Be Prepared - The Secret to

Successful Debt Recovery

By Bruce Patane, Principal, Patane Lawyers

 

“If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours” John Maynard Keynes.

You have issued your customer with multiple letters of demand and they still insist on not paying. So what can you do? There are three essential components of successful debt recovery to keep in mind when faced with an unpaid invoice.

1. Correct documentation

It is important to remember that the most important stage of debt recovery is when you open the account, and having good credit documentation in place from the beginning will always put you in the best position to recover a debt.

Firstly you will need a credit agreement, which is essentially a contract between the parties that sets out the agreed terms, and every good credit agreement and guarantee should have a charging clause. This clause will elevate you to secured creditor status with respect to any land owned by the customer or a guarantor. It will entitle you to caveat land so that any payments received from the sale or refinance of the charged land will be paid to you as a secured creditor in order of priority. This priority is usually determined by the date the document was signed, and a secured creditor you will also avoid any preference payments if your customer or guarantor is bankrupt or gets wound up.

2. Risk Management plans

• A good credit agreement should always be supported by a well drafted guarantee, which diversifies your risk, making the guarantor liable for the principal debtor’s obligations. Directors who refuse to give guarantees should be treated with care and you may need to consider alternative risk management strategies if this situation arises.
• If your exposure is significant, you should give serious consideration to a mortgage or a bank guarantee being placed over an asset to secure the trading relationship and give you extra peace of mind. In many instances a supplier could extend an amount of credit that would far exceed bank loans but as we all know the documentation required by banks relies on significant security, so this may not always be an option.
• Take the time to assess the credit application and information you have and use the credit documentation to do further searches to confirm exactly who you are dealing with. Make sure not to leave it to the point where the first time that you realise that the individual you have been trading with is in fact a company, is when you are chasing a debt. Also, confirm that your debtor and any guarantors have assets to support any judgment that you may obtain. Information is key, so try to get as much of it as possible. For example, if you retained details of the debtor’s bank account, a garnishee order may be issued against that account.
• Keep internal processes in good order, including how orders are recorded, invoices are generated, and payments are recorded. It’s also imperative to keep track of how complaints are lodged, credit conversations are recorded and deliveries proven. When a debt is pursued by legal means, your success will depend on how you prove each element of your claim, so good procedures and records will definitely improve your prospect of success.

3. A good debt recovery team

There are two tiers to a good team, your internal team and also the external resources that you rely upon.

The external resources can only do so much with the credit documentation and the risk analysis that has been undertaken by your own team, so having the right credit documentation is a crucial part of that process.

Patane Lawyers are specialist debt recovery lawyers and can assist your internal credit team by preparing credit agreements and guarantees. This will put you in the best possible position to ensure you have high prospect of a successful recovery. Good credit documentation will have a charging clause, deal with disputes and protect you in retention of title situations and much more.

Patane Lawyers have developed credit documentation that will place you in the best position to deal with the changing trends in credit and doing business with customers.

One of the most significant changes to be experienced by every credit manager and trade supplier will occur with the introduction of the Personal Properties Securities Act 2009 which is expected to be in full force by May 2011.

This scheme will set up a system of registering your security if you have an interest in personal property, which is property other than land and includes tangibles such as goods, crops and livestock and intangibles such as licenses, investment instruments, negotiable instruments and accounts.

Registering your security will include retention of titles, which you will only be able to rely upon if you register that interest. It is no longer going to be sufficient to have a clause in your credit agreement setting out your rights, so you will need to do more at the time of opening the account.

Again, Patane Lawyers can assist in ensuring that your credit documentation sits within the new legislation and also ensure that your rights are protected by registration.

The secret to good debt recovery doesn’t start when you are recovering the debt; it starts when you open the account.

David Huey, Managing Director, Atradius Australia & New Zealand, recognises the need for mutual and pre-emptive action to ensure that we are in the strongest possible position to manage risk and mitigate losses.

Patane Lawyers will provide a discounted rate to Atradius customers in Australia and New Zealand for updating their credit application and Atradius will reimburse A$100 or $NZ100 of the total cost. This offer is valid until 31July 2010.

For further information, please contact Bruce Patane on 1300 889 942 or your Atradius Account Manager.