Other Services   >  Recognising and Dealing with Bad Debts

• Introduction
• The warning signs
• Good money after bad?
• Debt enforcement pre-insolvency
• Petitioning court
• Creditors' meeting:  Creditors' choice
• Should I attend a meeting of creditors?
• During the insolvency
• How can we help?

 

Introduction

Over the last few years insolvency legislation has expanded to cope with modern business life and to provide more choices for businesses with debt problems. Terms such as liquidation and receivership are supplemented by terms like voluntary arrangement, administration and debt moratorium. More than even before, there are alternatives from which both financially troubled businesses and creditors can select the option most likely to provide the best result.

Inevitably, each option has its strengths and weaknesses, and often professional advice is needed to help assess which procedure is the right one for any particular case. Meston Reid & Co are experienced in dealing with businesses pursuing bad/doubtful debts, and helping businesses who are having difficulty in paying their creditors. We care about all stakeholder groups involved in financially troubled situations and, in almost every case, whether for those in financial trouble or creditors, our initial advice is provided free of charge. It is always provided in the strictest confidence.

 

The warning signs

Credit managers will be aware of the warning signs from a struggling business or individual, which can include:

• failure to answer correspondence

• not available for meetings or telephone calls

• word on the grapevine

• slow or late payments

• payments made on account

• round-sum payments

• payments made only when re-ordering

• cheques returned to drawer

• payments made by post-dated cheques

• unjustified disputes in order to delay settlement

• supplies taken from other suppliers at higher prices

• defaulting on obligation

• credit circle information

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Good money after bad?

With a few exceptions, insolvency proceedings generally mean that debts will not be paid in full. The unsecured creditor tends to be at the end of the queue and recovers very little. Thus, it is not uncommon for creditors to lose interest in a debt, particularly if it is fairly small. Nobody wants to throw good money after bad.

However, help is available to creditors in order to enhance recovery prospects. Positive involvement can also work as a signal to other debtors that the creditor will pursue all remedies available and help foster a robust reputation which encourages payment.

Unsecured creditors can do much to help themselves and maximise the amount they can recover, either before or after formal insolvency proceedings have incepted. For example, a business should:

• establish sound credit control procedures by:

  • using retention of title clauses

  • obtaining guarantees from directors, a bank or third parties

  • nursing difficult customers

  • factoring

  • taking out bad debt insurance

• adopt efficient enforcement procedures by:

  • choosing the right method

  • taking care not to waste money on inappropriate or ineffective remedies

• ensure that their interests are properly represented at any meeting of creditors

• keep a watching brief on the insolvency proceedings in order to ensure that the process is conducted efficiently, and that a creditor's interests are not prejudiced.

Meston Reid & Co offers unsecured creditors a wide range of services for their protection in a customer's potential or actual insolvency.

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Debt enforcement pre-insolvency

If formal insolvency proceedings have not yet commenced, it may be possible to enforce debt recovery in Scotland.  Choices include:

• repossessing goods

• obtaining a debt assignation from a person(s) known to owe money to the business or individual

• obtaining an arrestment in execution and following it up by a decree of furthcoming, or warrant sale

• obtaining an extract decree and following it up by an attachment or seizure of goods

• exercising a landlord's hypothec (for unpaid rent only)

• obtaining a charge for payment following an extract decree

• issuing a statutory demand for payment.

Some of these measures require specialist advice and Meston Reid & Co will help to establish which is the most appropriate choice in the circumstances. We can also advise on whether raising proceedings would justify the costs involved.

The financial position of individuals is governed by the provisions of legislation such as the Bankruptcy ( Scotland ) Act 1985 and the Debtor (Scotland) Act 1987 and thus, some of the courses of action will require careful appraisal beforehand.

Care is always required because for example, there have been cases where the creditor was ordered to pay the debtor's costs for serving a statutory demand improperly.

We can consider and advise on any informal voluntary scheme which may be viable. For example, a particular set of circumstances might merit an administration or a voluntary arrangement. If all parties are willing to meet and discuss alternatives, we are happy to attend such meeting and advise the struggling business or individual. If they fail to heed professional advice they may be required to account for their actions at a later stage.

It is sometimes possible to arrange for trading to be monitored by an independent accountant, at the businesses or individual's expense. Even if formal insolvency ultimately ensues, creditors can be satisfied that their interests have been properly safeguarded in the meantime. At the other end of the scale, such procedures can achieve the turnaround of a business and secure its long-term future.

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Petitioning court

If all attempts to recover a debt fail, a creditor may decide to petition court, either for sequestration (individuals and partnerships) or for winding-up (limited liability company and limited liability partnerships). The petition costs are repaid from the funds realised in the proceedings and take priority over unsecured creditors.

The decision on whether or not to petition often depends on what benefit the creditor can gain. We will advise you on this before a petition is presented.

Another important factor which can influence a creditor in the decision making process is the existence of evidence of wrongful trading by the directors of the debtor company. If formal winding-up proceedings incept, a full investigation into each director's activities will follow automatically.

If a case for wrongful trading is proved, the directors may be ordered to contribute personally to the financial shortfall arising.

 

Creditors' meetings: creditors' choices

Creditors are not always familiar with the purpose and the conduct of meetings called in respect of an insolvent business or individual. We convene, attend and chair them regularly and hence, are in a position to share this experience with you. Meetings can be:

• called by a company in order to consider either a debt moratorium or some form of informal scheme of arrangement.

• summoned by the nominee of a company to consider his proposals

• summoned by the administrator of a company to consider his proposals

• summoned by the receiver of a company to receive his report regarding the financial affairs of the company

• summoned by the liquidator in a solvent liquidation if he, during the course of the liquidation process, he forms the view that the company will not be able to pay its debts in full

• summoned by an insolvent company to consider a voluntary liquidation at the instance of its creditors

• summoned by the interim liquidator of a company to choose a liquidator

• summoned by the interim trustee to report on the debtor's financial affairs and, it appropriate, to elect a permanent trustee

• summoned by the trustee to consider a trust deed and whether it should become protected.

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Should I attend a meeting of creditors?

Most meetings of creditors have two objectives:

• to appoint an insolvency practitioner who will be responsible for dealing with the insolvency process. It is important that the most suitable person is selected to represent interests of the general body of creditors. If a creditor signs a proxy in favour of the chairman of the meeting he forfeits his opportunity to express a preference for the appointment of an insolvency practitioner of his choice. A creditor may have certain reservations about pre-insolvency transactions and wish someone of his own choosing to investigate them.
  
  

• to appoint a committee which represents all creditors and to work with the insolvency practitioner. The committee will, to a certain extent, supervise and regulate the insolvency practitioner's actions. Where a sequestration has been designated a small assets case, the representative creditor will be the accountant in bankruptcy.

 

Creditors should be aware that at certain types of meetings, notably those for voluntary arrangements or administrations, decisions can be taken in their absence which might diminish their recovery prospects while benefiting other creditors.

Such decisions can be reached at the meeting, and might contradict the terms of any proposals circulated in advance. Thus, particularly when there are specific proposals to consider with respect to an administration or debt moratorium and a debt is large, we believe that it is important to be represented at any such meeting.

We are pleased to represent creditors at meetings in north east of Scotland without charge. If required, we will accept nomination to the committee of creditors on behalf of a particular creditor except, of course, in cases where we are appointed to deal with the insolvency appointment.

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During the insolvency process

Once formal insolvency proceedings start, a creditor may want to know:

• his position with regard to any future trading with the insolvency practitioner appointed

• whether he will be able to pursue any retention of title claim, and how best to proceed

• whether or not any proposal is reasonable

• whether or not the insolvency practitioner's fees are reasonable

• how to deal with any questions that may arise on the validity of claims

• how to recover the VAT element of a debt

• what steps the the insolvency practitioner may be taking to investigate possible misdemeanours.

A creditor may also want to know if he can buy certain assets or even the business itself. We can act and advise on these issues, and conduct negotiations as appropriate on your behalf. Having sat at the table on many such cases we understand the problems faced by all parties.

Occasionally, contentious matters can arise between a creditor and an insolvency practitioner. In our experience, these can often be resolved amicably or avoided if the creditor is represented by another insolvency practitioner, thereby easing the discussion process. Our experience tells us that there is little to be gained by entering a long dispute with the appointed insolvency practitioner as it generally serves to increase costs, diminish dividend prospects and exasperate all concerned.

 

How can we help?

We have knowledge, experience and resources at your disposal. Recognising the warning signs, taking steps to monitor and control your credit risk, and dealing with debts which prove difficult to recover, whether or not due to formal insolvency proceedings, are issues we deal with regularly.

Why not call us or e-mail your question to Michael Reid, licensed insolvency practitioner, reidm@mestonreid.com or Michelle Byrne, insolvency manager, byrnem@mestonreid.com .

If you do nothing, you'll probably get nothing.

 

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