Insolvency - Debt Recovery
It is essential for finance directors and credit controllers to review their debt recovery ledger and policy in times of economic downturn and as a result, tighten their control over their company’s debtors.
Notwithstanding your own credit policies it is the wider market which must be considered with circumspection in times of recession.
The credit crunch is an excellent example of how the financial markets across the world are connected. The impact of sub-prime lender defaults in middle America has impacted upon the major clearing banks across the world. In the same way, the debt of your debtors, over which you have no control, might impact upon your debtors and the recoverability of your debts.
We believe that much of what was outlined in our newsletters of Winter 2007 and Summer 2008 which can be accessed via our website at www.laytons.com is relevant as the economy continues to slow down.
The Sene Pillars of Debt Recovery Wisdom
Some tips on debt recovery
1 Get your Terms and Conditions in order – bespoke to your company’s needs
2 Ensure that your Terms and Conditions apply to the contracts with your suppliers
3 Maintain regular contact with your suppliers
4 Ensure sales staff are well trained and are alive to credit issues as well as sales
5 Act promptly if credit terms are breached
6 If there is a default in payment terms ensure that a payment plan is realistic and practicable
7 Act decisively if legal action is required
Insolvency and Debt Recovery
In order to be able to understand debt recovery it is necessary to be familiar with insolvency. Some solicitors may present insolvency debt recovery as an expensive and aggressive route to recover debts. In our experience those pursuing debts on behalf of their organisation prefer insolvency debt recovery. It is often the case that sales-driven companies will resile from aggressive recovery for fear of losing work but it must be remembered if the company has traded outside terms and if the company does not pay on a polite reminder this sensitivity towards losing work should be avoided.
Recovery of debts through insolvency is as follows:-
• 7 day letter
• Statutory Demand (optional for companies) requiring 21 days to expire
• Petition lodged at Court
The threat of insolvency proceedings is very real when dealing with personal or unincorporated debt. It is also very important to note that company directors cannot ignore the threat of insolvency proceedings and may even incur personal liability if a company does not address debt problems in the form of threatened insolvency proceedings.
The threat of a Bankruptcy or Winding Up Petition can have important adverse timing consequences for a debtor and the mere threat can have the desired effect of recovering debt.
As a Petition has an immediate effect on a debtor company both through presentation at Court it will often be the case that company debtors will settle threatened proceedings to prevent the unwanted consequences of a Petition. The best example of this is a company settling debts to prevent a Petition in a busy sales period up to Christmas. It should also be noted that a company often finds that its bank accounts are frozen on the simple presentation of a Petition to Court.
Am I throwing good money after bad?
Is a question often asked by credit controllers when insolvency debt recovery is suggested as a method of recovering debts. When an individual or company is insolvent, it means that either the company cannot pay its debts or its liabilities exceed its assets.
It should be remembered that the legal costs of any Petitioner are a first Charge on the assets of the debtor. If the debtor has no assets then the creditors’ legal costs will not be paid. It is only in this circumstance that the answer is in the affirmative.
The Petition route is quicker and an outcome on recovery will allow for certainty for a creditor, it will also send an important message to the debtor and any associates of that debtor that the creditor will not allow its debtors to trade outside of terms. If the debtor is not trading profitably, the creditor will stop the debtor trading and freeze the debtor’s assets at that point. The freezing of the company’s or individual’s affairs will ensure that any percentage recovery will not be reduced further, after all, if a debtor can pay 80p in the £ it is much better than 8p in the £!
Allowing a debtor to trade as the organisation becomes more insolvent only serves to reduce the creditors potential dividend.
“I got an insolvency notice from the Insolvency Service, I realised our debt was now a bad debt and I threw the notice in the bin”
NO! Insolvency notices do not mean there will be no recovery. It is likely to mean that there will not be a 100% recovery, it is a great shock to most when they are informed this is a critical part of debt recovery, scrutinising any insolvency professional will help keep their costs down and assisting any insolvency practitioner to maximise asset recovery should ensure that a greater percentage recovery is achieved out of an insolvent estate.
Through our wide network of insolvency practitioner contacts, we can refer you to an appropriate person, when you receive an insolvency notice, who will assist you without charge in the management of these insolvency service notices. The notices must be considered to be warnings that the recovery may be limited but for the reasons stated should not be considered as an indication that a debt should be written off in its entirety. If you receive such a notice, a call into our Insolvency department might help you recover some of the debt.
If you would like further details, then speak to your usual Laytons contact, or call daniel Izza in our Manchester office on 0161 834 2100, or email him at Daniel.firstname.lastname@example.org.
For PDF version of this focus sheet please click here