When I commenced acting for several large commercial firms some 25 years ago, I used to send letters of demand to wayward debtors and I would receive a petrified response from a credit controller or a senior financial manager advising me that payment would be made the next day. How times have changed! Unfortunately letters of demand sent by credit departments and by attorneys count for nothing these days and the need to develop drastic measures to collect outstanding debts has become the order of the day.
The object of this article is to enlighten persons in the field of credit, particularly in your field, on effective means of collecting debts.
The “friendly” attorney’s approach
1. The first and friendliest way of collecting debts once they are handed over to an attorney, is obviously for the attorney’s secretary to make a call on the debtor in the hope that the call may elicit a payment. Sadly, most of these calls elicit a promise which is rarely forthcoming and so one has to proceed to the next step in an attempt to collect the outstandings.
2. Obviously, the next step is to issue a summons. The problem that I find with issuing summons is that there are many creative attorneys who will find some technical point to delay payment. The attorney will defend the matter on some technical or creative point which, notwithstanding the fact that the money is owed, will merely delay payment for a year or two. This is the time that matters take to come to court, a year being approximately the time it takes for the matter to be heard in the Magistrate’s and Regional Court and two to three years in the High Court. Horror of horrors! I have known of certain instances where companies have closed down in the interim and the debt is written off. Alternatively, where the delaying tactic has worked and the company sued has been liquidated. And what about the costs to carry on the litigation?
3. Many financial advisors and credit controllers of large companies have complained to me that they are sick and tired of attorneys rendering accounts for postages and petties and correspondence on a never-ending basis while the account remains unpaid and the only entity benefiting is the debtor who has successfully warded-off another action. The upshot, sometimes, is that on account of the fact that costs become so exorbitant, the debt is written off, and quite rightly, the attorney is told to “close his file”. The appetite for recovering the debt has been lost as a result of the endless costs that have to be paid to the instructing attorney.
Ivan the “Terrible’s” Way of Collecting Debt over R50 000.00
Liquidation of the Company/Close Corporation
4. My suggested way, is a liquidation of the Company/Close Corporation. This is the procedure to adopt if the following is in order. I would add that in any case, before a matter is handed over to an attorney, the following requirements need to be adhered to, namely that:
(a) the paperwork is in order, i.e. proper proof of delivery, etc;
(b) all genuine queries relating to the account have been resolved – there must be no room for the debtor to manoeuvre out of paying the debt;
(c) detailed notes of conversations with the credit department of the debtor as to why payment is not being made. I will return to this aspect hereunder.
(d) there is a willingness on behalf of the management of the company that the settlement of the debt is more important than retaining the customer.
5. To revert to point (c), a company or close corporation may be liquidated if it can be shown that it is unable to pay its debts. I have no doubt that this is the most effective way of collecting debts over R50 000.00.
Inability to pay debts
6. A company or close corporation is deemed unable to pay its debts if after a letter of demand has been sent to the registered office of the company or close corporation, demanding payment of the debt, (which letter must be served by the sheriff) and more than 21 days has elapsed from date that the letter has been sent and no payment or response has been received.
7. A company is also deemed unable to pay its debts if there is a written or oral admission by a representative of the finance credit department of the debtor that the company is unable to pay, because it has cash-flow problems.
8. It is absolutely imperative to set up a company/close corporation for a liquidation, if one obtains an admission such as “we cannot pay our debts because we are awaiting a payment of a large sum of money from the SABC” or “we cannot pay our debt to you because ‘nobody is paying us’”, or “we cannot pay our debt to you because ‘business is bad and our directors are trying to obtain finance from a bank or a third party’”. These are telltale signs of an inability to pay.
9. From a practical point of view, the credit controller should note these responses and confirm in writing to the debtor customer, the contents of the telephone call, e.g. “I confirm that I telephoned you on 6 October 2012, demanding payment of the sum of R100 000.00. During the course of the discussion you advised me that you could not pay the debt as you were also owed substantial amounts of money by your customers who were just not paying. I confirm further that there has never been a dispute relating to any of the orders placed but you merely are short of funds”.
10. Both the scenarios under 8 and 9 are the beginnings of successful liquidation applications. Bear in mind that one cannot liquidate a company or a close corporation if there is a genuine dispute about the amount owed. So, for instance, if and as often happens, there is a dispute about short delivery or credit notes not having been passed, or other substantial defences, one cannot liquidate. One then has to issue summons.
11. Assuming no disputes, and assuming you are armed with the debtor’s inability to pay, one then can liquidate.
The advantage of a liquidation
i. Cost Effective
12. I have found that if one can agree a fee with one’s client so that the attorney does not have to render countless accounts and the client does not know what the costs ultimately would be, this can be cost effective to all parties. Invariably, one can collect the costs from the debtor, or most of the costs, because the debtor is too terrified not to pay under the sword of threatened liquidation.
ii. Timing – the “First-Come, First-Served” principle
13. In today’s recessionary climate, it is first-come, first-served. So those companies who go on and on phoning without doing anything proactive from a legal point of view, are often the persons who will end up completing long winded claim forms when the company has been placed into liquidation and a meagre dividend of one cent in the rand is received years later.
14. I cannot be prescriptive as to when a credit controller needs to hand over a debt, but I know of many instances where because the company is scared of spending company’s money on legal fees, debts are handed over too late and the result is the “one cent in the rand” return.
iii. The Shock-Effect of a Liquidation Application
15. As I have said before, one has to balance the fact that you may not do business with a customer again, as opposed to “insulting” the customer by serving a liquidation application.
16. I have found from experience, that in the main, companies served with liquidation applications, find the money to pay as it is costly to oppose the application and file affidavits when, in most cases, there is no defence.
17. In a liquidation application, the technical defences referred to when one issues summons, are minimised so that one normally gets paid as opposed to waiting years for payment.
18. The prospect of the business being closed down, which is the effect of a liquidation order, outweighs all other considerations.
iv. The re-structuring of securities
19. A final advantage of a liquidation is that sureties that are out of date, i.e. where there are new directors, can be re-signed, or, in the case where there are no sureties, these can be obtained in the event of the company/close corporation wishing to make payment of the debt in instalments.
20. I honestly believe that in today’s times, careful consideration should be given to the liquidation process to collect debts.
Ivan Zartz Attorneys
2nd Floor, Palm Grove
Houghton Estate Office Park
2 Osborn Road
P.O. Box 9600, JOHANNESBURG 2000
Docex 696, Johannesburg 2000
Tel: +27 11 483-2741
Fax: +27 11 483-2033
Cell No.. 082-572-7320