The Carillion Lesson
The recent spectacular collapse of the British Construction firm Carillion left a trail of trade credit claims to suppliers estimated at many millions of pounds. The effect of the insolvency on numerous small businesses was devastating and pushed many of them into their own insolvency.
The demise of Carillion was widely predicted in the financial press with a number of profit warnings from the Company prior to its collapse. Despite this, suppliers continued to trade with Carillion right up to the date when it stopped trading. The Government also continued to sign Contracts with the Company worth hundreds of millions of pounds presumably on the basis that they wished to keep the Company in business in the hope that it would be able to trade out of its difficulties.
What can a business or sole trader, supplying a larger company do to minimise exposure to a potential bad debt? Clearly it is sole traders and smaller businesses who are more vulnerable and likely to suffer difficulties. They may be unable to pay the Court fees to take the larger Company to Court for non-payment of its invoices if it does not receive payment. Larger organisations can take advantage of their financial strength by threatening to take away their business and routinely delaying payment, or dragging out Court disputes. The larger the Company, the more likely it is that the delay in payment of outstanding invoices, is likely to result from internal communication problems.
In the case of Carillion the Auditors of the Company were criticised by MP’s for failing to tackle the crisis by not insisting that the Company paint a true picture of it’s financial problems. The Financial Director was accused by MP’s of being the Architect of it’s “aggressive accounting policies”. These policies included delaying payment to small suppliers for several months and when pressed for payment raising various reasons for non-payment. The Company also declared as profit revenue from contracts that had not yet been performed.
If you are a Company trading with a larger company, you should always follow the same principles by initially investigating the company’s ability to pay and by ensuring that you have a robust contractual case to proceed with action to recover the outstanding invoices if necessary by Court action.
If the terms of payment have been exceeded then the first step should be without delay to send a formal letter requiring immediate payment of the debt and to confirm that you will be taking legal action if you do not receive the full amount. You should always give the debtor a date for payment after which you will take action. A solicitors letter can often make the debtor realise that you are serious in taking action and this may often prompt the immediate response.
If Court action is necessary, the basis of your claim should ideally be either a written or signed Contract or a purchase order for goods or services containing the price and the terms of payment. You will also need to produce evidence that you have performed your part of the Contract and that there is evidence that you made the customer aware of Terms and Conditions before the Contract was agreed. If direct evidence is not possible, you may need to rely upon previous Contracts with the debtor for which you received payment and where the nature of the goods and services were the same as the ones for which you have not received payment.
If there is a dispute over the Contract, you should try to resolve such matters as the quality of the goods or services and whether they were delivered by the agreed date. If you are unable to resolve the dispute by way of a compromise, you may need to take legal advice as to what you can realistically expect to receive in the circumstances to take account of the complaints.
You may wish to enforce a claim for interest. For that purpose the Provisions of the Late Payment of Commercial Debts (Interest) Act 1998 can be of assistance. This Act allows you to charge interest at a set rate which is a Bank of England base rate plus 8% from the end of a notional 30 day credit period. You are also entitled to recover a small amount in respect of debt recovery costs. It is helpful to make it clear in your early correspondence that you are relying upon the provisions of the Act and this can be included in your solicitors letter before action.
The Court procedure allows you to take action for disputed debts of up to £10,000.00 by way of a Court claim through the Smalls Claims Track. This can provide an inexpensive and reasonably quick procedure to recover outstanding amounts. For disputed claims between £10,000.01 and £25,000.00 the “Fast Track” procedure is available in the County Court. For over debts £25,000.00, “the Multi Track” procedure should be used in the High Court. However these fast and multi track are more complicated and will involve considerable expenditure in terms of Court fees. For undisputed debts of more than £750.00 you can consider a statutory demand which allows you to petition to wind the Company up or to make an individual bankrupt if the debt is not paid within 21 days. However, this procedure must be used carefully because it may result in you having to pay the other parties costs of setting aside the statutory demand if there is an arguable defence to your claim.
It is advisable to consult a solicitor if you are unclear about your prospects of recovering unpaid accounts and the solicitor can advise you of the most appropriate procedure to recover your debt swiftly and with the minimum of expense.
For friendly advice concerning any debt matter contact Robert Anderson or Ram Saroop of RDC Solicitors who will be able to give you step by step assistance to ensure that you do not end up in a same position as the hundreds of small companies left high and dry by the Carillion collapse.
RDC has offices in Bingley, Bradford and Ilkley. Robert can be contacted at firstname.lastname@example.org and Ram can be contacted at email@example.com Alternatively Robert and Ram can be contacted by telephone for an initial chat on 01274 723858 or 01274 735511.