Debt recovery health check for your business

It is a sensible time for business owners to be taking proactive steps to protect themselves and their business as much as possible. This article provides some points to consider how protected, or exposed your business is and undertake a debt recovery health check.

Too often businesses take stock of their debtor position when it might already be too late - for example, when a debtor company has had receivers or liquidators appointed. Our insolvency and dispute resolution teams are not just an ambulance at the bottom of the cliff, we are here to assist you early on, to ensuring that you have the best measures in place to protect yourself in the case of unpaid accounts.

Some key areas for you to consider are:

Terms of trade

Your terms of trade are a contract between you and your customers/debtors. To best protect yourself should you not get paid, you should ensure that your terms of trade are clear and comprehensive. At a minimum, they should include the following:

• What happens if someone does not pay you on time, or at all;

• That you retain ownership of any goods that you supply on credit until they are paid for in full;

• Your ability to register against the debtor on the Personal Property Securities Register (further details below);

• Your ability to charge interest and debt collection costs so that you are not left out of pocket pursuing payments due to you; and

• A personal guarantee from director(s) of the debtor company.

Personal Guarantees

Many companies are reluctant to ask new company customers to give a personal guarantee while trying to build a new relationship or grow an existing contract. However, if things do go wrong, having this additional option for recovery and enforcement (including obtaining judgment against a director personally and proceeding with bankruptcy) will strengthen your position and increase the chances of recovery.

PPSR registration

The Personal Property Securities Register (PPSR) is an electronic register where financing statements are registered by creditors to notify other parties of their interest in goods supplied to a customer on credit. Anyone in New Zealand supplying goods on credit should consider registering their interest in these goods on the PPSR. If a company you are trading with goes into liquidation or receivership, it is ultimately the PPSR that establishes priority and whether you will recover any goods supplied or money owed. Prompt and accurate registration is critical to protecting your position, particularly ensuring the registration is against the correct legal entity, all details are spelt correctly and any serial- numbered goods details are accurately recorded.

Pursuing payment of overdue accounts

Prompt action is always best when pursuing overdue accounts. Do not let them sit on your books.

When negotiating with a debtor and potentially agreeing to settlement or payment plan terms, be careful not to prejudice your position by agreeing to a settlement or part payment which may later affect your ability to pursue the debt if the debtor defaults on their agreement with you.

Take advice early on

There is a range of options available to pursue outstanding accounts. These include:

1. A letter of demand

These letters are a demand for payment which shows that you are serious about collecting the debt due to you. These are often a cost effective first step in debt recovery.

2. Statutory demand

A statutory demand is a legal notice served under the Companies Act 1993. It can only be served on a company where a debt is greater than $1,000, and where no genuine dispute has been raised by the debtor regarding the debt.

Service of the statutory demand (usually on the company’s registered office) gives the debtor company 15 working days to pay you the sum demanded, otherwise you can apply to the High Court to put them into liquidation.

3. Negotiations/settlement agreements

On a without prejudice basis you may be able to negotiate new payment terms or payment over time and could consider whether there is further security you could obtain for the debt as part of this process (if any is available).

4. Other dispute resolution options

If a dispute has been raised regarding an invoice, general debt recovery proceedings can be filed in the District Court, or if the debt is less than $30,000 your claim may be eligible for the Disputes Tribunal. Whilst lawyers cannot appear in the Disputes Tribunal, we regularly assist clients in preparing their applications and for the hearing.

Alternative options such as mediation or arbitration can be considered and written into your business’s terms and conditions.