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Converting debt to £££

11/06/2014 | Alvin Ittoo

The importance of cash flow is a cold hard fact which concerns all business people. Yet despite the well known mantra that "cash is king" many businesses suffer serious, and often fatal consequences from allowing bad debts to accrue and failing to take action to recover cash that is sat on their balance sheet as debt. 

Credit control strategy 

Recent statistics have highlighted the problem of bad payers, demonstrating that 73% of small to medium sized businesses experience problems with cash flow and the majority of these cite late payers as the reason. In the short term it may be possible for a business to continue trading in order to "ride it out" until its cash flow situation improves, but over a sustained period of time constant battling with late payers can hinder a business' ability to thrive, grow or even survive. It is therefore imperative that you implement a credit control strategy to deal with bad payers as soon as the invoice becomes overdue. 

The initial stage of your strategy can be as straight forward as a series of emails which escalate in severity, with the final one stating that legal action will commence unless payment is received. Once this series of emails has been exhausted you will need to ensure a properly drafted letter of claim is sent in order to ensure that that any court action progresses efficiently. If a valid letter of claim is not sent this can lead to delays in any court action and may even have adverse cost consequences once the matter is determined so it is always advisable to ensure your final letter before you take court action is compliant with all requirements under the Civil Procedure Rules. Ultimately if no payment is received after all your efforts to recover it and you issue a claim, providing the debtor has no valid defence, for example that you did not provide the goods or services, it is likely that you will obtain a judgment for the sums owing. However, a judgment is essentially a piece of paper saying "you win". It does not guarantee that you will get paid and certainly does not in itself improve your cash flow. In order to ensure the best chance of recovering the money you are owed you must ensure that part of your credit control strategy is early consideration of how you can enforce against a debtor. 

Enforcement 

Enforcement is simply taking action against a debtor once you have a judgment that remains unpaid. There are numerous ways in which you can enforce a judgment debt but in order to enforce effectively it is important to know the debtor's circumstances. It is also worth noting that there have been significant recent changes in the law of enforcement, particularly in the realm of seizing a debtor's goods and possessions, which are somewhat favourable to the debtor who is an individual rather than a corporate entity. Creditors now need to cater for so called "vulnerable debtors" and can only enter a debtor's premises at certain times. That said, the reforms provide some much needed clarification in relation to enforcement and limit the fees for some methods of enforcement, so ensuring you have a good credit control strategy could enable you to take advantage of some of the recent changes. 

The choice of enforcement method will largely depend on the debtor's circumstances. One option is to seek a charging order which secures the debt against the debtor's property. This can be land, securities or certain other assets and can be a very effective way of ensuring your debt is paid. The downside of this is that obtaining an order does not in itself result in payment and you may need to wait for a sale, or otherwise force a sale by seeking an order for sale from the court, in order to realise the funds. Furthermore any creditors who have secured their debts against the property prior to you will have to be paid first. However, if you are aware of a substantial asset belonging to the debtor and you are able to assess whether there is sufficient value in the asset to secure your debt this is a good enforcement option. The existence of a charging order does not prevent you from seeking other methods of enforcement and in certain circumstances the Charging Orders Act 1979 allows you to accrue interest on the debt. 

If you know that the debtor is employed you may seek an attachment of earnings order. This is an inexpensive and easy way to ensure monthly payments and because the payments come directly from the debtor's employer you do not need to rely on the debtor. This method of enforcement is effective for smaller debts, however it can take a long time to pay of larger debts with this method. Furthermore, the rate of payments is set based on the level of income of the debtor and so if he or she is in a low paying job you may not receive a significant monthly sum. You can obtain an attachment of earnings order after you have secured the debt with a charging order and so this may be an effective way to ensure you receive at least some payments while knowing your debt is secured against a valuable asset and will be paid in full if this is sold. 

You may be able to freeze money due to the debtor which is in the hands of a third party, for example a bank or a customer of the debtor. This money can then be seized to repay the judgment debt owed to you. This is known as a third party debt order and can be a very effective way of enforcing a judgment if you have the relevant information, for example the debtor's bank details. Often creditors do not enforce in this manner because they do not have enough information, however something as simple as retaining the bank details of a customer who has previously made a payment to you could provide you with an effective enforcement tool. 

It is possible to take possession of certain goods belonging to a debtor by obtaining a warrant or writ of control. Warrants and writs have the same basic effect of giving a creditor the right to take control of the debtor's possessions and the only difference is that a writ of control is obtained where the debt is above £5,000.00 and must be sought in the High Court. The recent reforms mentioned above have made the process for taking possession of goods a lot clearer and provide a simpler fee structure which is beneficial to creditors. If you know that a debtor has goods you can obtain a warrant or a writ relatively quickly and this will command an enforcement officer to attend the debtor's property, seize the goods and sell them to pay off the debt. Certain goods are exempt, for example goods used in the course of business and other basic household goods such as fridges, cookers and washing machines. 

These enforcement methods are a few options available to a creditor with a unpaid judgment, however there are others. There is of course the option of making a debtor bankrupt if he or she is an individual and the debt is greater than £750.00. If the debtor is a company you can also seek to wind up the company. However, these are costly routes and may result in you receiving a fraction of the amount you are owed or, in some cases, nothing at all. What is important to bear in mind is having a strategy from the outset and an idea of which enforcement method is best suited to the debtor. Information about the debtor is crucial and in order to formulate a strategy it is advisable to collate as much information about the debtor as possible. This can be done from a very early stage. For example, simply ensuring you have a home address for an individual debtor will enable investigation into whether or not he or she is a home owner. Obtaining this information, details about their employment status and their bank details can, in some circumstances, be done at the beginning of the customer relationship under the guise of creating an "engagement record". Alternatively, something we routinely recommend in debt recovery matters is a pre-action investigation. However, if you have not collated much information about your debtors from an early stage all is not lost, you can still obtain an order from the court compelling the debtor to attend court and answer questions about his or her finances. In the case of a company debtor you can compel a director to attend and give information about the company's finances. 

Encountering bad payers is an inevitability of business but that does not mean your company should suffer. Implement a clear and effective credit control policy with strategies tailored to your debtors and you will minimise the bad debt on your books, improve your cash flow and in the long term may transform your business from one that simply survives to one that thrives.

Alvin Ittoo
Dispute Resolution Solicitor

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