Debt recovery in a fragile market: How to maximise recovery and minimise write-offs

The collapse and liquidation of construction and engineering giant Forge Group, the latest of several large-scale companies to crumble, is an important reminder that creditors need to be diligent in their dealings with debtors and put in place systems that ensure maximum recovery of debts and avoid write-offs.

Unsecured creditors of the Forge Group are currently waiting in a very long line to see if any funds will be realised and distributed after the monies owing to secured creditors are satisfied.

This is going to be a very long process and the likelihood of repayment is uncertain.

Inevitably for companies in this situation, the process of debt recovery is a distracting exercise which diverts time and resources away from core business activities, not to mention playing havoc with cash flow.

There are some practical ways, however, to ensure creditors can maximise recovery of their debts and avoid write-offs:

1. Entering into the relationship

The initial formation of the relationship is, without doubt, where many problems arise in relation to debtors. If you don’t get this stage right, you give your debtors a potential “escape route”. Good clients, contracts and systems are the key to effective debt recovery and getting the details of the relationship accurate at the outset is important to minimise or alleviate the risk of bad debtors. Who are you contracting with? This is the first question you should ask yourself when entering into a new business relationship.

The question, while it may seem simple, is sometimes not so straightforward.

Here are some other questions you may want to ask yourself:

• Is my business contracting with an individual or company? This impacts on the certainty of enforcement, as different enforcement options apply depending upon whether the debtor is an individual or company. It is important to correctly identify the party to the contract.
• Is the individual or company a trustee of a trust? If so, your contract should make that clear.
• If this is my first dealing with this individual/business, can I request references from other companies who have conducted business with this person/business? For example, can I ask for the contact details of two other business associates for a reference check?

Once you have determined the correct identity and status of the debtor, it is advisable to undergo a process of confirming the debtor’s solvency prior to reaching final agreement on the relationship. If the debtor is an individual, you can conduct a national bankruptcy search.

Citec Confirm is a useful product in this regard. Citec is an online database which provides real-time information regarding personal bankruptcy records. For a small fee (approximately $25), you are able to conduct a search against the individual in question to ensure that he or she is not an undischarged bankrupt.

If the debtor is a company, you can perform a company search on the Australian Securities and Investments Commission website free of charge. However, this does not return significant amounts of information. Preferably, you should conduct a Company Search via ASIC or Citec Confirm for a small fee, as you will obtain a much more comprehensive look at the company’s position. You can also undertake a free search on the ASIC Insolvency Notices website, which serves as a comprehensive notice board of company affairs in relation to insolvency (i.e. winding-up applications and deregistration).

Further, Dun & Bradstreet and Veda Applied Intelligence are both credit reporting agencies which will provide you with information regarding the credit status of both individuals and businesses.

These searches are easy to conduct, relatively inexpensive and can provide you with important information that may inform your decision to establish a business relationship with an individual or company and, moreover, potentially save you the time and energy associated with chasing unpaid bills in the long run. Can you provide proof of the agreed terms and conditions? When you are negotiating the terms of a business relationship ensure that you are being very clear about what the terms actually are.

There are some questions you may want to ask yourself in this process:

• What are the goods and/or services being provided? Are they properly defined in the contract?
• How much is being charged for these goods and/or services? When is payment due – at the end of the project, periodically or at completed stages? Is a deposit required?
• What are the parties’ rights (e.g. termination rights) in the event of non-payment?

After these matters have been considered in detail, reduce it to writing. This does not necessarily need to be a formal, lengthy document, but the terms of the agreement (in some detail) need to be documented.

If you have standard terms of contract or a template contract document that you use, have a system in place to retain signed copies of these documents. If you don’t have standard terms of contract, you might consider sending an email to your customer confirming your understanding of the agreement and request that they confirm by an email in response that the terms as outlined in your email are agreed.

Not documenting the terms of the agreement can lead to a ‘he said, she said’ situation which may cause difficulties in debt recovery. Narrowing the ‘escape route’ by creating a paper trail significantly minimises the potential of a bad debt. Accordingly, consider whether you have a central place where copies of emails, invoices and file notes of conversations are stored.

Protect yourself even further by considering the following options as additional ways of safeguarding your business:

• Can you request full payment or at least a deposit upfront?
• Can the payment be separated into stages with part-payment to be made upon completion of various stages?
• Can you request a personal guarantee (i.e. has a director of the debtor company personally guaranteed the debt or some other valuable consideration)?

Also, don’t forget that security interests over personal property should be registered on the Personal Property Securities Register.

2. Managing the relationship

Managing your business relationships involves keeping the lines of communication open with your customers or clients.

Here are some simple techniques that can be employed to ensure that your client feels in the loop and their needs are front of mind:

• Provide your customer or client with regular updates about the project or the provision of goods and/or services and keeping communication open;
• Regularly check to see if you are within budget and promptly notifying the customer/client if you are going to go over budget; and
• Get feedback on the goods and services you have provided so as to try and identify any complaints as soon as possible.

The benefits of employing those methods are, firstly, increased likelihood of payment because the client is not surprised by the bill and is aware of exactly what work has been done in relation to that bill. Secondly, even if there is a discrepancy or dispute about a bill you have issued, as you have already established a business relationship based on open communication, it is much more likely that you will be able to discuss the issue and come to a resolution.

3. Seamless recovery/payment

Be prompt, prompt, prompt! Be sure to promptly bill upon completion of work. Customers and clients are always more willing to pay upon the completion of a project or the delivery of goods or services as they are familiar with what you’ve done for them. Conversely, they are more likely to dispute a bill that arrives well after the work has been completed and they have forgotten what a great job you did.

Also, consider whether you should implement a ‘debtor timeline system’. That is, processes whereby, for example, if a bill is overdue by three days, you call the debtor, then at the seven day mark, you make another phone call and re-post the bill, etc. You need to be diligent, and the debtor needs to be aware that you are not just going to “forget about it”.

Abbey Richards is a lawyer at Holding Redlich.