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Litigation – top ten tips to minimise the risk of bad debt

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Darren Morgan, a partner in dispute resolution at the York office of Langleys Solicitors LLP, offers SMEs his top ten litigation tips to minimise the risk of incurring bad debt.

Darren Morgan
Darren Morgan

1.  Identify the potential bad payer at the outset
When you carry out work for a customer without taking payment up front, you are offering them credit.  Most bad debts can be avoided by being careful with whom you trade – do credit checks, take references and obtain personal guarantees if necessary. If you have any concerns, consider asking for money up front to make your customer earn their credit.

2.  Make sure you know the status of who you are dealing with
Precious time can be lost by not knowing at the outset whether you want to pursue an individual, a partnership or a company – the options for enforcing a debt are very different, and it is normally more difficult to pursue an individual than it is a company.

3.  Monitor payment patterns
A customer who begins to take longer each month to pay can be a warning sign.

4.  Record action taken to chase a debt

Make a note of all the chasing calls and letters which remain unanswered or promises of payment made. Debtors sometimes make incorrect claims that you have not pursued the debt, or that you agreed to reduce the debt or write it off altogether. A clear log of communication with the debtor may be useful in pursuing the matter.

5.  Rely upon your terms and conditions of business
If well drafted these can put you in the driving seat in the event of non payment of debts by allowing you to lawfully suspend deliveries on other contracts, make all debts become immediately payable and keep ownership of any items delivered with you until payment is received. If you do not have terms and conditions, or if they do not provide you with the protection that you need, you should consider seeking legal advice to update them.

6.  Remember to claim interest
The base rate of interest is currently a very low 0.5%. However, legislation often allows creditors to claim interest over and above base rate and also an additional compensation payment to compensate you for the additional cost of pursuing the debtor.

7.  Do not be fobbed-off!
Many creditors rely upon promises of cheques being in the post and offers of part payments.  In our experience, very few cheques in the post turn up, and those that do are often returned unpaid.

8.  Take action sooner rather than later
Set deadlines for payment and stick to them – if payment has not been received consider legal action.  Those creditors that shout the loudest often get paid first.

9.  There are many options to secure payment
Seek advice on the options open to you to enforce a debt – the legal procedures are there to secure payment if the debtor has assets.  There are many ways to reach the goal of receiving payment, such as statutory demands, court proceedings or contractual remedies.

10.  Do not rule out making the debtor insolvent
A statutory demand (leading to a bankruptcy petition) against an individual or a winding-up petition (leading to a company going into liquidation) should not be ruled out to secure at least part payment from a debtor. Many individuals and businesses will want to avoid insolvency or bankruptcy at any costs, and will find the money to pay you from somewhere.

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