Businesses are struggling in these recessionary times. In particular, major difficulties can arise when debtors fail to pay what they are due.  To the Creditor, the knock on effect can be catastrophic. In this Fact Sheet, litigation specialist Maggie Moodie gives some top tips for ways in which businesses can effectively avoid and combat difficulties when they are not paid by debtors.

  1. How can businesses attempt to maintain cash flow when  debtors are struggling to pay?  

Cash flow: two little words, but ultimately the key to any successful business. A business may struggle to survive without maintaining a healthy cash flow. Even if a business has a number of high net worth assets and an impressive balance sheet, it is irrelevant if the business’ creditors are able to establish that it cannot pay its debts as they fall due.  If this so called “apparent insolvency” can be established to the satisfaction of a court, then a business may face bankruptcy.

Contractual terms. First, businesses should provide debtors with clear, unambiguous contractual terms. Debtors should be left in no doubt about what is to be paid and when.  

Statements. It may also be worth setting out a statement on payment terms and explaining the reasons behind why obligations must be met timeously. 

Consistency. Make clear that any failure to pay on time will not simply be ignored. Businesses must ensure debtors know that action will be taken if there is a failure to pay. By being up front and consistent, debtors will know that consequences will follow should a payment be missed. Some debtors will deliberately fail to pay those creditors who have a poor track record in debt recovery.

Preventative Measures. Consider credit checking customers before you agree to contract with them. Companies such as Experian can provide credit reports relatively cheaply.

Maggie’s Top Tips:

  • Use clear contractual terms
  • Issue regular statements
  • Be consistent
  • Establish a credit checking system
  1. How can businesses attempt to improve credit control when debtors are struggling to pay? 

A robust credit control system is important. Many businesses automatically issue demand letters when payment isn’t made on time but it is very often more productive to pick up the phone and speak to your customer. If you opt for making a call, it is however important that you keep a record of the conversation and that if you are promised payment by a certain date; you follow up on that date with a further call or a demand letter.

Credit control letters also serve a purpose.  If you are forced to raise a court action for payment, you will want evidence that you have made a formal demand for payment and made clear that if payment hasn’t been made by a certain date, you or your solicitors intend to raise to proceedings. 

Maggie’s top tips:

  • Pick up the phone and speak to your customers
  • Use credit control letters
  1. How can businesses effectively manage the need for court action?

With the best will in the world, the most robust credit control procedures can fail to produce results. At this stage, businesses have to consider whether or not court action is appropriate. 

Solicitors. Unless the debt is under £5,000, limited companies require to instruct solicitors to raise court proceedings. For debts under £5,000, you should consider raising the court action yourself. The Small Claims Court was designed to avoid legal costs and Sheriff Courts are very helpful in advising on the process if you decide to go for this option.

Bear in mind, however, that sometimes even one letter from a solicitor rather than the business itself wields good results.

Court procedure. The vast majority of cases settle before any substantive hearing is held.  It is highly unusual for a hearing on evidence (a Proof) to go ahead, particularly in debt recovery cases.  In most cases, the debtor either does not defend the action (in which case a court order or “decree” is pronounced automatically) or the debtor defends the action but parties come to a settlement agreement in order to avoid costs. 

Enforcement. Finally it is important to bear in mind that obtaining a court order or decree is not necessarily the end of the matter. Yes, it is an official document ordering the debtor to pay. However, this does not mean the debtor will actually produce the money! There are a variety of ways to attempt to enforce court orders in Scotland such as serving arrestments (which freezes money due to the debtor in the hands of a third party), attachments (which may ultimately lead to the sale of the debtor’s moveable property) or inhibitions (which prevent the sale of land or buildings without first settling the debt). It may be worthwhile to instruct your solicitor to ensure that the most effective enforcement method is used to ensure optimum recovery and    minimum cost is carried out properly.

Maggie’s top tips:

  • For debts under £5,000, you should consider raising the court action yourself.
  • Consider a letter from a Solicitor.
  • Seek advice on enforcement.
  1. In summary

A successful business needs to have healthy cash flow and robust credit control procedures. Ensuring debtors know where they stand is important. A consistent approach is necessary. Whilst chasing customers can be a difficult and sensitive task, it’s often a necessary evil if you want to survive.