What is B2B debt recovery?
B2B debt recovery involves the collection of payment for outstanding debts incurred in business-to-business transactions. B2B debt recovery can be distinguished from B2C (business-to-consumer) debt recovery. B2B debt recovery is unfortunately a more difficult and high-stakes process than B2C debt recovery, given the large sums and complex business relationships involved.
Why is effective B2B debt recovery so important?
The way a business goes about recovering B2B debts is crucial. There are many methods, tips, and providers out there, and choosing the right ones for your situation and your business will save time, increase the amount of money you are likely to recoup, and help you implement a long-term plan to manage your debts and avoid headaches later on.
Who does B2B debt recovery?
There are three types of service providers for B2B debt recovery:
1. Mercantile agents
Mercantile agents are debt collectors with unique authority to sell, pledge, or otherwise dispose of goods; to receive payment for them and issue receipts; to sue on a contract for the sale of the goods in his/her own name; and to exercise a lien for outstanding expenses and commission over the goods in his/her possession. In terms of B2B debt recovery, it is important to be aware that mercantile agents are protected and therefore cannot be sued for the outcome of their debt recovery services.For more information on mercantile agents, please read our dictionary entry.
Some law firms (such as ours) with a focus on business law will also offer debt recovery services to their clients to complement their legal advisory function. When deciding if a lawyer is best to help you with a B2B debt recovery claim, it is important to consider their experience in debt and their relevant knowledge and expertise in the laws surrounding debt recovery for businesses.You can read about the debt recovery services we offer here.
The first step that businesses undertake when attempting to recover a B2B debt is often to give it a go themselves. While this is not necessarily a bad thing, if businesses go about attempting to recover their debts in an improper or unprofessional way, it may harm later attempts by professionals to recover their funds. If your business is chasing up a debt personally, it is important to remember several things:
- Be polite and professional – although you may feel cheated out of money owed to you, it is important to maintain a civil manner when conversing with the debtor in order to protect the business relationship and avoid further conflict
- Be consistent – you should implement a system of invoicing and reminding debtors of their debts owed, and stick to it. This will help avoid confusion about what is owed to whom, and when payment is due. It will help if a single person in your business is tasked with chasing up the debt to ensure information not lost or miscommunicated.
- Keep clear and accurate records – if your records are logical, clear, and regularly updated, you will have an evidentiary basis to support your claims of the B2B debt owed, which is crucial, especially if the matter proceeds to legal action. It is important to keep not only financial records, but also records of any communication between the parties involved.
How much does B2B debt litigation cost?
The cost of B2B debt litigation is variable, and depends on how long it lasts, and the hourly rate of the lawyer you have engaged to represent you. It should be noted that even if there is a favourable outcome, where the Court does not make an order as to costs, your business will likely have to cover its own legal fees. Where a debt amounts to less than $10,000, litigation may be uncommercial.
Whilst there are some lawyers who offer ‘no collection, no fee’ services, a business should be wary of engaging such practitioners. They are likely to not commit time and effort to complicated collection matters (a large proportion of cases) and therefore fail to achieve desirable results in most scenarios, wasting your time and reducing your window of achieving a favourable outcome.
Legal costs in NSW and Victoria are regulated by respective Legal Profession Uniform Law. Lawyers are generally required to be up front about their pricing system, including hourly rates, fixed fees, and blended rates. Before engaging a lawyer and embarking on B2B debt litigation, talk to the lawyer about their costs, and any other costs that may be incurred by the legal process. If a case is not defended, lawyers are required to limit their fees to the applicable Court scale.
Why take bankruptcy or winding up procedures?
Initiating bankruptcy or winding up procedures against a company should be a last resort for a creditor to attempt to recoup a B2B debt. It can also only occur in circumstances where the company is unable to pay its debt to you as a result of insolvency. If bankruptcy or winding up procedures are successfully initiated, normal processes will apply, meaning that secured creditors and creditors with their interest registered on the PPSR will get priority, and you will likely not able to reclaim the entire amount owed. Furthermore, even if companies are not deemed to be insolvent or are reinstated, such procedures will irreversibly damage the debtor’s business and your business relationship with them. However, in some scenarios, it may be appropriate to take bankruptcy or winding up procedures to force action and ensure some funds can be reclaimed toward the debt.
Sending a Creditor’s Statutory Demand to the debtor pursuant to section 459E of the Corporations Act 2001 (Cth) sets this procedure in motion. Companies served with a statutory demand have 21 days to apply to have it set aside. If the statutory demand stands and it is not paid within 3 months, the company will be deemed insolvent.
Why is a customer credit application important?
Credit Managers and Financial Controllers that offer credit to small-to-medium enterprises (SMEs) face high credit risk. They need to make sure their contractual documentation provides an appropriate level of protection for the industry risk they face. The first step towards improving results in B2B debt recovery claims is to review your business’s Commercial Credit Application.
Your customer credit application is the contractual document that establishes your legal relationship with customers. Lawyers understand that your customer contract includes not only the customer credit application, quotes and purchase orders but potentially conversations and emails with your customers.
The key issue for Credit Managers is to recognise that the written contract documents should be clear and consistent to avoid arguments ‘down the track’. If a customer wants to dispute an account, their lawyer will start off by reviewing your contract documentation. Your B2B debt recovery contract documentation includes:
- Customer credit application
- Customer quotes
- Purchase orders
- Consignment invoices and terms of trade
- Credit notes
- Emails to the customer containing representations or agreements
If there is a legal dispute a Court may undertake an exercise of interpreting this contract documentation and if there are inconsistencies in your contract documents, your chances of recovering the whole account may be reduced.
Things to consider for B2B debt recovery
1. Applicant’s name to be clearly identified with an ABN
If your customer credit application doesn’t identify the debtor properly, such as their legal name and Australian Business Number (ABN) you may discover that their trading name, i.e. ABC Supplies, isn’t registered.
2. A personal guarantee for all directors and proprietors of the debtor
If you are dealing with a small private company (i.e. the proverbial $2 company) it is reasonable to require the directors of that company to provide a personal guarantee for all debts incurred. This may protect you against the ‘phoenix company’ – the situation of a company that is loaded with debts and then strategically abandoned by its directors for profit.For more information about these concepts, please see our blog posts on personal guarantees and phoenix activity.
3. Purchase Money Security Interests (PMSI)
You may want to have the right to reclaim goods supplied to the customer who then defaults on payment. Alternatively, you may want to require a liquidator appointed over the customer to pay for those goods rather than assign you to the category of ‘unsecured creditor’. The best protection is to have a PMSI clause and register the interest on the Personal Property Securities Register.For more information on the Personal Property Securities Act and its implications for businesses and individuals alike, please read our blog post.
4. Incorporation of standard terms and conditions
Each industry has a set of standard terms and conditions for the supply of goods and services. These should be incorporated (i.e. attached and specifically referred to) into the commercial credit application.
5. Cost indemnity
B2B debt recovery costs such as mercantile agents and solicitors add value but are not cheap. If your credit application does not provide the right to recover all collection and legal costs you may not have a right to recover all these costs from customers that delay payment. Your customer credit application should include indemnity for debt collection and legal costs.
There is a right to claim interest on a B2B debt if you file a claim with a Court, but if the debt is paid before legal proceedings commence, you will want the right to claim interest upon default. Your customer credit application should provide that if the customer defaults on the agreed trading terms (e.g. 30 days net), you will be entitled to charge interest each calendar month on all overdue amounts until the date of payment.
7. Privacy disclosure so that you can implement credit checks
If you want to undertake credit checks into customers or to report payment defaults, your customer credit application needs to obtain the consent of the customer. This will include:
- Consent to obtain credit information; and
- Consent to disclose this information regarding the customer and its directors or proprietors.
If you use a credit reporting agency, they will be able to assist you with this.
8. Exclusive jurisdiction clause
If you are forced to take action against a customer based in another state, you don’t want to have to face proceedings in that state, as it would require the operation of a different set of laws, as well as repeated, costly travel. Your customer credit application should include an agreement that the parties submit to the exclusive jurisdiction of the Courts in your home state.
How do you optimally engage a lawyer to conduct a B2B debt recovery claim?
Engaging a lawyer to conduct a B2B debt recovery claim as opposed to a different debt recovery agent has many benefits. Not only will they have a thorough knowledge of the legal framework within which the process of debt recovery occurs, they will be able to advise you as to how to protect your business and its debts in your current matter and going forward.
As outlined above, the drafting and construction of your business’ contracts will have a significant impact on your ability to recover monies owed. Personal guarantees, registration on the PPSR, incorporation of standard terms and conditions, privacy disclosure, and exclusive jurisdiction are all legal issues relating to B2B debt recovery that a lawyer will be far better equipped to advise you on than any other debt recovery agent. Put simply, a lawyer can offer you the whole package in a B2B debt recovery scenario.
Sewell & Kettle offer specialised debt recovery services, helping you develop strategies for optimal receivables management, prepare settlement contracts and personal guarantees, and prosecute your B2B recovery claims in Court. With over 17 years’ experience, we are uniquely placed to help you get the most out of a B2B debt. Read more about our debt agent services here, or contact us.