Debt collection over R80 000 needs special focus and instead of going the usual “Summons” route which many advisors suggest, Ivan Zartz Attorneys take a different view. It’s sometimes been called “Ivan the Terrible’s” way of dealing with significant debt, due to successes in this area and is only suitable when dealing with amounts due by a company or close corporation.
There are naturally certain things which need to be in order, so that the procedure can be adopted successfully and these requirements should be adhered to before the matter is handed over.
- The paperwork is in order, i.e. proper proof of delivery, etc.
- 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.
- Detailed notes of conversations with the credit department of the debtor /person responsible for finance as to why payment is not being made. See more about this later.
- There is agreement by the creditor concerned that the settlement of the debt is more important than retaining the customer.
To revert to point 3 above, a company or close corporation may be liquidated if it can be shown that it is unable to pay its debts and some detail is needed here.
Inability to pay debts
A company or close corporation is deemed unable to pay its debts if no response is received following the process outlined below:
- A letter of demand has been sent to the registered office of the company or close corporation demanding payment of the debt;
- This letter has been served by the sheriff and more than 21 days have lapsed from the date when the letter was sent.
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.
It is absolutely imperative to set up a company/close corporation for a liquidation, if one obtains an admissions such as:
- “we cannot pay our debts because we are awaiting a payment of a large sum of money from Company AA” 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 tell-tale signs of an inability to pay.
From a practical point of view, the credit controller, or other relevant person, should note these responses and confirm in them writing to the debtor customer, if these remarks were made over the phone regarding debt collection issues. Another example of this could be:
“I confirm that I telephoned you on [date], demanding payment of the sum of RXX XXX. During the course of the discussion, you advised me that you could not pay the debt, as you were 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 transactions between our companies, but rather that you are short of funds”.
Both the case examples above 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, then one cannot liquidate. One then has to issue summons.
Assuming there are no disputes, and assuming you are armed with the debtor’s inability to pay, one then can liquidate.
What are the advantages of a liquidation?
- Cost Effective
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.
- Timing – the “First-Come, First-Served” principle
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 those who will end up completing long-winded claim forms when the company has been placed in liquidation and a meagre dividend of one cent in the Rand is received years later!
It is not possible to be prescriptive about when the creditor needs to hand over a debt, but there have been many instances where, because that 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 scenario.
- The Shock-Effect of a Liquidation Application
As mentioned earlier, one has to balance the option of not doing business with a customer again (because YOU are now broke), versus “insulting” the customer by serving a liquidation application.
From experience, Ivan Zartz Attorneys have found 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.
In a liquidation application, the technical defences a debtor can resort to, when one faced with summons being issued against them, are minimised so that one normally gets paid, as opposed to waiting years for payment. The prospect of the business being closed down, which is the effect of a liquidation order, outweighs all other considerations.
- The Re-structuring of Securities
One final advantage of a liquidation is that sureties which 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 that the company/close corporation wishes to make payment of the debt in instalments.
Ivan honestly believes that in today’s times, careful consideration should be given to the liquidation process to collect debts.