Make sure your debt collection strategy is driven by commercial imperatives

Thank you to Linetime customer Wright Hassall Solicitors for the use of the following article.

Make sure your debt collection strategy is driven by commercial imperatives

Looking on the bright side, a positive outcome of the recession is that companies have been far more meticulous about managing costs and cash flow – a good habit that most businesses are unlikely to abandon once the economy turns the corner. Advice about ‘knowing your customer’ has been taken on board and flagging potential bad debtors has been done sooner rather than later. However, having a clear strategy for dealing with debt is important when deciding on the means to recover it – do you go down the debt collection route first or simply call in the legal team?

Debt Collection – the first line of defence

A good debt collection team pursues debts firmly, sensitively and cost-effectively. An initial heavy-handed approach causes more harm than good and often wrecks a previously good customer relationship. The right collection strategy for a debtor can be planned and executed to a timetable: if full payment is not achieved immediately, then an agreed repayment programme can be put in place. An experienced debt collector can also ascertain necessary information about the financial health of the debtor which can then help to decide the next move if payment is not forthcoming.

When to stay the litigation hand

There are some practical reasons why going straight to litigation is inadvisable – not least the cost and the long-term relationship with your customer. The Civil Procedure Rules require claimants to prove that they have attempted to settle any disputed debt and, in the case individual debtors, that they have been supplied with the necessary information to help them pay. Litigating first may also be in breach of the FSA ‘treating your customer fairly’ initiative. Customer retention is important: slow or reluctant payers may well be playing their own game of payment cat and mouse and a ‘softer’ debt collection approach may be all that is needed to resolve the situation.

No option but to litigate

If there is a real risk that the debtor’s assets will be dispersed before the debt is paid, a freezing order may be the only option and can often precede insolvency or suspected fraud. If the debt is not in dispute, then the threat of winding up proceedings can help to expedite matters.

A balanced approach

A joint approach between the debt collection and the litigation teams can help to secure payment if the collections approach has failed initially. If sufficient information about the debtor’s financial (and personal) situation has been gathered, any decision about whether to litigate or not will be properly informed and can be actioned appropriately. You can take strategic enforcement action when judgment is obtained but collection activity and, as importantly, ongoing communication with the debtor can continue so that unnecessary legal action is not taken or further costs incurred.

In summary, how you collect your debts must be guided by the commercial imperatives of the business. In many cases, there are sound financial, legal, regulatory and commercial reasons why litigation should be the last resort – not least customer rehabilitation and retention. However, your debt collection agency needs to have a finger on your customers’ pulses so that at the first sign of trouble, the litigation team can swing into action – but in a controlled way with an eye, as ever on the commercial imperative.

Phil Wilding, Partner, Wright Hassall LLP