Credit control: cash course

In these volatile markets, securing prompt payment for your business becomes ever more important. How best can the finance function safeguard cashflow, even when customers refuse to pay on time or themselves go bust?

There are essentially two aspects to getting paid, getting everything right contractually when the deal is signed, and using the law to help you in the event of a dispute. Rather than leaving it to your legal department, however, the finance function should ensure everything is in place to facilitate payment before any customer becomes a bad debtor.

A good starting point is to include standard terms and conditions within every invoice. An easy way to stop any dispute over whose T&Cs apply, is to ensure that you, as the seller, include a clause to the effect that yours apply exclusively to the contract and to all quotations and orders accepted. You should also include a clause specifying that under no circumstances will any terms introduced by the customer take priority over your T&Cs or change them unless agreed in writing by both parties.

Price is the vital aspect of any contract and as a minimum you should specify whether the price is exclusive of packaging, insurance, carriage and unloading of the goods if delivered off-site and whether the price is VAT inclusive or exclusive. You need to specify when and how payment is to be made. Making everything clear up front will help avoid dispute when it comes to payment.

Late payment does not entitle you to terminate your contract unless you include a clause specifically stating that the time of payment for the goods or services is ‘of the essence’. Apart from offering discounts and payment in installments as a means of encouraging prompt payment, you should also include a provision that in the event that payment is late, the customer agrees to pay interest on the amount outstanding. The rate of interest should not be excessive, otherwise there is a risk that it may be held by the courts to consti tute a penalty and therefore unenforceable.

Ensure there is nothing missing from the terms that could make them unenforceable by a court. For example, it is crucial to stipulate that the T &Cs are governed by English law when contracting with foreign entities, especially those within the EU (although this could be overridden by some countries).

Where there is a contract for the sale of specified goods, you can retain the right to ownership until payment is received, provided that you and your customer have agreed to this and it is stated in your terms. This will give you a form of security against your customer’s default or insolvency. To be valid, a retention of title clause must be incorporated in your terms and must exist at the time of supply. For a retention of title clause to work, your goods must also remain clearly identifiable from those of your customer. You can then recover your goods even if those goods have been manufactured or incorporated into some other property, provided that your goods are still identifiable in their original form.

If your best efforts still fail to ensure payment, what are your options? First you need to work out who the defendant would be in any court case and whether they are ‘good for the money’. The last thing you want is to incur the cost of bringing proceedings only to discover that the defendant has no assets from which to pay the original debt let alone the additional costs incurred.

First check with Companies House whether your company debtor is still active. There may be tell-tale signs of difficulty such as a note that it has filed its accounts late or a significant decrease in its turnover, profitability or change in its debt position etc. A bankruptcy search can also determine whether any insolvency proceedings are already under way.

With larger claims it is often worth employing an enquiry agent to establish the extent of the defendant’s assets or their location. It may also be useful to consider any information that might help tactically. For example, is the debtor media-sensitive or would any prospective litigation scupper plans they have to sell their business or merge with another company?

Option one is to sue for the debt, and obtain a judgment. If the debt is still not settled after the claim is issued, you can proceed to enforce that judgment.

If there is evidence that the debtor is trying to dissipate the assets against which you might be able to enforce a judgment, you can apply for an injunction freezing their assets. Option two is to issue a petition to apply for a bankruptcy or winding up order against the debtor.

Whatever you decide to do, it is prudent to get your solicitor to write a detailed ‘letter of claim’ setting out how the debt arises and enclosing any documents relied on in support. You should check that those responsible are keeping good records of the contract, the terms of business that apply, the invoice and correspondence throughout. This lets the customer raise any reasons they may have for non payment and lets you assess the risks and likely costs in proceeding with court action. Often a letter of claim from solicitors can be surprisingly effective in prompting payment.

If you get a judgment against the debtors but they fail or refuse to pay, there are various methods to enforce the judgment, such as freezing their bank account or forcing the sale of their own goods to service the debt.

A solicitor can advise you on the best route to take depending on the knowledge you already have of the debtor’s own financial position. Trying to enforce the judgment generally has a better result for the creditor than insolvency as you do not have to share the proceeds with other creditors.

Andrew Whittaker and Emma Box are partners at law firm Gordon Dadds