Making the most of a bad (debt) situation

The statistics issued by the Insolvency Services for the second quarter of the year highlighted another fall in the number of formal company insolvencies, down 4.2% on the three months to March and continuing the declining trend since 2012.

But the statistics sadly aren’t all ‘rosy’; the report also found that one in every 239 companies trading in the UK entered into liquidation during the 12 months to June 2016.

When you consider the possible implications of this, it is an unsettling thought, particularly if one of your key customers (and one who owes you money) turns out to be the one entering liquidation.

So how do you handle the thorny issue of a bad debt in your business? Every business wants to protect the great relationships it has built with its customers, but there will inevitably come a time when the decision needs to be made to not  extend credit any further. Here’s our guide to making sure your business is protected from the potential damage that a bad debtor can bring 

1. Get tough on the bad payers

It is a common misconception that you need to issue a statutory demand and give 21 days to invoke the threat of a Winding Up Petition for a bad payer. If the debt is not disputed, failure to pay within seven days can be all the grounds you need to move straight to the threat of a Winding Up Petition. This can be a very powerful tool to encourage your bad debtors to pay!

2. Take back stock

Retention of Title, also referred to as ‘Reservation of Title’ or ‘ROT’, is a contractual provision which seeks to reserve title in goods delivered to a customer until payment has been received. If you have delivered goods to one of your customers under these terms and their payment is long overdue, you can recover your goods up to the value of the outstanding debt. Review the content and clauses of the agreements with your customers to make sure your ROT terms and practice are robust and that you are protected should this situation arise.

3. Claim back VAT on sales invoices

As a VAT registered business, it is likely that you will already have accounted to HMRC for the output VAT on the sale of goods or services provided, prior to a bad debt crystallising. You can recover the VAT paid when the debt is six months old and written off within your accounts.

4. Influence the insolvency process

If you do become a creditor within a formal insolvency process, remember that there have been recent changes made to the insolvency legislation which encourage creditor engagement in formal insolvency processes, giving you certain powers to influence proceedings. Under the new rules, you can now;

  • attend creditors’ meetings to ask questions of the directors and/or the insolvency practitioner, or appoint a professional advisor to do so on your behalf;
  • highlight concerns about conduct of directors and transactions that the office holder should investigate, and
  • vote to influence the appointment of a particular insolvency practitioner and the basis upon which they will be paid in the insolvency process.

5. Make sure you submit a claim

After the VAT bad debt relief and RT claims have been made, any remaining liability will form an unsecured claim within an insolvent estate. Make sure you submit a claim (an alarming number of creditors don’t). It is a straightforward process which involves completing a simple form and which generally only needs to be done once. If funds are available for a distribution, all creditors will take a proportionate share. 

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