Business is hard enough work without having to worry about how to collect unpaid debt. Parry Field Lawyers offer legal assistance on a range of commercial matters including streamlining your debt collection process.
Before the work starts
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 of risk. For more advice on writing payment terms, see our article on how to write payment terms and conditions.
Just as important as writing your terms and conditions of trade is making sure that your customers are bound by them. They must be brought to the customers attention before you agree to carry out work for the customer. Ideally, the customer should also sign a copy of your terms so its clear they have agreed to abide by them.
What should you do when payment doesn’t come?
- Write to the Customer
When a payment is missed, promptly write a (polite) letter to the customer. This letter should include the invoice amount, the daily interest charge the customer owes you for late payment, and the steps you will need to take if payment isn’t made promptly. It should also invite the customer to contact you if they are having trouble paying your bill, to discuss alternative payment options.
- Telephone the Customer
It is a good idea to follow up your letter with a telephone call. If you don’t call the customer, they often simply ignore your letter.
- Get a written record of any payment agreements
Don’t be fobbed off with promises from the customer that they will get a cheque out to you within the next 2 or 3 weeks”. In a month’s time you will invariably hear the same story. Instead, ask for a post dated cheque. Where appropriate, if 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. Make signing a written agreement a condition of you not immediately going to Court, or a debt collection agency.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 a court will raise a defence that the work was not properly done and cost X dollars to fix. If you have previous written acknowledgement from the customer that the work was completed, and that they have repeatedly failed to pay, it will make it much harder for them to convince a court or disputes tribunal that your work was poor quality.
What if the customer doesn’t respond to your letter and phonecalls?
Standard letters often have little effect. With some customers you will have to follow the matter up with further action.
There are a number of legal options to use, including:
- Serving a Statutory Demand on a company.
- Filing a Notice 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 Veda Advantage. Such a listing may make it difficult for the customer to obtain credit from other businesses or lenders. You should, however, make sure that you clarify what amounts are payable to the debt collection agency. You may be required to pay to the agency a specified percentage of any payment recovered from your customer.
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 director’s personal assets. Where good documentation and procedures have been used, the legal remedies will be far speedier, cheaper and more effective.
What if the customer is insolvent?
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’ third party source such as an adult family member of the debtor). 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!
After reading through this list, we recommend you do the following:
- Review your terms and conditions of trade
- Review your process for getting your customers’ agreement to your terms and conditions of trade.
- Review your business practices ie the manner in which you let people run up debts with you.
- 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.