If the debtor pays there is no problem. If he does not, few realise that directors are just NOT responsible for the debts of their company. That means that the only asset left available to  an unsatisfied creditor if he sues is the company seal!

Let me spell it out. Mr Brown suggests what work he wants. The price is agreed. He then asks that the invoice be made out to his company. If he does that after the work, Mr Brown himslef  is liable. If he asks before the work is done then the company was introduced into the contract and the company is liable.

A company in financial difficulties just does not pay. What money it has is removed by the directors, fees salary, other debts etc and all that is left in the company is the company seal. Suing the company is not an option.  The director is not liable. He is sheltering behind the li ited liability company. The company may have cost only £100 to set up and the delinquent director is fee to set up his next one.

Remedy: amongst your terms of trade should be a term ( togethe with reservation of title etc) along these lines:

The person signing on behalf of the company by signing accepts personal liability in the event the company fails to pay according to the terms.

Approximately one in five enquiries these days come from landlords. The picture is almost always the same. The luckless landlord has given the tenant every consideration, waited for the promised rent, allowed substantial arrears to build up and then come direct to us or first got judgment and then come to us. Its all the same.

We have been in business for 50 years now and only in the last years has this problem assumed such proportions. We earn our fees by collecting from debtors. Sadly we tell landlords that they are wasting their time.  We are unlikely to be able to help. It could have been different if the tenant had had a guarantor, but if a tenant cannot afford the roof over his head, then what can he afford?. The landlord’s best bet, we tell him,  is to get vacant possession and re-let.

But what about when they come with a judgment? It is a court order to the debtor to pay. Enforcement is problematical and costs £100 or so. The general picture is that the tenant never had much worth and anyhow the landlord does not know where he went to. A sad picture. We use a tracing agency, if asked, but to what purpose? Often before the landlord can find where the tenant had moved to, the tenant has moved yet again – to cheat the next landlord. I’m sorry, but the picture is bleak.

Commercial rents are a happier story! Different techniques! 80% success rate

leslie m wise

On 1st November 1998 small business suppliers gained the right to charge interest on accounts paid late. For more than one hundred years if a contract neglected to stipulate what was to happen when accounts were not paid timeously, that was an end to the matter and the unfortunate seller had to go without interest. From as long ago as 1978 it was recognised that larger concerns were using their weight, abusing their weight, and mercilessly delaying payment. The problem came into sharp focus in the recession in the early 1990′s, but it took until 1998 to try to provide the remedy.

The Late Payment of Commercial Debts (Interest) Act 1998 at last supplied the bits missing from a contract involving credit and was thought to provide the answer. It gave the commercial supplier of goods or services a Statutory right to interest, whether or not he put it in the contract. More, the right cannot be contracted out of – nor the rate whittled down by the debtor.

The Act came into force in three stages and has been available for since 1.11.98. It allows a supplier supplying another both in the course of a business, which expression includes professions, to charge interest on overdue accounts at, a swingeing 8% above base rate (the rate it was generally estimated small businesses paid for credit) from the “relevant date.” Nor was there anything complicated or technical in the meaning of “the relevant date.” It just meant the due date under the contract.

Despite the clarity with which the Act is worded and its clear invitation, DTI reports to date indicate that, however well-intentioned , the Act so far has been a waste of time. Sellers seem not to be willing to exercise their rights. Data published in May shows no improvement in the time taken by publicly listed companies to pay their bills. The average time it takes a plc to pay its bills is 46 days, the same now as in 1999, whilst 19% of the 3141 companies in the survey took between 60 and 200 days!

This is a pity. In a recent article on Controlling Sales Balances I posited that the reason for this failure to collect interest is that sellers think that pursuing their rights will prejudice the chance of repeat orders. It may. But I doubt they have even considered telephoning the buyer to see if he knows payments are late. Often the accounts dept has quite a different agenda and the buyer just does not know the accountant has re-arranging his bargain for him. In that size of organization it is unlikely that the buyer will get to know that their supplier is pursing his legal right re interest.

Judging by the use so far by small businesses of a relief designed especially for them, no one is interested in interest. Credit costs dear. The government has provided help. It is a pity not to use it. Nor actually is it too late. Small suppliers could be sifting through the late payers and sending off supplementary invoices by the score. Or just bearing the cost.

L M Wise FCA
Barrister-at-Law

Do you really have control of your debtors?

Anybody can sell if he does not expect to get paid. Time and again businesses achieve their sales targets, yet go to the wall, because they have cash flow problems (17,000 companies alone in 2005/06). And it is not just the new and inexperienced businesses either.

One of the secrets of survival is proper control of the sales balances outstanding. Monitoring them starts with a list. It is sad how often that list is produced in ABC order? Every list is an opportunity to rank the contents in some order or other. There are only two arrangements. ABC order is not one of them. Who cares whether the £10,000 outstanding for two months is owed by AA & Sons or ZZ Ltd? The amount and the period overdue are all that count.

Before the chasing – start off on the right foot

But even before the chasing stage there are a number of checks and balances that ought to be incorporated in any good system of credit control. Not all will apply, but how many of them form part of yours?

Firstly the order. It ought to be on your terms, not theirs. Perhaps bear in mind that it is an old trick to return the seller’s order form altered. It almost always works, because it is covertly done. Then just, for example, as you are about to exercise your right to repossess your unpaid-for goods under the properly drafted Retention of Title Clause [is yours properly drafted? (see Indictor Issue No ....)] in your contract, the buyer queries something else and casually draws your attention to his alteration.

Your terms are certain to have included a date for payment. No marks if they stipulate for “payment by…” Many do. What is wrong? Your job as credit controller is frustrating enough. Do not give the late-payer the satisfaction of telling you the cheque is in the post. If you had said “payment is to be received by…” you would be on preciser ground for later if it comes to suing (and also incidentally when calculating interest).

You will, of course, have written for credit references. A well-run department might well have its own credit application form. Do not let your eagerness allow you to overlook the fact that you have not had the form back. Telephone if there is a delay. The reason may be quite innocent, but (as with staff references) many a referee would rather not reply than give a bad reference. Speaking to the referee is a sure way of giving him an opportunity of expressing his doubts.

Having established a credit limit stick to it. In R v Chandler the jury heard how this fraudulent trader started his account innocently and then time and time again worked on his greed to get him to supply more and more (before the time for first payment) – well exceeding his initial modest credit limit. And, of course, no-one got paid. That leads to the next point. Do you even have the information in place to allow you to suspend deliveries if the account is overdue.

Chasing your money – before the going gets rough

A tight system is essential. It should come into operation on the very day payment is due (before it is due if you are waiting for a substantial sum). Most firms write. A telephone call works better - preferably, credit controllers say, from a female. Either way the conversation ought to be meticulously recorded. A form will pay for itself. Who you spoke to, when, what was the reason and what the promise. Then the date for follow-up. Good intentions are not enough. Persistence pays too.

Lastly few people threaten to claim the statutory entitlement to interest on overdue accounts. They reason that it will prejudice the chance of repeat orders. It may. But consider a) telephoning the buyer to see if he knows payments are late. Often the accounts dept has a different agenda and the buyer just does not know the accountant has sneakily re-arranging his bargain for him. In that size of organization it may be that the buyers won’t even know if you are pursing your legal right re interest; and consider b) adding the interestre late payment into the price you originally quote.

No system is perfect and a credit controller who has never had a bad debt has probably lost his firm a fortune in sales. On the other hand the business with a proper system is a safer place to work in and deserves to prosper.

L M Wise FCA
Barrister-at-Law

Statutory Demands – the last resort

Getting in all the monies due can often be a nightmare. Even with a good system in place the best regulated businesses can still experience the occasional determined non-payer.

The Same Old Tricks

The scenario is common enough. After a long series of tricks either the creditor has run out of patience. First the debtor had asked for yet another copy of the bill. Then there was the delay until his computer was up (again?). Then there was a dispute, followed by a wait for a new cheque book and a cheque lost in the post and when the cheque, returned to be properly signed/re-dated, eventually arrived it was dishonoured. Exasperating beyond measure.

A Solicitor’s Letter

Time for action. Action which on reflection most would find should have been taken much earlier. For those who believe in employing (and paying) experts the next step is a solicitor’s letter or to instruct us. A simple expedient. It ought to be considered a regular part of the debt-collection routine. It is generally effective and need not be expensive. Work out with your legal adviser the information he requires or just fill in our form.

The letter from the solicitor will (i) demand payment (promptly), (ii) threaten action (possibly for good measure enclosing a copy of the summons) and (iii) may also these days as a precaution against costs later give the debtor the opportunity to disclose whether he has a genuine reason for non payment.

Solicitors generally get all that right. It is when the date for payment arrives that their organization so often lets them down. In Chambers the Clerks say that the only briefs that arrive from solicitors marked “urgent” are those that have been on the solicitor’s desk for the last two months! Don’t let your action be one of them. See that someone rings/faxes the solicitor’s secretary timeously with instructions for the next step.

The Next Step

Too often the next step is ill considered. Or, rather, not considered at all. The experienced debtor playing the system is waiting for a summons. He can usually reckon on at least a month, especially in Central London, where despite the “Court Charter” mail appears repeatedly to be neglected and lost.

Why not confound him? For the more aggressive there is an alternative to the summons – a Statutory Demand. Practitioners advising on debt collection are regularly overlooking one of the most useful and effective weapons in their armoury.

Then a Statutory Demand

The Statutory Demand is far more than a ritual. Abused it can be expensive (see below) but in the right circumstances it confronts the debtor with a simple and uncomfortable choice – prompt payment – or insolvency.

When To Serve a Statutory Demand

The law stipulates that a person can only be made bankrupt, [or a company made insolvent,] if he owes more than the bankruptcy level, currently £750, and he appears unable to pay a debt (an immediately payable debt). And the law provides that he “appears unable to pay a debt” only if the creditor to whom the debt is owed has served on the debtor a demand (known as “the Statutory Demand”) in the prescribed form (or if execution has been returned unsatisfied) and the demand has not been complied with.

The Form of the Demand

The Insolvency Act requires the demand to be in the prescribed form and there is a pro forma in the Rules1 Rule 6.2(1) specifies the information to be contained therein. There is nothing complicated† and some credit departments draw up and serve their own as a matter of course.

Service – on a firm

Service it must be admitted presents a problem. If the debtor is an individual (as opposed to a company) the Demand has to be served personally. Solicitors employ process servers (and a visit from an unknown caller is unnerving of itself).

Easier to serve on a company

By contrast, serving the Demand on a company is comparatively simple. If it cannot readily be served personally on an officer of the company S 437 (1) of the Companies Act 1985 provides that “a document may be served by leaving it at or sending it by post to the registered office.”

Demand BEFORE Judgment – ‘A High-risk strategy’

It is idle to pretend that there are not risks associated with the serving of a demand without first having obtained judgment. It is not improper and indeed many cases are clear-cut, but if there is a genuine dispute – particularly if sufficient to bring the amount below £750, there is a risk of being held in abuse of process, even innocently.

“If you go in you’re sure to win. Faint heart never won fair lady”

The forms for Statutory Demand (one for individuals, one for companies) are simple. They are readily available (from HMSO/ Oyez or from INDICATOR £2 plus s.a.e.). Once the risks are appreciated Statutory Demands should hold terror only for the recipient. They spell out for him the painful consequences of non-compliance. It is an intrepid debtor indeed who faced with such a demand will not come to settlement. The mystery is why so few practitioners consider this route when dunning for their clients.

L M Wise FCA
Barrister-at-Law

I have long criticised the accountant’s approach to Romalpa Clauses – the term in the contract which allows the unpaid seller to re-possess his goods (because title has not passed). Contracts may be for lawyers, but it is Accountants who verify stock and the schedule of bad and doubtful debts. A doubtful debt where the client can recover the goods must be worth more than one where he can’t.

Identifying the Goods

The basic requirement of a claim to repossess goods is that the seller must be able to identify the actual goods on the unpaid invoice. We all know that if the last delivery gets mixed with an earlier one the lot is lost. In one case I remember, the unfortunate manufacturer had delivered twelve pallets of bricks. His own driver then put them in the storage bin together with one left unsold from a previous delivery. It is the liquidators job to maximise the assets for the creditors. In this case he had no difficulty resisting a claim for re-possession. He knew that the seller could not point to the actual twelve.

A properly drafted Clause

It has always seemed to me that Accountants let clients down when they fail to look at the clause in the sales invoice which is supposed to protect the seller against non-payment. I say “is supposed to” because in so many cases the clause is shamelessly useless.

(i) Events terminating the period of credit

A recent brief dealt with goods delivered through the factory gates at noon and the factory going into receivership the next day. On the facts of this unfortunate case the supplier had to wait sixty days of credit before his right to re-possess even crystallised! An instance of unthinking drafting, but not to high a price to pay. A properly drafted Romalpa Clause will cater for what happens if the buyer goes into Receivership etc before the due time to pay. It

(ii) Facilities to Collect

The next requirement is less obvious. The object is, or ought to be, to be able easily to get the goods back and that without having to resort to the courts. A well-drafted clause will include the right to reasonable admittance and in appropriate cases, assistance and use of facilities to re-load the goods. Years ago I learned of an unpaid seller thwarted because the goods he came to repossess were in a shop in a shopping precinct and the precinct manager was sharp enough to advise the shop keeper that the seller was a trespasser!

Is the clause part of the contract?

However water-tight the clause, is it incorporated in the contract? In a sad case only this year, the client had delivered a most expensive laser treatment machine to a clinic. The liquidator just asked to see the paperwork. The negotiations showed that neither party had given a thought to the terms of trade and unfortunately for the creditor, the clinic’s director confirmed that the first they would have known of any attempt at reservation of title was as the machine came through the door. Too late!

However well-drafted the Romalpa Clause, it still requires to be incorporated in the contract. The terms on the back of the delivery note or on the back or of the invoice are often not part of the contract at all. Particularly if the deal is the first with a new customer. It is obvious really. To be part of the contract, terms have to have been drawn to the buyer’s attention before the contract is entered into.

Re-possess or Sue?

There is another trap for the unwary and many a solicitor fails here too. The unpaid seller always has the option of suing for the sale price. What he often does not appreciate is that, if his claim is only a money claim, when he gets his judgment – usually unopposed – all he actually has is a bit of paper. If the buyer then goes into insolvent liquidation or bankruptcy

• a) that paper is usually worthless (about 2p in the £ is the average distribution by the Official Receiver); and worse
• b) even if he had had an effective Romalpa Clause, in most cases, when he got his judgment he lost his right to re-possess.

A good commercial The object is, or ought to be, to be able easily to get the goods back and that without having to resort to the courts. solicitor will have coupled with the money claim a claim for an order that title in the goods does not pass until the judgment debt is settled in full. Few solicitors are that astute.

Reservation of title clauses have been around since 1976. They are good law, but their extent has still not been fully explored. When the subject is better understood, perhaps clauses will be better drafted. Then solicitors and accountants with a client in difficulties will be on surer ground encouraging him to fight his corner and hopefully helping him to salvage something from the wreckage.

L M Wise FCA
Barrister-at-Law

A sad ending

Recently we were pleased to receive instructions to collect over £9,000 due by a small firm of builders. The debt had accumulated more or less steadily over the previous seven months.

Large debts call for immediate measures and I handled the account personally.

Alarm bells began to ring when the debtor’s telephone went unanswered in office hours. We sent a fax. Actually we sent a batch of faxes. One to anybody we could identify from their web site and from a search of Companies House. Twenty in all before we discovered the sad news – the real position.

A report on the creditor’s credit rating revealed that there were already three unsatisfied County Court Judgments against them – one for £19,000. That meant:

• a) at least three people had invested (and probably wasted) their money issuing their claim;
• b) the debtor company was shameless and in trouble; and
• c) we had to advise our client to consider the debt as a write-off (perhaps with the remote chance of dividend).

A happy ending

We have noticed that people without much money tend to move more often. Most people are, of course, honest, but a determined debtor can by moving regularly and with a bit of thought avoid his creditors practically for ever -or at least most of them!

One of our collectors recently called on just such a debtor. He owed £455. Previously the chap had lived in Stanmore. He had left behind a large (and growing) pile of bills on the mat and no forwarding address. Nevermind. In this case the collector struck lucky.

An obliging neighbour helpfully gave our man an address for the “birthday flowers” he claimed he wanted to deliver. The debtor was so surprised to be located he paid up without further fuss.

L M Wise FCA
Barrister-at-Law