A strategic guide to debt collection (Part 1)

Preface

In the past couple of years, external debts have skyrocketed and the global economy has taken a monumental blow. As per the International Debt Statistics Report 2021, the global Gross Domestic Product (GDP) has slowed down and is about 2.4% lower than the GDP during the 2008 financial crisis. The advent of the pandemic was the straw that broke the camel’s back, and has been a major contributor to this stagnation, affecting the prospective development of the economy all over the world. It is true that underdeveloped and developing countries have borne the brunt of this economic crisis, however, developed countries have also taken a massive hit.

The concept of debt has been in existence since time immemorial, businesses all over the world have been struggling to level their asset to liability ratio since the financial crisis in 2008. With the advent of the pandemic keeping a check on the economic vulnerabilities of the company has become ever-more important. Further, with the increasing complexities presented by this situation, there is a crucial need for appointing experts!

Introduction

As entrepreneurs, we recognize the importance of commercial transactions and the need to manage the risks associated therewith. Every transaction is a give and take relationship; in the event that either party fails to honor their end of the obligation, their relationship can turn sour, and there is a high chance that one of the parties would suffer a fiscal loss. Under such circumstances, experts under their wing can assist businesses in making the right decisions at the right time, safeguarding their rights and offering them with solutions that will effectively mitigate the risks.

There is no straitjacket system that fits all businesses and situations equally when it comes to debt recovery matters. Just like a doctor treats all his patients differently depending on their symptoms, an expert evaluates the magnitude of debt, the possibility to achieve a settlement or the need to proceed with litigation. In other words, the conversation around debt collection also has the same objective of finding the root cause and treating it.

This article aims to cover the essentials of debt collection, the scenarios that may arise and strategies undertaken by experts to tackle them.

Addressing the problem  

There is a sense of exhilaration that comes with closing a deal worth millions. However, in the midst of this thrill, many businesses ignore the importance of getting to know their client. In many situations, this fleeting euphoria is followed by years of fiscal hardship.

Many times, businesses neglect the need to check the authenticity of a company before proceeding with a transaction. In our experience, such oversight costs the creditor millions, wherein they discover only at a later stage that the defaulting party was fake or was misrepresenting its existence. This is the reason why it is important for any company to know who it is dealing with.

Another important aspect that most businesses may turn a blind eye to, are the basic terms of a contract and their implications. Many times, the instruments used to execute a commercial transaction include legal terms that may require clarification, so it is important to conduct a review of such documents by professionals before executing it. Let us take an example, during the course of preparing the contract, the jurisdiction clause or the dispute resolution clause may not seem essential, however, these clauses determine the fate of the creditor, for instance, when contracting parties choose an international jurisdiction that has no bearing to the place of business of either party, it can add to the fiscal burden of the creditor significantly. In such you should practice caution. This may mean engaging legal experts to review and verify the implications of such terms so that the business may not suffer later.

Further, it is necessary to appoint professionals to guide you with the right operation that is compliant with the relevant laws of the jurisdiction, the dispute is uncertain but likely. This step enhances the evidentiary value in litigation. This precautionary step ensures that you have safeguarded your rights by evidencing fulfillment of your obligation.

Additionally, it is also important to keep an eye on the company structure of your clients, for instance, in the case of a limited liability structure the liability of the manager is restricted to the assets of the company. In such a case, you would not want to be caught in a situation where you are unable to recover your debts. In such a scenario, taking precautionary measures and executing a guarantee by an individual will strengthen your position during debt recovery. You would be shocked to hear the number of times we have come across newly established enterprises in UAE, that have fallen prey to bad debts of over AED 20 million with no viable recourse and have ultimately resorted to liquidation.

Due Diligence: prevention is better than cure

As Benjamin Franklin aptly said, “By failing to prepare, you are preparing to fail”.

Businesses deal in millions every day, the last thing an entrepreneur would want to do, is hand over their hard-earned money into the hands of someone that they do not trust. Imagine if a person introduces themselves as a thief and you go ahead and voluntarily hand over your hard-earned money to them. Crazy, right?

As legal experts and entrepreneurs, we understand that it is crucial for any business to practice caution when moving ahead with a transaction, which is why we strongly advocate for conducting due diligence. You may be wondering at this point, what is due diligence and why should I hire experts and incur these additional costs? it is important to understand that evaluating the pros and cons of a transaction is not a waste, rather, an investment; and this is an investment with high-value returns. It analyses the worthiness of a transaction you would thereby be safeguarded from chasing your debtors for eternity.

To put it simply, due diligence basically means, reasonably investigating and assessing the most appropriate course of action that would ensure the safety of a business. By conducting due diligence, you ensure that you are well versed with the background of the contracting party, its structure, financial health, legal history and so on. Overlooking those could potentially cause impediments in the future. Think of it this way, the aim of a business is to achieve long-term development. Therefore, as a business owner, would you want to take a risk and execute a transaction on a whim? Or would you take a moment to research the party and conduct a detailed risk ratio analysis to determine whether it is or isn’t advantageous to enter into such a transaction?

We have to admit that the essence of business revolves around taking risks, however, taking careful and calculated risks would serve as an advantage to any business in the long run. Preliminary assessment can strengthen the management of the business and operational hazards, mitigating and lowering the risks of issues that increase financial burden.

Identification of the root cause of the issue is

the first phase of ensuring the fiscal wellbeing of your business.

In the next phase, we will discuss in the next article is identifying the approach and solution that suits your business best.

Author: Erum Sheikh
Legal Associate