We regularly encounter cases where a client has allowed a debtor to get away with a debt for more than a year or even two years. It’s human nature to feel sorry for someone and to want to give them a few months’ grace. It’s also a PR challenge – you hope for future work, and you don’t want to lose a client. But here is why you shouldn’t delay more than 90 days to collect this debt.
1. You're going to get nailed for the VAT liability.
If you’re like most businesses registered for VAT, you’ll be advised by your accountants of your VAT liability during every third month, for the preceding two months (e.g. for the period January – February, you’ll pay VAT by the end of March). SARS doesn’t care whether your debtor has paid you or not – VAT is calculated from the date the invoice is raised, not from when the debtor pays you *. If your debtor hasn’t paid you, your VAT liability is coming out of your own funds. If that’s not enough reason to lose all sympathy for your debtor, we don’t know what is.
* Unless you have a rare, special consent from SARS.
2. A debtor who hasn’t paid for 90 days is in financial trouble.
If your client – especially a client you’ve had for a while – suddenly stops paying their monthly bill regularly, you can be sure they’ve run into cashflow problems. If you’re a business owner, you know that cashflow issues:
(a) should have been foreseen and planned for by a diligent director;
(b) take a long time to resolve; and
(c) can sink a company in a matter of months.
By the time you eventually take action a year later, sick of all the excuses and dodging, that company may already be in business rescue or liquidation. It’s not difficult to do - a tactical liquidation is easy. You may then find yourself with a claim that is effectively worthless.
We have seen cases where clients have claims of over R100,000 against a debtor company, already millions of rand in debt to various creditors. These clients effectively have to write that debt off, as the value of their claim relative to the total debt would net them mere cents in the rand – and they’d have to tolerate lengthy business rescue or liquidation processes just to get it, or worse, make a contribution in the liquidation proceedings.
You’re going to get nailed for the VAT liability. If that isn’t enough reason to lose sympathy for your debtor, we don’t know what is.
3. They're the ones who ruined the relationship, not you.
You hope for future work or sales from this client, and you know that while you’re not making any money from them now, you certainly won’t make any more from them in future if you sue them.
That may be true, and it’s natural not to want to ruin a relationship with your client, but that future work is not going to happen. You need to realise now that it is your client who has ruined the relationship, not you. They’ve ruined it by taking money or value from you, your company and your family, and not compensating you for it fairly.
This may sound harsh, but as attorneys who want the best for your business, and who see this scenario every single day, believe us – you should feel zero guilt at informing your client or their breach of contract and handing them over for collection. It’s not your fault the client didn’t manage their finances properly, and it’s not your fault they haven’t held up their end of the contract *.
* unless it IS your fault due to something like rendering substandard services to the client.
4. If you don’t take action, your client will lose respect for you.
It’s also human nature to continue behaving in a certain way if you are allowed to, and if your debtor has made the decision to breach contract and not pay you for 90 days, they will continue acting that way if you allow them to.
You get what you tolerate. The longer you wait to demand respect from your client, the less they will respect you, the less important your bill will be to them, and the more they will prioritise other bills.
Remember – every company pays a whole list of running expenses every month – from petrol, to rent, to salaries, to instalments on the director’s fancy car. They’re paying expenses – just not yours. If your requests, pleas and letters haven’t worked, you need to move your bill up their priority list by taking legal action and serving them with a summons.
5. The longer you wait, the tougher (AND MORE EXPENSIVE) it becomes to collect the debt.
The costs of recovering a debt, and prospects of successful recovery early in the process are significantly better than trying to do so later.
Early on, your debtor is usually more sheepish and apologetic about the debt, and their financial situation has not yet made repayment impossible. They are likely more willing to sign an acknowledgement of debt, which will bind them to terms more suitable to you.
But later on, after the debtor has got away with withholding payment for a year or two, they’ve resolved not to pay you, they’ve likely come up with a defence that your services were substandard thereby excusing non-payment, and they may already be liquidating. A tactical liquidation is so easy in this country. We’ve seen many instances of businesses closing their doors and opening down the street, under another name, using the same stock, clients and staff as previously without batting an eye.
The prospects of recovering debt once your debtor is in business rescue or liquidation are vastly diminished.
6. Your claim could prescribe.
The Prescription Act 68 of 1969 provides that civil debts generally “prescribe” (i.e. are extinguished) if you fail to take legal action within 3 years of the debt becoming due.
Working in this industry every day, we see it all too often that clients are bitterly disappointed when approaching us for help after leaving a debt for over three years, only to find out they have lost the legal right to collect it.
Rip off the band-aid.
If there’s a contractual issue causing your client to withhold payment, for example if your client is unhappy with the service, meet them head-on, without delay. If the client’s account is in arrears for longer than contractually agreed, consult with us to determine your options. It’s often easier to have your attorneys be “the bad guys” who send a notice of breach to the debtor, asking them to contact you immediately to resolve the situation. You may be contractually required to deliver a breach notice, further extending the time to collection. Clients are often disappointed to realise they haven’t complied with their own contract, and still have to deliver a breach notice and conduct a mediation procedure before being entitled to commence legal action.
It’s easy to commence a debt collection.
Clients sometime avoid taking legal action because it seems like too daunting a task. But at Maybery Inc. you’ll find the process streamlined and simple to understand. Book a consultation, bring along evidence like your contracts, invoices and emails. We’ll advise on the merits of your claim and commence collection within a week.
Unfamiliar with the litigation process? Read more here.
How much does it cost to commence debt collection?
Clients are rightly concerned about the costs of the debt collection exercise. After all, the purpose is to end up with more money, not less. That’s why we advise clients NOT to proceed with a case if:
(a) the costs of recovery are envisioned to be more than 40% of the quantum
(b) the client cannot prove to us that they have done everything correctly their side, giving their case at least 80% chance of success should it go to court.
Want to know more about the specifics of debt collection? Read more here.
Does your case qualify for legal action?
Contact us for a complimentary brief consultation to determine your rights.
The above information is for illustrative purposes only and does not take into account your specific circumstances. It therefore does not constitute legal advice. Please contact us for comprehensive advice to address your circumstances. Under no circumstances should any person use the above information in an attempt to circumvent the provisions of legislation or contract, or to cause damage to any other person. Always ensure you and your company are in compliance with the law in all dealings.
This information is accurate as of the date of publication.
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