Companies may be writing off money owed to them by suppliers and customers overseas because they believe that there is no reliable method or legal mechanism they can use to reclaim debts. However, credit experts say that organisations can overcome these problems through a combination of better in-house credit management, using locally-based lawyers, and – if in the European Union – by considering a range of new procedures that aim to speed up transnational legal claims.
UK companies make a significant chunk of their revenue from selling goods and services abroad. The Office for National Statistics says that for the fourth quarter of 2009, UK exports in goods reached nearly £61bn and for services £40bn. However, while such figures look good on paper, in reality, billions of pounds is being withheld from UK organisations due to late payment. Barclays Bank estimates that on any given day around £9bn is owed to UK businesses. It also says that the survival of around 18% of companies is threatened because invoices are not settled within stated credit terms.
Foreign debtors have an obvious advantage if they delay payment – recouping monies owed abroad can be expensive, time-consuming and bureaucratic for the company chasing the debt. Anecdotal evidence suggests that it can be difficult to reclaim money from companies within some African countries, while in the European Union (EU), reclaiming money can be a particularly slow and arduous process. Chasing debtors based in the United States can also take time and be expensive, particularly if the company contests payment.
Traditional methods of debt recovery are limited. Local lawyers can be instructed, but finding an appropriate one – that is fluent in both languages, understands both sets of jurisdictional law, and that will work on a contingency fee basis – can be difficult, unless the creditor already has a lawyer based in the debtor’s country. Also, while most European jurisdictions will allow a lawyer to conduct a case prior to litigation on a contingency fee basis, many do not permit lawyers to handle a case on a contingency fee once court proceedings are issued.
Other available options are to use a UK-based Commercial Credit Management agency, who can utilise relationships with UK law firms to save their client’s fees and in CBC International’s case, client’s can benefit from their foreign collection agency network, who can deal with collections and all legal matters outside of the UK.
Experts agree that in-house lawyers need to ensure that their organisations have sound procedures in place to ensure that customers and suppliers are able to pay, that overdue payments are flagged, and that appropriate measures are at hand to chase debts – through the courts if necessary.
Roy Caligari, director of CBC International, a firm of commercial credit consultants and debt recovery agents, says that companies should check out the financial stability of the company they are trading with abroad as far as possible. Most cases are abandoned, he says, not because they lack merit, but because the debtor is in financial difficulties. “In-house lawyers should make sure that their organisations’ procurement officers carry out credit checks on any new customer or supplier that they are going to do business with, particularly if it is a large order. They should also consider using letters of credit or cash against documents to minimise the likelihood of payment default with all new accounts,” he says.
He adds: “if the debtor has no money, the chances of an unsecured creditor recovering anything are slim”. He says that as a matter of course, in-house lawyers should check that their organisations’ accounts departments have procedures in place to carry out background checks – how long the company has been established, where it is registered, directors’ details, whether it has ever been fined for any credit infringement or late payment, and whether the company has changed its name (and if so, how frequently).
“Companies should check to see, for example, whether company accounts have been filed on time. If they have not, alarm bells should start ringing and more stringent payment terms should be coming into contracts. Companies should also ensure that they have credit control procedures in place and that they are adhered to, even for the smallest business. Payment dates should be diarised and a system prepared to regularly chase unpaid invoices, particularly those past 60 days,” he says.
UK companies should always look to include a “jurisdiction clause” in their terms and conditions. This would ensure that English law applies to the contract and that the English courts have jurisdiction in the event of any dispute so that Englsih costs rules, interest calculations, procedures, and so on would apply. While any dispute would still be complicated as any proceedings would have to be issued in England but served abroad (and organisations would still have the difficulty of enforcing any judgement abroad), such a clause still provides UK companies with more options and added leverage.
Having a paper trail is also important, especially in this day and age where business is increasingly done via email, Some countries – such as the former Eastern bloc countries – believe that paperwork (and lots of it) is paramount in proving any claim. Furthermore, in some jurisdictions, electronic evidence is not always admissible.
However, while tightening up payment and credit practices will help prevent late or non-payment, there are now a number of methods of recovering debt from businesses in another European Union (EU) member state. The European Order for Payment (EOP) procedure was introduced in December 2008 and provides an easier and quicker process for creditors to recover uncontested monetary debts in a cross-border claim. The procedure operates on the basis of standard forms and a uniform process across all EU member states. It can be used in both civil and commercial matters and does not require the use of lawyers. The EOP is optional and can be used instead of existing procedures under national law. If a company obtains an order using the EOP process, it will not have to undertake intermediate steps to enforce the decision in another EU member state.
However, it does have limits. Companies cannot use an EOP procedure if the claim is about bankruptcy or insolvency, or if the claim does not involve a contract, unless there was an agreement or the debt was admitted. Furthermore, if the defendant opposes the claim, then the case would go before a national court of the country that is issuing the proceedings. This involves time and money. Also, even if a defendant decides to do nothing, enforcement of an EOP varies from one EU member state to the next.
Despite this, the EOP procedure does seem to work, Roy Caligari has used it on behalf of clients and says that it is quick, easy, and inexpensive. “I have used the EOP procedure a couple of times and it is a very easy process. Furthermore, it worked – the debtors paid up once their national courts became involved.”
The EU has recently implemented other processes that are also geared at enabling companies to reclaim money owed to them more effectively. Launched on 1 January 2009, the European Small Claims Procedure (ESCP) provides consumers and businesses in Europe with an affordable debt recovery process for low value claims in cross-border cases. The procedure applies in civil and commercial matters where the value of a claim does not exceed €2,000.00 and applies to both monetary and non-monetary claims. The ESCP introduces standard forms for both the parties and the court across the EU and also establishes time limits for the parties and for the court in order to simplify and speed up litigation concerning small claims.
Claimants do not need to be legally represented. However, if the other party does seek legal representation then claimants may be liable for those costs if they lose. The unsuccessful party will be liable for the costs of the proceedings, which may include such legal costs. However, the court can decide not to award costs to the successful party to the extent that they were unnecessarily incurred or disproportionate to the claim. A judgment given under this procedure shall be recognised and enforced in another EU member state automatically and without any possibility of opposing its recognition.
Another possibility is to apply for a European Enforcement Order (EEO). This provides a simple method for enforcing a company’s uncontested judgment in another country within the EU. However, if the claim is defended, then the claimant must follow the normal rules of the court for enforcing a judgment abroad.
While the EU’s moves to allow companies greater access to justice by facilitating cross-border claims, experts say that the mechanisms put in place only really work if the debtor decides to pay up under threat of legal sanction. Otherwise, says Roy Caligari, “if the debtor decides to contest the claim in its local jurisdiction, or even to do nothing at all, then it is incumbent upon the claimant to pay for expensive legal proceedings and no one wants to go down that route. The best course of action is to be cautious from the start and have tough credit controls in place. That approach will pay dividends in the long run.”
Making a claim in the EU
If a company’s dispute is against a person or business in a different EU member state, the company will have to find out which member states’ courts has the jurisdiction to deal with the case. Jurisdiction in cross border cases is governed by EU Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, otherwise known as the Brussels Regulation.
Normally the usual place of residence of the defendant is the country with jurisdiction to process the case. People who normally reside in a particular member state must, whatever their nationality, be sued in the courts of that country. For example, the French vendor of a motorbike can be sued in England if that is where the motorbike was due to be delivered. However, there are exceptions to this so that some claims can be brought in another member state other than where the defendant resides. These exceptions mainly occur in matters relating to a contractual obligation; actions for damages; matters relating to maintenance; matters relating to consumer contracts, insurance and to individual contracts of employment; matters relating to patents and trademarks; and matters relating to ownership or tenancy of immovable property.
Ten top tips
Credit experts give their advice on what organisations should do to make sure that they avoid payment default
- Have a well devised and written in-house integrated collection plan or strategy for collecting debts from your customers.
- Keep track of all the past dues with an automated system to red-flag debtors. Generally, a payment which is due for more than 60 days is considered to be debt.
- Remember that accounts 60 days or less past due are highly collectible so focus your in-house efforts on tackling these.
- Hire a third party collection agency to handle everything past 60 days. However, ask to see actual letter samples that they send to debtors – you want to know how they are communicating with your customers.
- Have written terms with foreign clients, signed by both parties, before doing any work or supplying goods or services.
- Include a “jurisdiction clause” in your terms and conditions. This ensures English law applies to the contract and that the English courts have jurisdiction in the event of any dispute.
- Penalty interest should be provided for in the event of late payment.
- A paper trail is important to prove what you are asserting, perhaps to the satisfaction of a court. If it’s your word against the debtor’s in their home court, expect to lose.
- Check the financial stability of any foreign company you intend trading with.
- Ensure you have credit control procedures in place and that they are adhered to.
This is an edited version of an article featuring CBC Director, Roy Caligari. It was published on 4th November 2010 in ‘The In-House Perspective’ by the International Bar Association’s Corporate Counsel Forum. Published quarterly, the magazine provides in-depth articles on subjects of particular interest to corporate counsel and in-house lawyers, as well as profiles of leading counsel and advice on managing external counsel and internal clients.
CBC International is registered under Data Protection, Licensed under the Consumer Credit Act by the Office of Fair Trading (“OFT”) and holds an ISO 9001:2008 Quality Assurance Accreditation, which it has held for over 8 years.
If you would like discuss how our Debt Recovery/Debt Collection service can assist your business, please visit the ‘Debt Recovery/Debt Collection’ section on our website, contact us on +44 (0) 151 515 3014 or email us.