Should I agree to a business debt being paid in instalments?
‘Something is better than nothing’, or so the saying goes, but is this really true when it comes to securing settlement of a commercial debt. If you have been asked to accept payment by instalments, you may wonder whether the debt will ever be fully repaid?
It is a tricky question, as Stephanie Wintle, debt recovery legal executive with WBW Solicitors in Torquay explains: ‘If a customer has asked to pay a bill in instalments, then it is fair to assume that this is because they cannot afford to pay it in a lump sum as they are experiencing financial problems.’
‘This puts you in a difficult position. Do you say “yes” and hope that you eventually get what is due, albeit later than planned and at a greater administrative cost, or do you say “no” in the hope of forcing the customer to find an alternative way of paying, knowing that this may not be possible and could lead to you not being paid at all?.’
There is no easy answer, but as a creditor it is incumbent on you to find out why your customer is struggling and to then use this as a basis for determining whether it is sensible for you to agree to what is being proposed.
Temporary cash flow problems versus deep rooted financial issues
All businesses experience cash flow problems at some point and if it is clear that this is where the problem lies, then you may decide to cut your customer some slack. However, before doing this you need to determine whether this is a temporary problem from which they are likely to recover or something more serious which could result in bankruptcy.
To make an informed decision, you need to ask the customer what is going on and, where appropriate, to see a copy of their latest set of accounts.
If you feel uncomfortable about doing this, or lack the time and resources needed to make the checks required, and the amount is significant then it may make sense to pass the matter to a solicitor if the amount owed justifies this.
As well as helping you to ascertain the customer’s current position, a solicitor can establish whether they are indebted to anyone else and if they have sought advice from an insolvency practitioner about entering an individual voluntary arrangement (IVA) or a company voluntary arrangement (CVA). They can also check to make sure bankruptcy or insolvency proceedings are not yet already underway.
Giving debtors a little longer to pay versus effectively writing off the debt
Allowing a debt to be cleared over a few weeks or months is one thing, but where a significantly longer period of repayment is proposed then there are some key issues that will need to be considered, in addition to the risk that the customer’s finances may implode.
- the impact on your own business’s cash flow;
- whether the administrative cost of having to process multiple payments will effectively cancel out the amount you stand to recover; and
- how likely it is that the promised instalments will be paid.
Although decisions will need to be taken on a case by case basis, generally it is only advisable is to only agree to a proposed arrangement that will result in a debt being settled within a reasonable period and where you are satisfied that the customer is fully committed and likely to be able to raise the funds needed to meet their obligations.
While a request to pay by instalments should always be considered, regard should also be had to any other means by which the debt might be recovered which could see you paid sooner. This includes issuing a statutory demand for the debt to be paid within 21 days, in default of which you will become entitled to make them bankrupt. Alternatively, you could pursue the debt via a claim issued through the courts.
Advice on the options open to you should always be sought from a solicitor specialising in debt recovery who understands the avenues available and the commercial wisdom of pursuing a particular route given your own, unique circumstances.
Instalment payments proposed through a debt repayment plan, an IVA or a CVA
If it is not just your bill that your customer is struggling to settle, then you may find that proposals to pay by instalments are made through a professionally negotiated debt repayment plan or an individual or company voluntary arrangement.
In the case of a debt repayment plan, there is no obligation on you to say ‘yes’ to the proposals made and, if you do, you will usually be entitled to continue to levy any charges and interest to which you may be entitled.
However, the rules around IVAs and CVAs are a little different. In broad terms, you will be bound to accept the proposals where 75 per cent of the customer’s creditors (in value) vote to say ‘yes’ and will usually only be entitled to whatever payment is proposed, which will almost certainly not include charges and interests.
If you are presented with a debt repayment plan or an IVA or CVA, then you should seek immediate legal advice on your position.
Instalment payments proposed to settle a judgment debt
If you have already taken the plunge and obtained a court order in respect of the monies owed, then you may find your customer asking to pay this by instalments instead.
Where you elect to reject such a request, the customer will be entitled to ask the court to intervene and overrule you. However, the court is only likely to do this where it is clear that payment by instalments is appropriate, having regard to the customer’s income, expenditure and assets, and where the plan proposed is a sensible one that will see the debt repaid within a reasonable period of time.
As confirmed in the 2018 Court of Appeal decision in Diana Loson v Brett Stack, Newlyn plc, where it is clear that the customer can only afford to make nominal payments towards what is owed, an order permitting payment by instalments should generally be refused in order to leave you free to pursue other enforcement options.