Insolvency: Credit where it’s due

When debts go bad, it’s a costly business all round. But there are some simple steps credit-granters can take to reduce the
risks they run

Hundreds of thousands of pounds is written off in bad debt throughout the ­country annually, but there are a number of simple guidelines lawyers can give clients to better manage their credit lending.

Judgment creditors get upset at the ­failure to enforce, while advisers look to the courts and enforcement officers to extract debt that a very complex chain of credit management often failed to collect.

A recent analysis of judgment debts sent for enforcement using execution against goods found that more than 90 per cent of it was in a “high-risk” category for the ­granting of credit.

The starting point to combat this problem is for credit-granters to be much more ­cynical during the application process and view every new customer as a potential judgment debtor. Lawyers could advise clients to ask important questions before offering credit to assess the credit risk of enforcing any resulting judgment.

First, customers can be categorised into individuals in the home, sole traders, ­partners, companies and unincorporated associations. Using standard credit-­industry tools, your clients can verify information about limited and non-limited businesses, cross-check addresses, credit reference and telephone records for individuals in the home.

Second, ensure your clients apply a ­checklist of assets a debtor might have. By looking at whether the debtor type has premises, with the limitations on execution against goods in a private house, a profile of the debtor and their or its assets begins to emerge.

Some debtor types may have a home address and a commercial trading address, but clients should anticipate or ‘visualise’ the potential assets in either.

In the past, Shergroup has gained custom from debtors needing help to chase their own debts. Over the years, the firm has seized goods ranging from gold bars, the entire contents of a sex shop, high-­performance cars, planes, helicopters, boats and a herd of cows. It is much easier for the credit-granter to establish where these assets are from the outset.

At the home address there may be a ­vehicle and goods, while at the commercial address there may be office equipment, stock, or plant and machinery.

Lawyers can manage client expectations by reminding them that ‘goods’ have a ­narrower meaning than assets. So in assessing what assets a debtor might have, they can consider any available equity in ­property, money owed to the debtor, salary payments, or whether more information is needed.
Lawyers can then offer their clients better advice on what types of enforcement might be suitable for different types of debtors.

They can also construct a matrix of the types of debtors based on consumer and commercial situations, and the types of goods they might have. For a sole trader the enforcement options are:

• Instructing bailiffs to attend to remove goods at the house (difficult but not ­impossible), or business unit (easier).
• Assessing what equity is available in the home.
• Assessing what debts might be owed to a judgment debtor (ie bank account, trade debtors).
• Making the debtor bankrupt where there is no defence.
• Seeking an order to obtain information on the basis that the creditor is unsure of what assets are available – which should be enough of an incentive to capture that ­information up front before the claim is even issued.

In building this type of checklist the credit-granter takes control of enforcement, rather than reacting to the need to enforce a judgment using execution against goods as the only method of enforcement.

Lastly, there should be a review of the credit application form. Obviously, it will not ask a customer: “If we have to enforce a judgment against you, do you have equity in your home?” But you could ask: “Do you own your own home? What is it’s value? What is the value of any outstanding ­mortgage on the property and does anyone live at the property?” Then you would probably have all the information needed to start a successful charging-order application.

Suddenly, you know whether that ­customer has equity, so in the event of default, and possible litigation, a charging order is an option should enforcement ­actually become necessary.

Of course, one can never make a silk purse out of a sow’s ear and enforcement is in many ways a pig of a problem, but not one that is insurmountable.

Claire Sandbrook is chief executive of Shergroup