Dealing with Bad Debtors

The best way to deal with bad debtors is to implement standard form contracts and debtor management procedures within your business to actively reduce or eliminate them in future.

The best way to deal with bad debtors is to implement standard form contracts and debtor management procedures within your business to actively reduce or eliminate them in future.

A contract will exist when your business agrees to perform works or supply goods for reward regardless of whether the contract is in writing. The adoption of standard from business contracting documents including tailored Terms & Conditions of Trade and the incorporation of your Terms & Conditions of Trade into the negotiation and acceptance stage of a contract by the use of those contracting documents will help reduce the consequences of dealing with bad debtors and improve cash flow.

Know Who You are Dealing With

When negotiating a contract the most important thing to know and appreciate is who you are contracting with. If you are contracting with a business you should know if the business is a sole trader, partnership or a company and ensure that you record their correct company name or partners’ names, ABN and the location of their principal place of business (not only a PO Box address).

Get Personal Guarantees from Company Directors

Your business may have difficulty recovering a debt from an insolvent company even if the director who you dealt with has sufficient resources to pay the debt personally. Directors’ guarantees can be easily included in a contract by the use of standard terms and conditions and signed Acceptance pages. If your business implements a policy that all contracts with unfamiliar companies must be guaranteed by a director you will save considerable time and expense and reduce write-offs if you are able to recover the debt from a guarantor, especially if the company is insolvent.

Partners are Jointly Liable for Partnership Debts

If you have contracted with a partnership, there may be other partners of whom you were not initially aware, who will be jointly liable for the debt even if the partner that your business dealt with is insolvent or bankrupt.

When can you recover Debt Collection Costs and Interest

Apart from losses due to write-offs, the most obvious consequences of bad debtors are the opportunity cost of utilising the money owing in the conduct of your business, including by receiving interest, and the usually unrecoverable cost of taking pre-Court recovery action. Generally, debt collection costs and interest can not be recovered without a Court order. That is, however, unless you business uses standard contracts to incorporate Terms & Conditions of Trade that create contractual rights to payment of debt collection costs and interest an agreed rate. Standard form contracts are easy to implement. Check out our Guide to Making Effective Business Contracts to get started.

Be Willing to Compromise or Go Legal

Many businesses waste valuable time chasing debtors on the telephone and sending letters that get ignored. The time and money spent dealing with bad debtors are valuable resources of your business. When dealing with bad debtors you should, therefore, be prepared to compromise the debt in order to receive payment quickly (and avoid costs associated with Court proceedings) and/or refer the matter to a professional in the event of a dispute or once it is clear that payment will not be forthcoming.

Make Payment Agreements not payment arrangements

Where the debtor is unable to pay the debt in full immediately, the negotiation of an instalment plan and the execution of an appropriate Payment Deed can eliminate any potential for the debtor to subsequently raise a dispute and may include additional guarantees or security to ensure that payment will be recoverable in the event of a default or the insolvency of the debtor.

Take Away

You are better off spending your time running your business than dealing with bad debtors or being involved in Court proceedings. These approaches can save your business thousands of dollars in legal fees as well as the time and headaches involved in Court proceedings.
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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.

Managing Director
Accredited Specialist (Commercial Litigation)