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Managing company debt - prevention is better than cure

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Part 1 - deals with the various PREVENTATIVE MEASURES which might be employed to avoid exposure to risk.

Part 2 - will address the standard CONTRACT TERMS which ought to provide the best protection in the event of failure to deliver payment.

Part 3 - is intended to deal with the measures available should parts 1 and 2 fail - LITIGATION & COLLECTION.



Extending credit is a risky business and informed caution is essential when assessing the level of risk. If you think that enforcing the terms of a contract is time consuming and expensive here - try litigating in a foreign jurisdiction. Some basic precautionary steps might minimise your exposure. The desire to make the sale can sometimes overwhelm common sense. However, sensible precautionary steps will protect you later without frustrating the sale. Always remember the following:

Basic Checks - Every reputable company in the developed world has a credit status of some sort - ensure you are as well informed as possible. Credit checking is frequently an inexpensive way of ensuring that the purchaser of your product is in a position to pay for it. Credit checks in the developed world are usually a good indicator that it is safe to enter into a credit arrangement at the recommended level. Emerging markets are more difficult to gauge but reports are available and if used in conjunction with extreme caution, will still provide some protection.

Know your customer - Your staff should always ensure that they know who they are dealing with. It is no use trying to mount a legal action in a foreign jurisdiction (or in the UK) if you have not established the legal identity, address or contact details of the contracting party. The following information should be obtained on or before the point of sale and stored on the  customer's file.

  • Customer's name and full legal title.
  • Name of the point of contact and position within the company.
  • Confirmation that that person has authority to make decisions.
  • As many telephone numbers as possible, including mobile numbers and email addresses.
  • Bank details (very useful for third party debt orders)
  • All delivery addresses.
  • Checks made in the contracting country are sometimes the only way of establishing the existence / identity of the organisation. They are not necessarily expensive and can save considerable sums later.

Record Keeping - It may sound obvious, but the number of recoveries which fail because the order been lost or mislaid is astonishing. All written orders, PODs and invoices should be immediately retrievable so as to resolve queries the moment they arise. Oral requests to vary the terms of an order should always be confirmed in writing. Email is easy but ensure it can be retrieved whenever necessary.

Trade Association - Does your trade association hold a database of organisations who have previously caused difficulties to other members? This might be the best indicator of all. Many trade associations maintain such lists, which provided they are kept up to date and are accurate, are a very useful and free source of information.

Invoicing - Time will run from the date of the invoice. Invoice immediately upon delivery of the goods. By invoicing in a timely manner you can minimise the potential for delayed payment. This will certainly have repercussions should you wish to impose penalties for late payment.

Contract Terms - This is a topic in its own right and will be dealt with in Part 2 of this series. Invoice your creditors immediately and ensure your standard terms are watertight. Don't put them on the invoice - it is too late. Notify your clients of the standard terms at the time the contract made (point of sale).

Penalise Late Payment - Claim interest: Once a payment is overdue then interest can be charge on all commercial debts.

·         Claim interest under the Late Payment of Commercial Debts (Interest) Act 1998
·         Claim debt recovery fees under same Act
·         Sending out a letter before the invoice is due asking for confirmation that the order was received could also prove useful.

Many countries have a system of late payment penalties within their legislative framework - If you are trading from outside the UK find out whether such a law exists and if so use it. If there is no similar legislation simply incorporate penalty clauses into your standard terms & conditions providing for interest and reasonable debt recovery costs.

So when is a payment late? - Wherever the contract provides for payment periods the payment is late if it is made after the last day of the credit period.

If no credit period has been agreed, then in the UK the '98 Act sets a default period of 30 days after the invoice following which interest can run. This is not a statutory credit period. Contractually, whenever no credit period is agreed in a contract the principal debt will still become due from the moment the goods are delivered or the service performed

Once payment is delayed don't delay - act immediately

Credit Insurance & Letters of Credit - As ever with insurance you are paying for someone else's mistakes. If you can bear the expense of being charged a percentage on every transaction, and your industry is considered a 'safe risk,' then it has its place, especially when trading with the emerging overseas markets. Otherwise, taking the above mentioned steps in conjunction with the measures recommended in stages 2 and 3ought to provide sufficient protection. So far as Letters of Credit are concerned - over 50% of them fail on the first presentation. The cost of putting in place a guaranteed letter of credit may well render the transaction a commercial nonsense.

All of these steps are little more than common sense but frequently overlooked. Ensure that your company has clearly defined procedures and that they are adhered to and you will probably avoid disappointment.



Always remember that your standard terms are your contract to supply - the rules of contract law apply. It is therefore important to ensure that your terms are current, enforceable and comprehensive. Having them drafted by a specialist lawyer and reviewed regularly is always the best way of ensuring that your contract terms provide for the best business protection.

Broadly, your terms ought to achieve the following objectives:

·         Clearly state the intentions of the contracting parties.

·         Set out a timetable for delivery and payment.

·         Protect the rights of the contracting parties in the event of a failure of a party to perform.

·         Provide for a regime of dispute resolution.


1.                  INTENTIONS

a.      Identify the contracting parties.
b.      Clearly define what product or service is being supplied and at what price.
c.      Limit the right of the other side to dispose of or sub-contract their obligations under the contract.
d.      Ensure that the person who purports to be acting on behalf the contracting party has the authority to do so.

2.                  INVOICING

a.      It is generally desirable to invoice immediately upon supply.
b.      Incorporate that intention into your contract terms so there can be no misunderstanding about credit periods later on.
c.      Remind the customer of the repayment terms and return of goods clauses on the invoice.

3.                  CLARITY

a.      Ensure all parties are clearly identified. Do not confuse consumers with commercial entities - they have different rights.

·         DELIVERY - specify:

·         Where the goods are to be delivered
·         Who is responsible for delivery costs
·         If possible, ensure that the time of delivery is not "of the essence" (otherwise the customer can cancel)
·         PAYMENT TERMS (Protect yourself from slow / late payers)
·         Specify when payment is to be made.
·         Include discounts for early payment.
·         Exclude the right of "set off".
·         Include an acceleration clause - in the event of failure to pay one invoice you can include payment for invoices not yet due within the claim on the unpaid invoice.
·         Entitle yourself to cancel current orders if payment is withheld for any single order.
·         Include penalties for late payment (fixed fees and interest are both permissible. Once a payment is overdue then interest can be charge on all commercial debts.
·         Claim interest under the Late Payment of Commercial Debts (Interest) Act 1998 (Currently running at 12.5%)
·         Claim fixed debt recovery fees under same Act. The fixed fees are:
1.      £40 for debts under £1,000;
2.      £70 for all debts from £1,000 up to £10,000
3.      £100 for all debts of £10,000 and over

If you trade within Europe use the European late payment provisions. Most countries in the EU have now incorporated a system of late payment penalties into their domestic framework of laws. Where the right to claim the penalties exists by statute there is no necessity to include them in your T & Cs. However it is good practice to do so. The most frequently cited reason for not paying the LPP is that there was no notice within the T&Cs. Communicating your intention to claim within your T & Cs eliminates the element of surprise and is more likely to preserve goodwill. It also substantially increases the prospect of being paid the fee.

In non EU countries simply add late payment penalties into your contract terms. Even if you do not wish to enforce them it is a useful bargaining tool when it comes to getting paid. Use them as both a carrot and a stick.

Clauses providing the right to claim interest and fees can be incorporated into the contract and, when they are, the late payment legislation will not apply.

So when is payment late?

Where there is an agreed credit period, and the supplier has agreed, either in writing or orally, a credit period with the purchaser, the payment is late if it is made after the last day of the credit period.

If no credit period has been agreed, then the LPCD(I)Act 1998 sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed.

The 30 day default period starts running from whichever of the following is the last in time:

  • The delivery of the goods or the performance of the service by the supplier; or
  • The date upon which the purchaser has notice of the value of the debt.
  • A payment is late once the agreed credit period or the default period has expired.


·         Include RETENTION OF TITLE CLAUSES - Protect the ownership of your product until payment has been received. Ensure your customers understand that you retain ownership until payment is made in full. This may increase your chances of repossessing any unused stocks of your products held by an insolvent customer. An example of such a clause might be: - "We reserve the rights to the invoiced goods until full payment is received. It is only then that the title of those goods may pass between the parties."
·         Include an ALL MONEYS CLAUSE holding on to title until monies are paid under all contracts.
·         Include a STORAGE CLAUSE which prevents title passing upon delivery until goods are paid for.
·         Include a clause which protects any intellectual property in your product.


·         Include a cause limiting your liability for consequential losses in the event of delivery of faulty goods.
·         Include a proper procedure for the reporting and exchange of faulty goods.


·         Ensure that the English legal system is used to interpret the contract and that disputes will resolved by an English court.
·         The International Chamber of Commerce has developed a system of "incoterms", their purpose is to provide an internationally recognised vocabulary of terms designed to promote clarity and eliminate ambiguity. Wherever possible they ought to be used when trading overseas.


This is very brief guide as to the areas your standard terms ought to address. It is always advisable to have your contract drafted by a specialist lawyer and reviewed at regular intervals.

The final part in this series of three deals with what happens when all these careful and meticulous measures fail: Lawyers & Debt Collectors.



If all of our carefully prepared measures as set out in parts 1 and 2 of this series have failed then it is time up to move to stage three and consider third party intervention. By 60 days your credit controller ought to know whether there is a good reason for non payment. If not then the intervention of a third party should be considered at this stage. If there is some legitimate reason for delay seek to resolve it immediately as the longer it remains unpaid the less prospect there is of a successful recovery. A further reason for early use of a third party is price. Good agencies offer reductions for early referrals as they are usually easier to collect.


Rocks and hard places spring to mind here. However there is something to be said for both (here I confess that I am both and no, I don't get invited out much).

Debt Collectors - The principal advantage they have over lawyers is that they do not charge hourly rates. Most will work on a no win - no fee basis with commissions payable out of sums recovered. Most debt collection agencies (DCAs) are thoroughly respectable and hard working, but there are small minority who are not. Here is a checklist of what to look for when instructing a DCA:

1. Avoid those who charge set up or registration fees. You end up paying twice for the same thing out of pocket if they fail to recover. The less reputable companies simply pocket the set up fee and make no effort to collect the money.
2. Always use an agency which is a member of the Credit Services Association. They have a code of conduct and grievance and disciplinary procedures in the event of complaints. The CSA will supply you with a list of members or simply look at their website
3. In addition ensure the company has the following:
a.      A consumer Credit Licence.
b.      Data Protection registration
c.      ISO 9001 or equivalent
d.      Professional indemnity insurance - ask to see the policy.
4. When instructing a debt recovery company ask for a discount for volume or value. Almost all will adjust the rates for large value or high volume accounts. In the UK you should not be paying more than 15% for straightforward debt recovery. Europe it is usually around 20% and the rest of the world is around 25% - 35% with certain countries such as Jamaica can cost 50% for security reasons.
5. Check to see whether the agency has its own litigation department. If it does it is both and indication of size and could save you a lot of money in legal fees later on.
6. Finally, if you trade overseas ensure the agency you use has a physical presence in the countries in which you trade. There is no point in using an agency to collect in Poland if they have no office there. The extreme probability is that their demands for payment will be taken as seriously as your own. A local office should ensure that they can trace, collect and litigate in that country and that they are conversant in both the language and legal system of that jurisdiction.


Many law firms now offer to write debt collection letters on behalf of their clients in return for a small fee. That is fine as far as it goes but unfortunately it doesn't usually go much further than that. The next step is the option to issue proceedings on your behalf and to prepare the case at their usual hourly rates. They do not usually have the systems in place to chase accounts and resolve issues. Most good debt collection agencies have teams of experienced collectors trained to collect money quickly without the necessity of going to court.

There are however advantages to instructing lawyers, not the least of which is that it should ensure a minimum standard of quality. The lawyer who takes your case should be at least competent and if not, they are answerable to the Law Society. Again, there are a number of things to look for when choosing a lawyer.

1. Ensure that they are expert in the area in which you are seeking to litigate - many lawyers now specialise and the old high street lawyer who claims to do everything is something of a dying breed.

2. On the same point the law can be esoteric and sometimes counsel (barristers) are used to provide highly specialist advice. However, some solicitors can be a little too quick to recommend counsel as it saves them the time of researching the what is frequently a straightforward point. Wherever possible ensure there is a genuine need for counsel's advice. It may be that using a more specialist solicitor is ultimately cheaper.

3. Ensure that the appropriate level of fee earner within the practice is working on your files. The most senior solicitor doesn't usually need to draft basic debt recovery letters.

4. Always endeavour to obtain a realistic assessment of costs before embarking on any given course. Wherever possible ensure that they are only those costs which will be deemed to be recoverable from the other side following a successful conclusion.

5. Use the Law Society to recommend a lawyer who specialises in the area in which you seek to litigate.

Generally there is no hard and fast rule as to whether a DCA or a lawyer will be the best option. For basic debt recovery a DCA is usually be the cheapest option and provided that you ensure have engaged a good and reputable agency. Lawyers are more expensive and tend to charge win or lose. The obvious solution might be to use a DCA with a litigation department to limit the costs and save the lawyers for the highly specialist and complex cases. 

Whatever you decide to do it is important to act quickly and seek third party assistance as soon as it is apparent that your internal procedures have failed. I hope that this short series has been of some interest and wherever you trade you don't need to call upon us too often.



This article was originally published in Communicate - the Association of Translation Companies' newsletter -

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