credit managment policy

Legal affairs

 

Major priorities during this crisis…limit all the operational expenses and decrease our working capital as much as we can. We are currently facing a major financial issue and with regard to this particular period it will become essential for us to find solutions and struggle to survive on the market.

Top priority:

Collecting bad debts
whether to pursue a bad debt or not is a delicate commercial balancing act. As commercial debt grows in US and Eastern Europe, so should business owners’ awareness about bad debt preventive measures, as well as an understanding of effective collection processes.

Preventive measures
Keeping extensive, accurate documentation of transactions is a critical commercial practice. These documents not only provide clear initial notice of non-payment, but also strengthen any subsequent claims made against a debtor whether as evidence in court proceedings or just as supporting documentation to a letter of demand. In the frame of my legal mission it is easy for me to advice my credit manager to get this reflex. Since four years, we have made deep progress on that point and we have fix some process that help us to get a clean documentation in order to bring a case into a court. That was the case with our Spanish distributor, and we are facing once again this issue with a major police electronic devices supplier.

Early warnings

The following actions of the customer are often warning signs to a business that a bad debt is looming:

• Failure to return phone calls and correspondence;
• delaying tactics such as breaking promises to pay;
• disputing specifications only well after the invoice becomes due; and
• claiming financial difficulties without specifics.

Collection agencies
Once a creditor has exhausted their lines of communication with a debtor, a collection agency may be engaged on their behalf who will generally work to collect the debt on contingent fee basis for a percentage (often 50 per cent) of monies recovered. However, a large number of debtors will not respond to a collection agency.

The legal route… My way.

When a collections agency cannot persuade a debtor to pay, it may be time for me to consult my lawyer’s network and find the right one who will analyze the pros and cons of filing a writ in Court or a notice of claim (small claims) court (for claims under 5,000€.) excluding interest and court costs. In this particular topic, a specific EC regulation has come in force since January 2009 that will help to collect easily our cash back.

The small claims court system has settlement opportunities, including mandatory Settlement before trial. These can be used to resolve claims much more quickly than Court procedures.

A creditor with a claim resting on the 25,000€ threshold may want to consider waiving (or giving up) its incremental amount over 25,000 € in order to file in short court procedure and take advantage of t

he more cost-effective and efficient procedures.

Pre-judgment
In both levels of court, there are pre-judgment remedies that may leverage a debtor into paying before reaching the lengthy and costly trial procedure. These include: Pre-judgment garnishing order:

1. A garnishing order from the court allows a creditor to collect money owing to the debtor directly from a person (the ‘garnishee’) who owes money to the debtor.
2. Preservation of property: A creditor’s lawyer may apply for the detention, custody or preservation of property. Aside from securing the amount in dispute, this tactic may force a debtor into settlement discussions. The Rules of Court also allow for the appointment of a receiver to recover payment of debts from the debtor’s assets in certain circumstances.
3. Default and summary judgments: Once a claim is filed and served on the debtor, the debtor has a finite amount of time within which they must file a response. If there is no response by this de
adline, the creditor may apply for default judgment against the debtor. Other pre-judgment securities: If there is concern about the debtor having significant assets that may be disp
4. osed of, or taken out of the jurisdiction prior to judgment, interim orders can be obtained upon application to the court to prevent this. These options should be explored at the initial stages of deciding whether to file suit.

Going to trial

While the judgment of a court is a weapon against a debtor, it can often be a blunt weapon. There are a number of reasons that a creditor may wish to resolve its collection matter before reaching trial, including the following:

• Diversion of time and resources of the creditor towards a court proceeding rather than the creditor’s daily business affairs;
• lengthy delays before the matter is resolved;
• no guarantee of outcome;
• further delays before the debt is recovered after jud

gment; delays caused by debtor relying on bankruptcy provisions to avoid payment; and limited recoverability of the judgment debts.
Mindful of these potential difficulties, the best measures are preventive, but when collectors fail, it is time to call in legal team of creditor’s lawyer; they will assess whether going to trial is the most appropriate course of action.

The good news is that a court judgment will permit a creditor to enforce both pre- and post- judgment interest on the outstanding debt.

Getting paid

While obtaining a judgment does not guarantee payment of a debt, the advantage of receiving a court order is that the following enforcement options become available to the creditor once judgment is rendered:

• Debtor examinations;
• Debtor subpoenas;
• Committal for contempt;
• Execution against personal property;
• Execution against real property; and
• Post-judgment garnishment on any monies owed to the judgment debtor, e.g. wages.

Again, these procedures do not guarantee payment, but can exert significant pressures on the judgment debtor.

Statutory limits
A creditor must be aware that it only has six years from the date of the debt in which to bring an action in court against the debtor in E.C. In determining the date of the debt, it is safest to assume that the limitation period commences from the date that the payment became due as stipulated on the creditor’s invoice.

The unfortunate reality is that rarely will the creditor recover all of the expenses they incur in collecting a debt.

Conclusion for my company

The bottom line is that it is always preferable to manage the accounts receivable to avoid or limit bad debts rather than allowing them to accumulate.

The burden is always on the creditor to prove the agreement and the debt, so there is nothing stronger than an orga

nized system and proper documentation.

Having said that, we will have to clearly manage our current situation in order to avoid  as much as we can these potentiaol additional financial difficulties…