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I need to recover a bad debt- how do I go about it?

In this blog, litigation Lawyer Sioban Calcott, gives an insight into her top tips for avoiding bad debts.

As we inevitably head into what is likely to be one of the deepest economic recessions in our lifetimes, it is fair to say that many businesses are struggling to find the cash to pay their creditors.

It would perhaps be utopia to imagine a world where invoices were paid immediately on their due date and you did not have to spend time chasing payment.  However, the reality will be that customers will be placed on “stop” because of overdue accounts. Suppliers will send threatening letters to their customers and, in many cases, litigation may need to ensue to recover payments that are due.

One of the frequent problems that lawyers face when seeking to recover debts on a client’s behalf is that the client does not actually know who their customer is.

Know your customer

It is vital to know whom you have entered into a contract with. If you do not get this information at the start of the relationship and properly consider credit terms, it makes pursuing a claim far more difficult.

Businesses must ensure that they have the full name and address and legal status of the customer.  It may be the customer is a sole trader, partnership, limited liability partnership or limited company.

It is important to remember that a limited company or limited liability partnership or plc is a legal entity in its own right. No employee is directly responsible for the payment, not even the “owner” or director of the entity.  A new limited liability company can be set up within minutes via the internet. If you choose to engage in a company with no assets, then you should not be surprised to discover that they have no assets in the event of a liquidation.

It is very simple to check a limited company’s details free at Companies House.  Just put the name of the company into Google. Check Companies House data and look at who the directors are. See if accounts have been filed and are up-to-date and check the registered office. You can then crosscheck this information against any purchase orders or correspondence that you have had with the customer.

You should also remember that many businesses might trade under a particular name; the one that appears on headed notepaper or above the door of their premises, but this might be different to the name of the legal entity that is responsible for the payment of the bill.

Credit accounts

If you are going to give credit, then checks need to be carried out.  Who are the directors?  Are there any unsatisfied county court judgments?  Have the directors been involved in companies that have previously gone into liquidation?  Is there a pattern that might be a little disconcerting?

Information can be obtained from credit reference agencies regarding a new customer’s details and their credit status.

When receiving orders from a customer business you should check that the details match those supplied when setting up the account.

Businesses should also consider whether it is possible to get personal guarantees from the directors of limited companies.  Understandably, many directors will balk at the idea and will not want to give them.  However, it does often come down to position and negotiating strength.  If you do not ask, you do not get.

Terms and conditions

All businesses should have terms and conditions of trading.  This does not mean that all businesses should copy their terms and conditions of trading of their competitors, which they may have got from the internet.  Leaving aside the copyright issues, it is likely that the terms and conditions that you require to protect your business will not be identical to those copied. Ts and Cs need to actually reflect what that business does.

Prospective customers need to accept the terms and conditions of the supplier.  Quoting terms and conditions on the back of an invoice may assist where there is a trading history but on a one-off or first order, this will be too late.  A contract will have been entered into long before the invoice is sent. It is worth having standard terms and conditions on websites.  Terms and conditions should be brought to the attention of customers upfront when applying for credit.

Quite often businesses can find that they enter into what is known as the “battle of the forms”, where a customer places an order stating it is based on their terms and conditions of purchase.  If the order is accepted without question, a business may find that their customer has replaced their terms.

Any changes to terms and conditions should be noted in writing.  Businesses should not allow a customer to set their own terms.  If appropriate, a business may wish to include in their terms and conditions what is known as a “retention of title clause”, whereby title to the goods themselves has not passed to the customer until invoices are paid.  There may be some products and services where this is not appropriate. For example, if you are a food wholesaler and you are supplying bread, you do not want to try to retain title to it some two months after it was delivered.

Interest for late payment should also be a standard provision in terms and conditions.

It is probably inevitable that every business at one time or another will be faced with a situation where they have a bad debt.  You can minimise the risk by taking action and preparing contractual paperwork properly at the outset of a trading relationship.  This may also include educating sale staff as to how important it is that they do not deviate from terms and conditions.

If we can assist to help people recovering debts due because of breaches of contract, we are more than happy to try to do so.

Please contact me on telephone number

Tel:  01295 661414     

Mobile:  07800 872936 

E-mail: siobancalcott@brethertons.co.uk

Sioban Calcott is a Partner at Brethertons and works exclusively in the Dispute Resolution Team.  Sioban is a Fellow of the Chartered Institute of Legal Executives and was awarded the coveted title of Legal Executive of the Year at the Law Society Excellence Awards.