Debt Collection – Two Recovery Options

“Creditors have better memories than debtors” (Benjamin Franklin)

How well you manage your debtors’ book, and how successful you are in actually collecting monies due to you, should always be a management priority. It can spell the difference between a successful, profitable business and a failed one.

If you are new to the game (the owner of a new start up perhaps), the debt collection process might seem confusing and a bit intimidating, but it needn’t be.

If you need to understand the basic principles and terminology, have a look at our simple overview below of a pretty “standard” debt collection process. We follow that with an alternative suggestion, which even established businesses with a long track record of debt collection will find useful.

Of course, some debts are easily collected – a gentle reminder and a few courtesy calls often do the trick. But when a debtor turns recalcitrant – dodging calls, ducking and diving, delaying, hiding assets – it’s time to bring out the big guns and go the legal route.

Let’s discuss two possible avenues of recovery –

1) Recovery Avenue One: The “standard” debt collection process 

Let’s start off with a brief (and simplified) overview of a fairly typical sequence of debt collection events –

1. A courtesy call: This is most effective coming from your attorney – there’s nothing like an official legal communication to convey that you mean business. In most cases it will be a polite but firm communication (think “iron fist in velvet glove”) – perhaps via a voice call, perhaps in writing, perhaps both – telling the debtor that the matter has now been handed over for collection. Warnings of the legal process about to be unleashed, and mention of the extra costs and the credit rating implications for the debtor, might be all that’s needed to extract payment, or at least an offer of payment and an Acknowledgment of Debt. If not, on we move…
2. Letter of demand: This is a formal notification (you’ll hear it called a “Section 129 Notice” where the National Credit Act applies) officially demanding payment within a specified deadline period. It’s the last step before the actual legal process starts…
3. Summons: A summons is now issued at the appropriate court, and served on the debtor, who now has an opportunity to defend the action. Expect an experienced debtor to enter an “appearance to defend” as a delaying tactic, but if the debtor just ignores the summons or takes no further steps to defend the matter, the next step is…
4. Judgment: Your attorney now asks the court to issue a “default judgment”, which entitles you to proceed to the enforcement/collection stage…
5. Execution: Depending on what assets or income the debtor has, this could be a warrant of execution against movable property, a financial enquiry or an emoluments attachment or garnishee order. A debtor who knows the ropes will be experienced in dodging and/or frustrating these attempts, and if the debt still remains unsatisfied you can move on to another form of execution…
6. Application to sell immovable property: You can now apply to the court for leave to execute against any immovable property (a house, land or the like) owned by the debtor. This may or may not be easy to obtain, given everyone’s constitutional rights to housing.

The above is just an overview of general principles, and it is essential to have legal assistance at every stage to make sure that your process complies with all the rules and regulations involved.

2) Recovery Avenue Two: Apply for liquidation or sequestration

This may not be the best option for every debt collection scenario, but in the right circumstances it can be dynamite!

Before we get going, a quick note on terminology – if your debtor is a company, you apply for “liquidation” (“winding-up”) of the company, and the appointment of a liquidator. If your debtor is an individual, you apply for “sequestration” of the debtor’s estate, and appointment of a trustee.

Either way, the pressure you bring to bear on the debtor is the threat of imminent loss of control of all assets. Company directors must suddenly focus on the looming risk of losing all control over their businesses, an individual on losing all their personal assets, house etc – whatever they have.

As a side note, if your debtor is a company, a particularly useful section of the Companies Act allows you to serve on the company’s registered office a “section 345 letter of demand”. The company is then “deemed” to be unable to pay its debts if the debt isn’t paid or secured within three weeks. That makes your liquidation application a lot easier to support and increases pressure on the debtor to pay up.

Just be aware of two factors in particular –

1. You may be in for substantial cost. A recalcitrant director or debtor can still delay the process by defending your application, and whilst our courts do not look kindly on delaying actions and other “abuses of process” calculated to postpone the inevitable, getting to that stage in opposed matters can be expensive. And if you do eventually succeed in getting an order, not only could you end up recovering nothing (or perhaps only a part of the debt) but you might even have to pay into the estate, so ask your attorney beforehand about the “danger of contribution” aspect.
2. You cannot use a liquidation/sequestration application as a way to short-circuit any genuine dispute over liability, and with individuals you will also have to show that sequestration will benefit creditors generally. Unless you have good grounds for the application you risk having to pay a large adverse costs order for “abuse of process.” Legal advice specific to your case is essential!

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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