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How to protect a business from bad debts


Many businesses can find themselves in a situation where cash flow becomes an issue, so it is vital that companies correctly manage their credit and capital.

This includes having the correct measures in place to recover debt, and minimise the risk of late payment and bad debts.

Protecting against bad debt from the outset

  • Have clear payment terms and conditions before supply; these will help if legal action has to be taken.
  • Arrange for payment of a deposit or a payment on account if appropriate.
  • Invoice regularly and follow those invoices up before payment becomes due.
  • Make sure the payment process is simple, have a point of access for clients that incorporates invoicing and cash collection.

How to keep on top of debtor management

  • Have an efficient and organised person administering the process, especially if they can foster good relationships, as this can often result in swifter payments.
  • Ensure that unpaid debts are followed up at regular intervals.
  • Document all conversations, and note down any agreed payment dates.
  • Don’t be afraid to discuss payment plans.
  • Instruct a solicitor to send a letter confirming that you will take legal action if payment isn’t received.

What to do as a last resort if debt turns bad

The first step is to seek legal advice as the litigation process can be complex and time-consuming.

Conduct investigations to identify any assets against which a judgement may be enforced and ascertain the debtor’s financial position. This may include carrying out company searches at Companies House, conducting a Land Registry search to establish the ownership of properties occupied by the debtor, searching the Insolvency Register and instructing enquiry agents if necessary.  There is no point in taking legal action if your debtor has no income or assets.  However, if it is thought that they have assets but these cannot be identified, even via the use of enquiry agents, a court order to provide information can be applied for once a judgment has been obtained.

It is also worth noting that if your debtor is a limited company, any assets may not be in the company’s name.  Although you can get a County Court judgment in this case, it could make things difficult later down the line.

If you wish to take enforcement action, then a County Court judgment must first be obtained, following which the enforcement can take place in default of payment within the time period specified in the judgment order or 14 days if none is given.  There are a number of courses of action, these are,

  • Execution by a court bailiff or high court enforcement officer – they may seize and sell a debtor’s goods to raise funds to satisfy the judgment debt.
  • Third Party Debtors Order – sums owed to a debtor that are in the hands of a third party, such as a bank, may be frozen and seized for the benefit of the creditor.
  • Attachment of Earnings Order – money will be stopped from a person’s wages to pay a judgment debt. The debtor’s employer must make payments out of his wages into court and the court then releases payment to the creditor to satisfy the judgment debt.
  • Charging Order – this is a way of securing a judgment debt by imposing a charge over land or certain other assets. In order to realise funds to satisfy the judgment debt, the judgment creditor must go on to also obtain an order for sale.

If all other avenues are inappropriate for whatever reason and the debt is more than £750, then insolvency proceedings, or the threat of, via the service of a statutory demand, may result in the debt being paid.  But, if this is the chosen method of debt recovery, then a creditor may only recover a fraction of what they are owed.

The courts also discourage the use of insolvency procedures as a debt collection exercise and if the debt is genuinely disputed, then the courts may not only dismiss petitions, but also penalise those bringing them in.

For more information, or to discuss any aspect of debt and insolvency call James Robbins on 01772 258321.

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