Jet set debt - debt collection in the construction industry

Yet when you consider former Carillion chief executive, Philip Green, said he felt like a bailiff when he flew out to Qatar chasing alleged debts worth over £200million, you can see that those stereotypes don’t match the modern reality.

The balance of power between creditor and debtor, at least within the modern construction industry, is not as described in Little Dorrit.

What’s more, the demise of Carillion appears to show that debtors can have enough power over their creditors to destroy them.

The reason for this is simple and obvious: the lifeblood of the construction industry is cash flow.

Even when profits are marginal, if cash is still coming in, construction firms can often survive. If that lifeblood is cut off or restricted by debtors not paying, the prognosis is generally terminal.

Collecting debts is, therefore, a crucial part of the survival of construction firms: indeed all businesses.

But debt collection is not always a simple process.

Problem debtors

For a start, there are three different kinds of problem debtor —

• The debtor who has no means of paying the debt: the “penniless debtor”

• The debtor who truly doesn’t owe anything because no sums are due or because the creditor owes the debtor even more money: the “disputed debtor”; and

• The debtor who won’t pay because they’d just rather keep the money in their own bank account: “the greedy debtor"

It is often difficult to know which of the three categories a particular debtor falls into.

If there are clear signs you are dealing with a penniless debtor, there may be no point in taking further action against them, because spending money on pursuing payment will likely just compound the loss.

With disputed debtors, we realise there are always two sides to every story, and if you decide to spend money and effort pursuing them, you’re taking a gamble that your version of the story will come out on top.

When faced with a greedy debtor, you should ultimately end up being able to recover the full value of the debt if you pursue it. The question is, how long will that take and what proportion of your cash flow will be siphoned off and lost in covering your costs?

All three categories of debtor, therefore, bring threats to the health of your cash flow on top of the original debt.

Forgetful debtor

Of course, there is a fourth category: the forgetful debtor, who has simply overlooked the invoice and, if given a reminder, will pay up without any further delay or expense.

The potential for your debtor falling into the forgetful category means that it is generally always worthwhile sending out a fairly robust reminder when payment is overdue.

What should you do, however, when that reminder has gone out, but no payment comes back in return?

Where you are dealing with a disputed debtor, the first step is to establish that there is, truly, a debt as well as determining its value.

Ideally this would be done through negotiation — saving on the expense of more formal proceedings. Failing that, you’ll need to go either to adjudication or court / arbitration.

With a greedy debtor, the most effective weapon in your armoury can be a statutory demand.

This is a formal document served by sheriff officers calling for payment.

Service of a statutory demand, and the potential repercussions, can often be all that’s needed to persuade a greedy debtor that they can’t put off payment any longer.

Then of course, if the existence of the debt isn’t disputed and payment isn’t made in response, the creditor can begin insolvency proceedings against the debtor.

Oh, and spoiler alert — the insolvency process doesn’t involve anyone going to prison anymore.