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Is it time to get tough with debtors?

20 May 2009



Running a business in today’s economic climate is not easy. Whilst success is often measured in the size of an organisation or its reputation within the business community, the tangible hallmark of any profitable business is a positive cash flow and this requires the prompt collection of debts.

Four in ten small to medium-sized businesses claim that late payments have become particularly problematic in the recession, and businesses are having to take a more careful look at their debts and debt recovery procedures.

Leticia Jennings, an associate solicitor at B P Collins and part of a strong practice of 10 litigators, has noted a steady increase in clients instructing B P Collins for quick and efficient recovery of debts.

However, Leticia observes: “More and more businesses are facing administration or failure altogether, and debts that were previously considered doubtful are now irretrievably bad. To prevent this, businesses should ensure that scarce internal debt collection resources are focussed on reducing all significant debts quickly so that the impact of a bad debt is minimised.

“Businesses must also be prepared to make hard decisions in terms of whether a client relationship is worth saving when a large amount of outstanding debt is at stake.”

In the event that your internal credit control procedures have been exhausted and your patience has worn thin, you could consider Court or insolvency proceedings as a means of recovering debts owed.

Writing formally to the debtor threatening proceedings if payment is not received within 14 days, can be a quick and inexpensive way of getting paid whilst avoiding further action. If this preliminary action does not achieve the desired result, you would then be entitled to commence either Court proceedings or, if the debt is at least £750 and is not disputed, insolvency proceedings.

For insolvency proceedings against an individual you would first need to serve a statutory demand, which allows the debtor 21 days to pay, failing which you would be able to commence bankruptcy proceedings. A statutory demand is not necessary for a company, and if a company debtor does not pay following an initial letter demanding payment you would be entitled to present a winding-up petition.

Often the threat of such action alone is enough to generate payment as the repercussions of such action would undoubtedly affect the debtor's credit rating and cause unwanted disruption to their business. Thought must however be given to the cost and management time involved and, as Leticia comments: "At the moment it may be preferable to accept a percentage of the debt owed if it means getting paid now, rather than pursuing the full amount over a longer period of time."

Leticia concludes: “Taking a harder line of action with slow paying customers may be repugnant to businesses that are used to nurturing customer relations. However, if a client is in financial difficulty there will undoubtedly be other creditors already forming a queue to be paid, and a softly softly approach from you is likely to make you seem less of a priority.”

For legal advice on debt recovery, please call 01753 279037, complete the online enquiry form or email your enquiry to disputes@bpcollins.co.uk.