Debt Collection / Cash Flow Improvement Pointers

---

For help with commercial matters contact Kris Morrison (379 4383)

Business is hard enough work without non-paying debtors. Parry Field Lawyers offer legal assistance on a range of commercial matters including streamlining your debt collection process.

How can I Get Faster Customer Payments?

Does your business have good cash flow?  Do you struggle to get debt payment on time from your customers?

In our experience at Parry Field Lawyers, cash flow problems are often compounded by poorly drafted or non-existent credit terms and terms of trade. Problems we commonly encounter arising out of such terms include:

• Spending thousands of dollars in debt collection or legal costs but recuperating as little as 20% of these costs when a Court judgment is obtained.
• Giving credit because you believe the customer to be a wealthy individual, only to later discover the debt was in fact being incurred by a (usually insolvent) company.
• Being unable to recover any costs or interest because terms of trade were not provided to the customer at the right time.

Before the Contract

Good terms of trade are an absolute necessity. In addition to sounding nice, they must actually mean something. Even that isn't enough. They must cover all the important areas:

• Payment: Specify when the contract price is to be paid. Ensure that it is paid without set off for any reason.
    
• Interest for late payment: It must be clear that interest applies whether a debt is disputed or not, when interest runs from, and the amount and manner of calculation of the interest. Be wary of setting it too high, some "interest" rates look like penalties, and run the risk of being unenforceable.
    
• Costs of recovery: All cost involved in enforcing your rights under an agreement (whether obtaining payment of monies or otherwise) should be borne by the debtor. This must be explicit, and must include "costs on a solicitor/client basis".
    
• Reservation of Title: These clauses have spread like a virus. Many are entirely unworkable, and will make anyone relying on them look silly in the eyes of a Judge. They can be very useful, but need to be specifically drafted for individual situations. In New Zealand, they must also comply with the Personal Property Securities Act 1999 ("Act"), which changed the provisions for taking security over personal property as a form of securing payment.  In most cases they will be ineffective unless you also register a financing statement on the Personal Property Securities Register.  In some situations they are inappropriate and other security ought to be sought. Legal advice will be necessary.
   
• Limitation of Liability: These clauses can be effective. Limit your liability by contract. Be reasonable. This shuts out the limitless possibilities for counter-claims for "economic loss" that down at heel debtors generate when pushed for payment.  You also need to make sure that your limitation clauses comply with the Fair Trading Act and the Consumer Guarantees Act, where your customers include consumers.

Once your terms of trade mean something, make sure they are agreed to.

If you give quotations, terms of trade must be inserted and the quotation form sent to the potential customer. If you do not use a quotation form, we strongly advise that terms of trade are sent to the client with a letter before agreeing to carry out work for them.  If your business is typically done by oral agreements, do not be afraid of scaring customers off by asking for their signature on your quotation form or sending them a letter advising them of the terms and conditions upon which you will perform services. Getting things clear from the start will hopefully mean no misunderstandings later. Blame your terms and conditions on your lawyer if necessary. If a client is scared off, maybe it is a client you wouldn't want to have anyway!

Also, beware of receiving orders which purport to be "given on the terms and conditions set out in our order form". This will bind you to their conditions.

Who is the client?

When providing goods and services, ensure you know who is liable for the debt. An order from Smith Ltd is not the same as an order from the wealthy Mr Smith. This is an issue easily resolved prior to the commencement of work - virtually impossible later.

Where goods and services are supplied to a company you are unsure about, a personal guarantee from one of the directors is always advisable. Various forms of guarantee are available. They are technical and must be properly drafted. They must be formally witnessed to be of effect.

Completing the work

We suggest you have a procedure in place where the customer expressly signs off on the work done upon completion. The signing off process should include making a payment but often this is not possible.  It is also important to have a procedure in place to deal with a customer who pleads poverty or "Sorry I left my cheque book at home". At the very least this should include them signing an acknowledgement of debt and interest.

Where the customer immediately begins to complain as a way of delaying payment try to deal with the complaint then and there. If the matter is resolved record the settlement in writing and have both parties sign it. If it is not resolved, take immediate steps to demand and pursue payment.  If you provide services that come under the Construction Contracts Act, you may be able to enforce speedy payment by following the procedures under that Act.

If you deny the complaints are valid, (or if you suspect a customer of being difficult) take photographs of the completed work where appropriate.

Due Date for Payment

When a payment is missed, write a (polite) letter promptly.

Where appropriate, is the customer is having difficulty paying, agree to a new schedule for repayment in writing. Such an agreement must commence by acknowledging the debt in full.

Arrears

Standard letters usually have little effect. A telephone call is better. If you are agreeing to reschedule payments, make signing a written agreement a condition of you not immediately going to Court, Baycorp etc.  Do not be fobbed off with "I'll see about getting a cheque out to you within the next 2 or 3 weeks". In a months time you will invariably hear the same story. Instead, ask for a post dated cheque or obtain written agreement to pay on X date.

You may think obtaining a written agreement is not worth the paper it is written on - it will not make them pay. This is probably true. Invariably however, defaulting payers when dragged before the Court will raise a defence that the work was not properly done and cost X dollars to fix. Therein lies the value of the debtors previous written acknowledgement that the work was completed and clearly showing the debtors numerous defaults.

Finally, there are a number of legal options to use, including:

• Serving a Statutory Demand on a company.
• Filing a Statement of Claim in the District Court.
• Repossessing goods sold (where you have registered a financing statement and your properly drafted terms allow for this).
• Lodging the debt with a collection agency such as Baycorp.

It is best to seek legal advice promptly. Where terms of trade have been properly drawn up, you may also have recourse to (via a personal guarantee) security such as directors personal assets. Where good documentation and procedures have been used. The legal remedies will be far speedier, cheaper and more effective.

Insolvent Debtors

When a debtor gets into financial trouble, do not accept extraordinary payments, that is, payments not in the ordinary course of business (unless the money comes from a 'healthy' source which is alright). If you do, such payments can be clawed back if the debtor subsequently goes bankrupt or into liquidation. These clawbacks can reach back up to 6 months, or in certain circumstances up to 2 years!

In summary

After reading through this list, we recommend you do the following:

• Review your terms of trade.
• Review your process for getting the customer's agreement to your terms of trade.
• Review your business practices ie the manner in which you let people run up debts with you.
• Review your security arrangements:
• Do you have a reservation of title clause and a procedure for registering financing statements?
• Do you have provision for guarantees?
• Review your practice of the collection of debts.
• Discuss anything you are unsure about with us.

Note. The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice.  It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations.

 View Printer Friendly Page