What can I do if my customer refuses to pay?

What can I do if my customer refuses to pay?

Payment of outstanding invoices by your customers should be a slick, user friendly and automated process and should be closely monitored as this is very often the reason behind any business’ ailing cashflow.

Cash is key to any business and nothing is more damaging than when cashflow slows down – with the main culprit being customers, large or small, not paying.

Whilst we are all compassionate to a degree – and we offer an honest broker some extra time to get their account up to date – slow payers and bad debts can have a catastrophic impact on your business and can have a domino effect with problems for you paying wages, suppliers, rent, rates and so on.

Aisling Muldoon from our Restructuring & Insolvency department specialises in working with businesses and individuals facing cashflow pressures. When Aisling meets a business customer who has been hit with bad debt, these are some of the questions she encounters:

1. Is there a reason for non-payment?

Assuming your customer is beyond the payment terms, is there a reason behind their non-payment?

Are goods supplied faulty goods, are there problems with the product, are there “pay when paid” clauses in your terms and conditions of trading and/or contract? Always revert back to your terms and conditions of trading.

But how are you going to know there are any problems if you don’t ask the question as to why invoices remain unpaid. Key advice here is to make contact with your customer, you won’t know if you don’t ask, lift the phone or personally visit the customer and always follow up when you say you will, don’t let the matter drift.

2. How do I know if my customer is having financial problems?

How often do you run credit checks on your customers? Do you do it before you take a customer on board and then periodically?

To keep ahead of the game, it is critical that you know who your customers are, what their payment trends are and if they are coming under any other financial pressures.

In the cases of limited companies, credit searches can be obtained online from a few providers for a small fee. Alternatively, accounts are readily available at Companies House; however these will not detail any unpaid judgements and you need to know what to be looking out for.

Sole traders and partnerships can be more problematic to monitor however you can do online court searches for unpaid judgments and monitor Stubbs Gazette.

Speak to us and we can guide you through the search reports.

3. What happens when my customer enters into an Insolvency Process?

More often than not, the first you will know that a customer has entered into an insolvency process is when notification lands with you from an Insolvency Practitioner appointed to look after their affairs. These notifications should not be overlooked and you should seek your own professional advice.

The most common question asked by a business when their customer “goes bust” is “am I going to get paid?”.

The time it takes to get a payment in an insolvency process can be long, time consuming to chase, and for suppliers, it can be very frustrating. The Insolvency Practitioner (IP) has stepped in to take control of the business and in most cases, there is no means for the IP to make payments towards pre-insolvency debts.

The chances of recovery in such cases can, however, be maximised by implementing some of the steps below:

1. Terms and conditions – As soon as you become aware of a potential or actual insolvency event the first thing reverted to is the terms and conditions of trade. To protect your business it is therefore essential to have a written contract that is properly signed and executed by all relevant parties or at the very least have a standard set of terms and conditions. Within these terms and conditions, you should have the right to terminate a contract should your customer enter into an insolvency process;
2. Rights to claim statutory interest and costs – these should be built into your terms and conditions and a footer put on all invoices. As standard, 8% per annum on top of the Bank of England base rate is acceptable as this is the rate set under the Late Payment of Commercial Debts (Interest) Act 1998. However, this interest is only chargeable up until the date of the insolvency event but should be incorporated to maximise your claim and minimise your loss;
3. Reservation of Title – all trading businesses providing a product should have reservation of title clauses incorporated into their standard terms and conditions of trading and it is good practice to have these acknowledged and signed by the customer at the opening of a trade account. When a business or individual enters into an insolvency process you can exercise your retention of title clauses and proceed, via the Insolvency Practitioner, to recover goods;
4. Right to set off – If your customer enters into an insolvency process the Insolvency Practitioner will seek recovery from you if there was cross trading, even if the customer owes you money. However, if you have incorporated a right to set off within your terms and conditions this allows you set off one sum against the other and therefore limiting any payment you may have to make to the insolvent party;
5. Lodge your claim – you can’t be party to any dividend if you don’t lodge your claim together with copy invoices. When submitting your claim ensure that you have accounted for any statutory interest and any debt recovery costs incurred;
6. Ask the burning question! – in an insolvency process, assets are realised for the benefit of creditors (secured, preferential and unsecured creditors). However, you may have concerns with any trading prior to the insolvency event. Raise these concerns with the Insolvency Practitioner. Was a substantially large order placed immediately prior to insolvency? Are you aware of any assets being transferred out of the customers name recently? Asset transfers can be challenged by the Insolvency Practitioner and in some instances these can be overturned; and
7. Wait and review – getting a payment back in an insolvency process can be slow and, in most cases, substantially reduced but even if there is a chance of a small recoverability then you should review the case annually, keep in touch with the Insolvency Practitioner, their job is ultimately to work for the benefit of you, the unsecured creditor.

Aisling Muldoon is a Licensed Insolvency Practitioner who specialises in Personal Insolvency and Bankruptcy. With more than 15 years’ experience of working with clients in difficult financial situations, Aisling is one of the most skilled advisors and negotiators in the region.  For an initial consultation with Aisling, free of charge, please email Aisling.Muldoon@gildernewandco.com or call 028 8772 4697 to make an appointment.