How to avoid bad debtors

Kapi-Mana News - - OPINION/ NEWS -

Basks what hap­pens if she is paid a debt and the debtor com­pany then goes into liq­ui­da­tion.

A liq­uida­tor’s job is to ob­tain all avail­able funds to share on an equal ba­sis with all cred­i­tors af­ter pay­ment of any se­cured or pre­ferred cred­i­tors.

If the liq­uida­tor con­sid­ers that pay­ment to a cred­i­tor has given them a pref­er­ence over other cred­i­tors, the liq­uida­tor may file a no­tice within two years of the liq­ui­da­tion to have the pay­ment set aside, and re­quire the re­turn of the funds that were paid to the cred­i­tor.

The rules specif­i­cally pro­vide that to con­sti­tute a void­able pref­er­ence claim, the trans­ac­tion must meet all of the fol­low­ing:

Pay­ment must have been within two years be­fore the be­gin­ning of the liq­ui­da­tion.

It must be made by a com­pany un­able to pay its due debts.

It must have en­abled the cred­i­tor to re­ceive more to­wards the sat­is­fac­tion of a debt than they would have other­wise re­ceived in a liq­ui­da­tion.

Liq­uida­tors must is­sue court pro­ceed­ings as long as the cred­i­tor ob­jects in writ­ing to the liq­uida­tor’s no­tice within 20 work­ing days.

Pre­vi­ously the liq­uida­tor could is­sue a no­tice and the cred­i­tor was re­quired to start court ac­tion if it dis­agreed with the no­tice.

Gen­er­ally dif­fi­cul­ties with proof and cost mean liq­uida­tors will only worry about large pay­ments within the last six months.

If you had due debts paid within six months of the liq­ui­da­tion, the onus is on you to prove you don’t have to give it back.

Be­yond six months the bur­den of proof is on the liq­uida­tor. The prob­lem for cred­i­tors is how to avoid claw­back when you know that your cus­tomer is in trou­ble.

It is hard to say you didn’t know they were in trou­ble when you only got paid as a re­sult of stop­ping credit or send­ing the debt for re­cov­ery ac­tion.

To pre­vent a claw­back the cred­i­tor must be able to show that it: Acted in good faith. Could not rea­son­ably have sus­pected that the com­pany was or would be­come in­sol­vent.

Gave value for the property or al­tered its po­si­tion in the rea­son­able be­lief that the trans­ac­tion would not be set aside.

It ap­pears that ig­no­rance of the debtor’s per­ilous po­si­tion will pro­vide a de­fence, but this flies in the face of good credit man­age­ment.

My ad­vice to businesses pro­vid­ing goods on credit is:

Have terms of trade in writ­ing and make sure all cus­tomers have a copy.

Send out state­ments to all cus­tomers who owe you money each month.

Look for a clean credit his­tory and a demon­strated abil­ity to pay.

It is worth­while ‘‘screen­ing’’ new cus­tomers to make sure they can pay.

Do not be a vic­tim of those un­re­li­able, late- pay­ing cus­tomers who of­ten shop around for an easy tar­get in hard times.

Re­mem­ber the old adage: ‘‘ If it seems too good to be true, it prob­a­bly is.’’

Un­der­take dili­gent and reg­u­lar book­keep­ing.

Cus­tomers who do not set­tle their ac­count within the agreed pay­ment terms must be closely mon­i­tored to avoid the debt be­com­ing se­ri­ously over­due.

Don’t de­lay. Make the time to call and ask for pay­ment.

Just be­cause the banks will not lend money to the debtor doesn’t mean that you should start be­ing your cus­tomers’ bank. Re­mem­ber that banks re­quire in­ter­est as well as pay­ment on time.

In tough eco­nomic times busi­ness will be com­pet­ing for a limited amount of cash.

That means many clients who usu­ally pay on time are likely to find it harder to con­tinue do­ing so.

Your debtors could stretch out be­yond the num­ber of days you cur­rently tol­er­ate, putting ex­tra pres­sure on your cash flows.

To com­bat that, your busi­ness must be par­tic­u­larly dili­gent about man­ag­ing cash.

The quicker you act the more likely you are to get paid and the less likely the liq­uida­tor will be able to prove you knew the debtor was un­able to pay its debts.

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