UK: How To Avoid... Bad Debt, Credit Risks And Missing Out On Debt Recovery

Last Updated: 19 March 2012
Article by Cassandra McCarthy

In the third of our new series of articles on "How to Avoid..." common legal problems, Cassandra McCarthy looks at the steps that you can take to avoid bad debts and credit risks, and provides some practical advice about how to recover debts.

Key Points to Remember:

How to Avoid... bad debt, credit risks and missing out on debt recovery:

  1. Know your client
  2. Obtain signed Terms of Business
  3. Take steps to recover the debt
  4. Consider Insolvency or Court proceedings

In the current climate it is commonplace to see credit periods being extended by businesses. Debt is also turning into bad debt, which cannot be recovered due to the debtor being insolvent. This article looks at the practical ways in which you can avoid bad debts. If a debtor is not settling his debt, you will need to assess whether it is a situation where the debtor will not pay or cannot pay. This article provides you with helpful tips and guidance on how you can decide whether it is worth pursuing the debt and if so how you can recover the unpaid invoice.

1 – Know your client

It is important to first assess whether you should take on a new customer. You should consider whether they had a previous supplier and if so establish why they left that supplier - for example, was it because they were unable to pay their invoices and they are now shopping around for a new supplier to obtain more credit? It is always worthwhile carrying out credit checks on a potential new client. This will give you an initial view of the company and its financial position. As the market is competitive in the current climate any new client is an attractive prospect, however, do not be blinded by this. Take the time to do the initial research into the customer, as they may not actually be a worthwhile proposition.

2 – Obtain signed Terms of Business

We strongly advise that you have Terms of Business in place. You need to make sure they are clearly and comprehensively drafted. If they are not, then they may not be worth the piece of paper they are written on. You need to ensure that they cover your business needs and clearly deal with payment terms and expectations. The Terms should set out concisely your rights of remedy in event of default of payment.

Companies often have Terms of Business but for them to be enforceable they need to be incorporated into the contract. You should take all necessary steps to bring the Terms to your customer's attention, such as notifying them of the Terms in advance of an order; placing them on your website; or having them on purchase orders. It is best practice to obtain a signed acknowledgement from the customer, acknowledging that they have read and understood the terms. For more advice on how to successfully incorporate your Terms of Business, see our earlier article How To Avoid... Disputes over your Terms and Conditions.

A clause which should be considered and which may help you to recover goods or their proceeds of sale in the event of a customer becoming insolvent is a Retention of Title Clause (also known as an ROT Clause or Romalpa Clause). You should however seek advice on the drafting of an ROT clause, as if worded incorrectly it will not be enforceable.

Further terms that should be considered include terms relating to:

  • Payments on account for services
  • Deposits for goods

We recommend that you seek assistance with the drafting of Terms of Business, to ensure that all recommended terms are included and are fully enforceable. Our Commerce and Technology Team have extensive experience in drafting tailor-made Terms and Conditions to meet your business needs. Please contacMark O'Shea of our Commerce and Technology Team if you would like further details.

3 – Take steps to recover the debt

It is vital that you act quickly if you suspect that a customer may be having financial difficulties, as any delay can potentially mean the difference between recovering an overdue payment and being saddled with irrecoverable bad debt. Do not expect your customer to tell you if they are having problems, as they will often be in denial themselves regarding how bad things have become. If even one invoice is overdue then you should consider very carefully whether it is in your best interests to continue to supply the customer with goods/services.

It is also recommended that you have an internal procedure in place to recover bad debt, which should include:

  • An initial phone call to the debtor from your Credit Controller. You can often gauge the position of the other side with such a call, especially in relation to whether it is a matter of them not being able to pay as opposed to not being willing to pay (which may happen if, for example, they are getting more pressure from their other creditors).
  • A 30 day letter – this letter can simply state the sum that is overdue and that payment is required immediately.
  • A 60 day letter/letter before action – before court proceedings are issued you must send a letter before action. If you do not you could be penalised in relation to costs later (i.e. even if you were successful in your claim, the court may not award you your legal costs). The letter should give details of your claim, for example, how much is due, when it was due, what services/goods were provided and what invoice the claim relates to. It would normally be best practice to send a copy of the invoice too.

Interest can be claimed either in accordance with your Terms of Business, or if there is no interest provision in the Terms, under the Late Payment of Commercial Debts (Interest) Act 1998.

4 – Consider Insolvency Proceedings or High Court/County Court Proceedings

If the above steps do not work, then you will need to decide whether you wish to take the next formal steps to try to recover the debt.

If there is a genuine dispute between the parties or there is a counterclaim then High Court or County Court proceedings should be considered (depending on the amount in dispute). If there is no genuine dispute over the debt, then insolvency proceedings may be more appropriate.

County Court / High Court proceedings

If you have decided to issue County Court or High Court proceedings, you will need to commence formal proceedings by issuing a Claim Form and Particulars of Claim at the Court. The parties will have to follow the Court's Civil Procedure Rules throughout proceedings.

Claims up to £5,000 are allocated to the small claims track unless there are complicated legal issues. The relatively informal procedure for small claims is designed to allow parties to conduct litigation without the need for solicitor's. Legal costs are not therefore usually recoverable for small claims.

For claims over £5,000 it is advisable to instruct solicitors to obtain assistance with the conduct of the claim, in particular to ensure that the correct procedures are followed.

If you are successful in obtaining a judgment against the debtor from the Court, you will then still need to enforce the judgment. This is why it is important from the outset to assess whether the defendant is good for their money. A judgement will be all but meaningless unless the debtor has assets against which the judgment can be enforced.

Insolvency Proceedings

When issuing an application for a Winding Up Order against a company or Bankruptcy proceedings against an individual, you will need to demonstrate that the company/individual is unable to pay their debts as they fall due. You can usually achieve this by sending a Statutory Demand to the debtor. If the Demand is not satisfied within 21 days, the debtor will be deemed insolvent and it will then be open to you to either issue a Winding Up Petition or Bankruptcy proceedings. For more information about establishing that a debtor is insolvent, see our article Off Balance? The test for Creditors just got harder.

At this stage it would be advisable to carefully consider whether there is any realistic prospect of recovery before you embark upon insolvency proceedings. As an unsecured creditor it is likely that once the company is Wound Up/individual is declared bankrupt, you will only receive a nominal amount, if anything, in respect of the debt owed. You would have to bear the costs of issuing the insolvency action, but you may not necessarily receive anything back, and you would not be put in a better position than any other unsecured creditor just because you commenced the insolvency proceedings. If you reach this stage, you may need to focus on taking steps to avoid throwing good money after bad. The threat of insolvency will usually force a debtor to settle the debt if it is feasible for it to do so, but if it doesn't then you may be facing a Pyrrhic victory.

Summary

Prevention is always better than cure, so it is vital to get to know your client in the first instance and assess how much credit you give. Ensure that you have safeguards, such as having your Terms of Business signed, which should clearly set out your rights to remedies in the event of non-payment. As soon as you suspect there is a problem with payment, do not give any further credit and take the first steps to recover the monies owed. If you are then in the unfortunate position where payment is still not made, you may need to consider issuing either County/High Court proceedings or Insolvency Proceedings to recover the debt.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.