CPAA Insight: Debt Collection and your clients

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This article appeared in the August 2012 edition of Practising Accountant

Get what’s coming to you

Richard Harrison of Laytons Solicitors LLP advises on collecting debts

ANY PRACTISING ACCOUNTANT will impress on clients that cashflow is king. Debts not collected can wither and die. What is the best advice to keep the flow coming?

As in any field of endeavour, it is the unseen preparation which creates the quality. If you’re painting a room, strip the wood and prime the surfaces. If you’re planting a lawn, prepare the seed bed, The meat for the barbecue must be marinated - and so on.

It’s the same when putting yourself in the best position to extract the funds owed to you by debtors. 

Get the contract right

Make sure that there is something in writing, suitable to the occasion and the relationship, to which you can point and say “this is what I agreed to do; this is what I’ve done; this is what you agreed to pay — and this is when you agreed to pay”.

Get the paper trail right

Of course these days it’s not always a paper trail but a chain of emails. But remember how complex some email chains get. It is so often difficult to understand what has been going on, who has been given what information or who has answered what questions. 

Sometimes, it’s worth getting a formal letter onto the record: this will be something that summarises all developments in the matter and which can function as a point of reference. It can also easily be passed to, and understood by, someone more senior in the debtor organisation than the person who may be creating the problem.

And ultimately, it may help a busy judge assimilate and understand the issues and so enable a case to be decided in your favour.

The point is keep it simple, don’t assume knowledge and don’t overuse jargon

With a contract and a history to refer to, the question “why should I pay?” should be easily answered.

Know your enemy

Or know if they really are an enemy. Find out about their business and track record, even if it’s only based on a Google search. If you are dealing with individuals, check them out. Use Companies House to establish the precise status of any company you are dealing with and do some due diligence on the directors.

It’s the quality of the business and the accessibility of assets that should be your prime concern.

Exercise pressure in the right way

There are various options depending on the circumstances. A wild threat to sue is sometimes counterproductive. The standard “solicitors letter” based on a bulk computerised collection model is often next to useless: a well-advised debtor can easily spot the non-bespoke product: and put a spoke in its wheels.

The carefully phrased letter hitting exactly the right pressure points is often more effective than the blunt threat.

There is of course room for the involvement of solicitors but the best sort of solicitors’ letter will draw together the threads identified above and make a persuasive case that it is in fact in the debtor’s best interests to pay up.

The aggressive option

Sometimes, based on a careful review of all the options, it can be highly effective to serve what is known as a “statutory demand” on the debtor. This is a formal document, non-compliance with which can  under the Insolvency Act 1986 provide evidence of insolvency and thus lead to the draconian sanction of a compulsory winding-up order.

So a company receiving one of these will either pay up or be forced to go through the expensive process of asking the court to issue an injunction against the presentation of a winding-up petition on the basis that there is a genuine dispute.

Equally, before going down this route, you will need to satisfy yourself that there is indeed no genuine dispute, otherwise you will probably be liable for the debtors court costs of applying for such an injunction.

This really is a high risk but potentially rewarding strategy. 

Can’t pay / won’t pay

This article deals with the second half of this famous conundrum: where the debtor simply won’t pay. As to when they can’t pay, and the insolvency options, this is something we will look at next issue.

Richard Harrison is a litigation partner  at Laytons Solicitors LLP, London. The firm also has offices in Guildford and Manchester.

Call 0207 842 8000 or email [email protected].