” but they will not return my calls. What shall I do?Relationships are important to preserve, but they have to be of mutual benefit.
The lack of response may be a classic sign that your customer is experiencing financial difficulty.
You need to act quickly to find this out. In the meantime, be wary of offering any further credit.
How do I find out more?
If telephone calls are not being returned, act swiftly to speak to others you know do business with the customer.
Check Companies House to see if there is any information about liquidation or administration.
There are also credit checking companies who can provide historical information, such as details of any secured creditors, or the average number of days a business is taking to pay its invoices – which can be an indicator of its liquidity.
What about my terms of business - will anything in these help?
If you have supplied goods and have not been paid for them, hopefully your terms and conditions will contain a properly drafted retention of title clause.
This means that you may have the right to have your goods returned whether voluntarily or by court order.
In other respects there may be contractual terms which enable you to “set off” sums owed to you by your customer against goods or pre-payments (if any) which you have obtained from them.
What about taking court action?
Inevitably this is a course which has to be seriously considered.
The chances are that there are other creditors and it is a question of trying to take what is due to you before them (unless they are of course secured creditors).
The sooner you can get a judgment against your debtor then the quicker you can take enforcement options or negotiate payment terms with more urgency.
I have heard there is an Insolvency Practitioner involved – what should I do?
The chances are that your customer is looking at some fairly serious options.
It is probably facing insolvency or having real liquidity problems. This could lead to either liquidation or possibly administration.
The latter provides a way for a business to trade out of trouble, or to try to realise a better return for creditors, by putting its day-to-day running in the hands of a licensed insolvency practitioner.
You should find out who is involved, contact them swiftly and provide them with as much information about your liability as possible. They should tell you fairly quickly how likely it is that you will recover anything.
What steps can I take to avoid or minimise this kind of problem in the future?
Most businesses learn through experience. Try not to see a bad debt as failure, use it to tighten up business practices.
Check out suppliers and customers’ credit ratings, particularly if it is a significant business relationship.
Review this on a regular basis. Firm up on credit control and don’t be afraid to “go legal” to lay down a marker.
Consider obtaining extra security from business owners, in the form of personal guarantees/indemnities. Review terms and conditions to include retention of title and “set off” provisions.
Chris Felton, Gardner Leader Solicitors, Market Place, Newbury
Tel: (01635) 508080
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