Debtors will always be part of businesses or personal life. You will always have people who owe you money or its worth. Since debtors are an integral part of a business, they need to be managed effectively. The sure point to make here is that for you to be successful in debt collection, you must have a sound credit policy in place. It is almost impossible for a business to avoid debtors. As much as some businesses run on a zero credit or cash and carry policy, debtors will always appear in some form. There are a number of points to appreciate as a business in order to put in place a sound credit policy and ultimately be successful in recovering from your debtors.
Let me emphasise that debt recovery is not easy, so you have to plan. We have those businesses which have so much faith in their debt collectors, attorneys or other debt collection agents in assisting with debt collection. The truth is that by far the success of your debt collection resides within your business or your person. Before the cause of debt arises, you have to structure your business processes in a way that makes subsequent debt recovery easy.
What is a debt?
The Prescription Act has so far given what I would call the best definition of a debt. It defines a debt as including anything that may be sued for or claimed by reason of an obligation arising from statute, contract, delict or otherwise. From this definition, it is clear that a debt can arise mainly in three ways:
l Statute or law – for instance levies that become due to a local authority or municipality, for instance — Zinwa, Zinara, town council rates and bills. This debt is created by operation of law with or without our input or contribution.
l Debts arising from contract – these are probably most common. These debts arise after a party to an agreement defaults in performing its obligations like payment thus creating a debt. The contract can range from a lease agreement where a tenant fails to pay its rentals as stipulated in the lease or where a bank client defaults in its loan agreement repayments or where, in a sale agreement, the purchaser of good/s fails to make payment as stipulated.
l Delictual debts are those arising as a result of an entity or person committing a legal wrong to the other. Delictual wrongs in our law are in many forms including killing a person or damaging another’s property arising from an accident, the list is endless.
Why timely and efficient debt collection helps businesses
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The following are some of the points that came to my mind that make debt recovery critical to businesses and all.
It enables a business to be sustained by enabling the collection of monies owed to the business — to ensure continuity of business operations;
Ensuring debtors pay within the agreed timeframes enabling business to also meet its financial, legal and statutory obligations;
Difficult economic environment, increase in payment defaults, failure to pay at all by debtors
Incentives to chase debts arise from difficulty to raise finance in the current economy in Zimbabwe
Know your customer checks
The importance of the Know Your Customer checks (“KYC”) cannot be over-emphasized. This is the area that most, if not all businesses fail. The success or failure of any debt collection is dependent on the strength of a business’ KYC. Before you consider extending any facility or credit to your customer, it’s a must that a business performs a thorough and systematic KYC. This must include the following steps:
Capture full names of the customer – if an individual request for a certified copy of their ID after inspecting originals, marital status, business and residential addresses, who their next of kin etcetera, proof of residence in form of utility bills. Take note of customer physical address which must be captured correctly.
On the next of kin, do follow up and verify that the next of kin exists in real life. In one of our assignments with a bank, we realised that the contacts and addresses for the next of kin were all fictitious as a result we failed to locate the debtor as well next of kin.
Check and verify the legal status of your prospective customer before making any credit facility agreements – whether it is an individual, club, partnership, company, trust, society etc. This is important because different forms of legal persons require differing authority to transact with third parties. It is important to verify who authorises the transaction e.g. ordinary director would need company resolution, managing director may directly represent company etc. if you are dealing with a trust owning property ensure that there is a resolution executed by the trustees.
In other organisations, there must be a resolution by the organisation authorising the transaction – if you thus do your KYC and verify the legal status, you then know who to sue in the event of a default, eg partners, members etc. Where your customer is a company, liability for the debt would be limited to assets of a company, but then you may extend liability to shareholders, trustees etcetera through a Deed of Suretyship signed by the individual directors or trustees.
Regularly carry out customer details renewals, where necessary
Properly carried out KYC helps a business to ensure that it locates the debtor easily upon failure to fulfil obligations in terms of the agreement. Failure to locate the debtor means that no recovery or litigation process may ensure.
Importance of appropriate terms in agreements
Once you do your KYC appropriately, the next step is to ensure that the agreement giving rise to a debt should be sufficiently clear as to the contractual obligations of the debtor. This is important when it becomes necessary to collect the debt. It is not enough that you hand over your collection portfolio to an attorney, debt collector or other collection agents. Their success depends also on the quality of your agreements. It is, therefore, good practice that your agreements incorporating credit terms must be constantly reviewed by an experienced attorney with a view to identify loopholes or shortcoming which may hinder successful debt collection.
This article is not meant to be exhaustive on debt collection issues under the subject nor is it intended to be any specific legal advice – it is meant to give a general overview on the subject. Should you need specific advice or assistance with debt collection, you can contact the writer or your attorney.
I will single out some of the common contractual provisions that can become problematic.
Amount to be paid, period and place
The credit facility agreement must be clear on what parties have agreed to do e.g. where a you agree to lend a sum of money to a business, or sell goods on part credit, the agreement should provide what goods and price the goods will be sold, the deposit payable, if any and the installments payable in respect of the balance and the period for installments and the due dates for installments. The agreement must state the date and, place it is concluded and the manner of payments and/or the place at which payments should be made. Likewise, the date of agreement is very important because it sets in operation due dates, whether the debt is now due or whether it is prescribed. The place of the agreement determines which law is applicable, among other things.
The agreement should also provide that debtor pays legal costs in the event of creditor approaching courts. The clause must clarify that the costs are payable at legal practitioner and client scale. It must be noted that these costs are only payable after conclusion of the court proceedings, and the court approves of the costs.
In addition, the agreement may provide for the court having jurisdiction to handle the matter. This is important and saves costs because ordinarily, the creditor must sue the debtor in a court closest to the debtor’s place of residence.
As part of the agreement, one may also consider requiring that the debtor also executes deeds of suretyships where directors, trustees or third parties act as surety for the debtor. This helps the creditor to ensure that in the event debtor fails to pay, they can always pursue the surety for payment.
A carefully drafted contract is like the proverbial ‘stitch in time’. A lot could have been said about contractual terms however, much depends on the nature of the agreement in question.
Use of acknowledgments of debt
In simple terms, an acknowledgement of debt (AOD) is when a debtor acknowledges his/her debt obligations in writing and undertakes to repay the amount on terms agreed upon between the parties involved. An AOD is of great value should the debtor default and a summons is required.
An AOD may be used a form of contract, and especially useful as a formalization of a verbal contract, and the creditor now wants to secure its rights in writing spelling out the agreed repayment or settlement terms and conditions. The good news is that an AOD is regarded by our courts as a form of undisputed evidence of indebtedness, and will usually follow the shortest route to conclude court proceedings referred to as the provisional sentence proceedings.
An AOD can also be used where the creditor no longer trust the debtor or there is a history of payments in arrears. The AOD is also used where the debtor fails to fulfil contractual terms and conditions, for instance where he defaults to pay an agreed amount or date of payment. The AOD will restructure the contract terms as to when, where, how and the amount owing, as well as the appropriate interest rate are payable. This is to ensure that the debtor is fully aware of all terms and conditions, avoiding any confusion. An AOD can be signed by more than one individual.
Collect your debt in time before it prescribes
Businesses must always act timely, expeditiously and purposefully to collect debts as soon as they become due. In terms of section 16 of the Prescription act, prescription begins to run once the debt becomes due for payment.
Once a debt becomes due, it must be collected. In terms of the prescription Act, failure by a creditor to collect an ordinary debt within a period of 3 years results in a debt prescribing. In simple terms, if a period of 3 years lapses before you start legal steps to collect the debt, you may no longer at law recover the debt. The provisions of the Act accords with the policy of the law embodied in the Latin phrase vigilantibus non dormientibus jura subveniunt, loosely translated to mean, the law will help the vigilant but not the sluggard.
The running of the prescriptive period can be interrupted where the debtor acknowledges the debt or where you start legal proceedings to recover the debt. Once you stop legal proceedings, the prescription starts again to run. It is thus important that business take timely action to recover their debts to avoid prescription of debts and loss of money or its worth.
Alex Majachani is an Attorney with ALEX F AND ASSOCIATES, he can be reached on 0774807058 or firstname.lastname@example.org