Debt Recovery: The Importance of Due Diligence

It is difficult to think of examples of businesses that will not, at some time or other, suffer as a result of their invoices being paid late.

So when is the appropriate time for a business to address late or non-payment of invoices?

I certainly do not advocate leaving it until an invoice has become overdue. The principle that prevention is better than cure is very relevant. So should you consider potential late/non-payment when the invoice is issued? What about when you supply the goods or services for which you will then invoice? Perhaps you should consider the possibility of late/non-payment as soon as you have contracted with someone?  

My view is that, for contracts of any significant value, you should always consider whether the person or business that you are entering into a contract with has the means, and is likely, to pay the contractual price on time, before you enter into a contract with them.

The key question that needs to be asked before any others is “who am I contracting with?” Without correctly identifying who you are contracting with, it is of course impossible to assess the creditworthiness of that person/business. It also means that, if your invoice is not paid on time, there can be considerable difficulty in identifying who you have a claim against.

Businesses should be particularly mindful of the possibility of confusing individuals using a sole trading name with partnerships or limited companies and/or the possibility of confusing different companies within the same group.

As a dispute resolution and debt recovery solicitor, I recognise that, for many businesses, I am a distress purchase. I therefore often only receive instructions when a party has an unpaid invoice which they wish to recover i.e. by the time things have gone wrong. If the identity of the contracting parties has never been clearly and unambiguously recorded in the contractual documents (which can often be little more than a written quote and perhaps a few emails), the first exercise that I will always need to carry out is to seek to identify who the contracting parties were. This is not always who the client expects them to be!

Only at that stage can a credit check then be undertaken to see whether or not the debtor is likely to be able to pay the debt, which determines whether litigation is likely to be worthwhile. This is of course not the ideal time to be checking the debtor’s creditworthiness.

Much of this uncertainty can be avoided by correctly identifying from the start who it is that is asking to contract with you. Credit checks can then be carried out, which will enable you to ascertain whether the other party has the means to pay for your goods or services as well as whether they are likely to pay (evidence of outstanding CCJ’s or previous insolvency events should serve as a severe warning). If there are doubts about the creditworthiness of the contracting party, you may, depending on your bargaining power, be able to ask for a more creditworthy third party to guarantee their payment(s).

If, having considered the creditworthiness of your potential customer, you decide to contract with them, it is important that you then accurately record their identity in the contractual documents. Reduce possible ambiguity by avoiding abbreviating their name.  

The above steps should help to reduce incidences of late or non-payment of invoices but, if the worst does happen, they should make it much quicker and easier to take action to recover any outstanding sums and unpaid debts.

Click for more information on Holmes & Hills’ debt recovery and collection service.

Holmes & Hills Solicitors has seven offices across Essex and Suffolk, located in Colchester (Marks Tey), Braintree, Witham, Halstead, Sudbury, Tiptree and Coggeshall.