Claw back what’s rightfully yours

Adam Bernstein
Friday, October 30, 2020

We’re in trying times and firms looking to drag in what they’re owed are struggling. If getting paid in normal times was tricky print is now having to up its game just to stand still.

Chris Else, a solicitor and managing partner with Else Solicitors LLP, has been in debt recovery and commercial dispute resolution since 1987 and says that, the current crisis aside, he has never known a period where debt recovery has not been busy. “Of course,” he adds, “clients only instruct lawyers when they need to chase substantially overdue debts... and inevitably as we provide this service, we are bound to be busy and so do have a cynical view of the business world.”

Printers may think they’re getting a raw deal when seeking payment, but Else says that the problem respects no boundaries: “We act for law firms, banks, pub companies, commercial landlords, schools, construction companies, dentists and even surgeons; there is no sector immune from bad debt.” As he sees it, there seems to be a general rule that some always wait until they are forced to pay.

This attitude is on the rise. MarketFinance, a business finance company, published statistics in January 2020 which offered contradicting payment data for the creative industries. On the one hand, 78% of invoices were being paid late in 2013 compared to just 44% in 2019. But the average number of days late rose from 17 in 2013 to 27 in 2019.

And coronavirus is pushing the boundaries. Says Nicola Langley, head of legal and commercial solicitor at the BPIF: “We are seeing some customers wanting to push payment terms to 60, or 90 days. And a new trend during the Covid-19 crisis is a request from customers to effectively wipe 10% or 20% off any outstanding invoices.”

But where this happens, her response is that it’s a commercial decision where “the supplier will need to weigh up the benefit of keeping the customer against the potential loss of profit.” However, she says that if a client unilaterally makes a deduction, the printer can treat the balance as an outstanding debt.

Avoiding the zombies

There have always been companies unable to pay their way properly as they live from one day to the next. Known as ‘zombie companies’, these businesses have substantial debt, and although they generate cash, after covering running costs, fixed costs, they only have enough funds to service interest on their loans and not the debt itself.

These businesses, says Else, “generally depend on banks and creditors for their continued existence which effectively puts them on a never-ending life support system”. That support has recently moved to the public sector with the measures to counter the effects of the pandemic.

Identifying zombie companies isn’t easy and, in these circumstances, as Else advises, “the only sure way to be paid on time is to ask for the full amount in advance of the goods and/or services being supplied”.

There is another option notes Langley: part payments or ‘split invoicing’, where the customer pays for the materials upfront and the balance on delivery. “That”, she says, “only works if the cash is actually received first.”

But often neither of these options are practical and even when money is paid on account, cash will be exhausted, and further indebtedness will arise. Chasing this can be time-consuming and costly.

To lock the stable door before the horse bolts means engaging a business information service or credit reference agency to assess debtors or a (potential) customer’s credit worthiness. This allows, as Else says, firms to “understand exactly who you are dealing with and the customers’ correct title.” He adds that it’s key that a limited company and directors are checked against Companies House records looking for details of past failures.

But Else says to also look at the Register of Judgments which is kept by the Registry Trust to “check whether there are any judgments against the individual directors of a company and also whether there are any judgments or indeed winding up petitions issued against a potential customer.”

Business information services are important and are often overlooked – sometimes because of the cost. But where they are deployed users should remember that the information can be out of date.

Langley prefers to be more positive, saying that “one of the things that is great about our sector is that it still has lots of traditional companies, managed by people who do business ‘on a handshake’ basis. That’s fine if you know your customers and suppliers well, however, unfortunately it can lead to difficulty”. Her advice is to have robust systems in place that start with a credit application form that all new customers must complete. “This will capture the information you need to understand who your customer is,” she says. This should be followed up with a couple of trade references. Beyond that she advises setting a credit limit for customers and sticking to it.

For the record, the BPIF offers a template trade credit application form which asks for full contact information, detail on the directors, bank and trade reference contact information, company and VAT details, as well as stating that the printer’s terms apply to all sales.

One critical part of the business infrastructure that Else says should be in place is “an individual member of staff, if you do not have a fulltime credit controller, to carry out the credit control function”. And to be effective, they must use a standard procedure so that if an invoice is due and payable after 30 days, then at 45 days all services and deliveries are stopped if payment is not made.

In his view, overdue accounts are immediately due, and all work should be stopped to minimise further loss. For him, the benefit of a good credit control process is that problems become apparent much sooner, not after 90 days when invoices become aged.

This process can also be tied to a factoring arrangement to help cashflow. But it should be remembered that a printer using a factor will suffer a shortfall on each invoice paid and further, cash advanced by the factor will usually need to be paid back if customers don’t pay. Also, a factoring arrangement may limit the ability of the company to access other forms of borrowing and in addition, a factor may deal with customers differently and cause damage to the printer-customer relationship.

No matter the process, the importance of adhering to credit limits cannot be overstated says Langley: “So often when members of the BPIF come to me for advice, I hear that a new customer has placed a few orders for low value, maybe a couple of hundred pounds. These invoices have been paid on time, but then the next order is a few thousand pounds and these higher value invoices are not paid.

She continues: “I have seen businesses that have set up systems, but then not stuck to them. Deals are done and orders taken over the course of often lengthy email correspondence, the content of which is sometimes a little vague, and so it becomes very difficult to establish what has been agreed.”

For those ‘new’ to credit control, the BPIF can provide advice and template documents to help as well as training (coronavirus permitting) for sales and management teams to understand exactly how contract law works. The training is bespoke and includes a seminar on contract law, how contracts are formed and remedies for breaches.

Carrot and stick

For more than 20 years the Late Payment of Commercial Debts (Interest) Act 1998 has been in place to level the playing field. Its purpose was to help creditors claim interest on overdue accounts, obtain compensation and latterly, payment of reasonable legal costs or costs of recovery.

But as Else points out, a printer doesn’t have to actually use the legislation, just refer to it: “Compensation, interest and costs… [offer] leverage to add costs onto the debt to ensure the ‘won’t pays’ now pay rather than face the increased costs of court proceedings.”

In other words, he’s saying that when a debt is over the agreed payment credit controllers can offer to ‘waive’ the compensation fee (due on each overdue invoice) and possibly the 8% per annum statutory interest due if the debtor pays very quickly. These charges are a powerful tool for credit controllers. However, notes Else, the legislation won’t counter those that can’t pay.

Aside from the Act, Else recommends that companies have terms of business that cover things like charges for late payment with a standard administration charge of £100 and interest on late payment (for example 2% per calendar month or part of a month) as a standard.

Good credit controllers should, he says, be calling and writing to confirm payment dates and requesting confirmation of the date upon which payment will be made. Reference can be made to terms of business and/or the late payment legislation. Else thinks too that a decent “credit manager ought to say something along the lines of ‘if there are reasons for non-payment or if you are unable to pay please confirm this in writing and confirm a later payment date... if you keep to the later payment date, we will waive the administration fee and also the interest charges. However, if you fail to adhere to the later payment date then we are likely to instruct solicitors who will claim these charges and in addition legal fees’”.

But sight shouldn’t be lost of the fact that there is always the risk of losing clients if you fall out with them, especially if a heavy-handed approach is taken to debt recovery. But the contrary argument is that there’s no point supplying a customer that doesn’t pay. Even so, Langley reckons the reasons for non-payment should be understood: “Is it can’t pay or won’t pay? Is there a complaint about delay or quality to deal with? My advice is to open a dialogue with the customer if possible, find out as much as you can about the circumstances and reasons for non-payment. If it’s a temporary cashflow problem, consider agreeing to an instalment arrangement.”

As a side note, she adds that any disputes relating to quality which are disrupting payment can often be resolved by commissioning an independent report from a technical expert which will deal with issues relating to fitness for purpose and whether the goods conform to specification. As she explains: “The parties can agree to abide by the decision of the independent expert. If no agreement is reached and court proceedings are issued, the court may ask for expert evidence to assist in adjudication.” The BPIF can assist in the preparation of technical reports.

Moving forward, if Else were to set up from scratch, he would have a written sales and credit control procedure that properly incorporates terms of sale that ensures that a debtor cannot dispute a debt and that genuine issues with payment are dealt with no later than seven or 14 days following delivery of the invoice. “The important point here,” he says, “is to communicate with the customer to ensure that they are fully aware of the terms that apply and also that they are prepared to pay on time.”

It’s of interest that he has “sued many debtors on behalf of the same clients and the same debtors often (re)appear; they actually use the debt recovery process as a red letter... they pay on judgment before enforcement proceedings”. He’s found that sometimes a debtor will receive the judgment which is sent to the High Court for a Sheriffs High Court Enforcement Officer to visit when payment is then made. It’s fascinating that some clients still deal with these customers and “it all seems to be part of a game of cat and mouse... but the important point to remember is that if action is threatened it must always be taken”.

On your terms

Read any management book and terms and conditions of business are highlighted as one of the most essential sales tools. Else, from experience, believes that “they should be written in a way that puts the supplier in the strongest possible position”.

Even so, the best conditions in the world are worthless if they are not incorporated into a contract so that they’re binding on all. The obvious and most straightforward way to do this is to ask clients to sign that they agree that the terms are incorporated. And Langley agrees. She emphasises that “standard terms of sale are really useful, and I recommend that members do use them... we also have guidance for members as to how to make sure they apply”. Again, the BPIF has a template with model terms that members can adapt.

But as Else explains, through dealings between supplier and customer it can also be implied that the supplier’s terms of business have been incorporated into a contract over a period of time and over several transactions.

To makes terms as effective as possible the BPIF suggests that they’re put on the company website as well as on the trade credit application form “so that customers are aware of them right at the outset”. She also recommends attaching them to quotes or estimates while using wording such as ‘subject to our standard terms of business’ on documentation. All the same, she says to “be aware that if a customer sends you a purchase order, they may be seeking to impose their own terms of purchase”.

This is known as the ‘battle of the forms’ and as Else notes, can itself form substantial litigation and costly disputes between parties. “The preference is as always to ask the customer to sign, date and return a copy of the terms of business,” he says.

But before antagonising a customer by rejecting their terms outright, Langley thinks it prudent that printers understand their own terms – and the protections they offer them – and then read the customer’s terms to work out where the differences are. She says: “Decide what you can live with and what you can’t, then seek to negotiate a compromise. Agreed amendments to their terms or yours should be recorded in writing.”

The nuclear option

If, at the end of the day it’s not possible to agree a resolution with a customer, then court proceedings may be the only option. But before embarking on this, Langley says that members should use the ‘overdue accounts toolkit’ from the BPIF website; it features template letters and guidance including a letter before action.

A wise litigant will always be mindful that court proceedings and enforcement involves cost. As Langley notes, “the commercial reality is that not all debts will be collected even if you are granted a judgment in your favour”. But she adds that collection through bailiffs is not the only option in the county court – there are alternatives such as a third-party debt order, which orders the debtor’s bank or building society to pay, or a charging order over assets. It’s also possible to apply for an order that the debtor, or a director if a limited company is involved, attends court and is questioned about the assets of the business.

Ultimately…

At the end of the day, it’s better to talk than to throw stones for you might win the battle (and receive payment) but lose the war (lose the client). In the current climate, many companies will be having genuine, but temporary, cashflow problems, and instalment arrangements could reduce a printer’s exposure to loss. However – and it’s a point advocated by Langley – firms should be wary of “letting their customer’s cashflow problem become their cashflow problem”.

Work to get some of the outstanding monies paid and add interest to the remaining balance. It makes commercial sense to help good customers stay in business, but not if doing so ends up damaging your own business.


TERMS TO INCLUDE

Clear, concise and comprehensive terms should appear on your website and all relevant correspondence, but what should that comprise?

  • Payment terms and the date for payment should usually be 30 days from the date of invoice
  • Interest is payable on overdue accounts at a proper percentage rate - possibly 2% per month or part thereof
  • A £100 administration charge for each overdue invoice can also assist to offset recovery costs
  • Retention of title that allows a supplier to recover goods that are identifiable (and not incorporated into another product). At all times the goods remain the property of the supplier until paid for in full
  • Detail delivery times. While a customer may want to make time a condition of the contract, often deliveries can take place later than anticipated. It is important for suppliers to have a specific clause to counter this stop a customer withholding payment for this reason
  • A mediation clause to cover disputes that may arise, and a jurisdiction clause so that English law and courts are used to ensure swift recovery
  • Customer disputes must be be notified within 14 days of invoice date so that if a dispute arises at a later date, and it’s spurious, a credit controller can point to the fact that complaints or problems - unless they are not obvious - should have been pointed out much earlier

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