Increase Profits by Collecting 100% of all Sums Due

When I was Legal Director at a global tech company, I helped collect delinquent payments from many customers and business partners. Often the counter-party was located overseas, the balance due had grown to millions of dollars, and the counter-party had no complaints about our products, but just claimed to be suffering cash-flow problems, which it expected to be resolved shortly. 

Obviously, red flags are raised. Are they being truthful? Will their financial situation worsen? Are they insolvent? Will they file bankruptcy? Are they paying off other creditors, transferring assets to insiders, committing fraud?   Such fears are completely reasonable and such cases can be challenging. 

Fortunately, by taking proper precautions at the start of a business relationship, monitoring throughout, and managing closely when issues arise, one can greatly mitigate risk and ensure that almost all sums that are owed to your company will be paid in full. I am now employed with a leading US law firm and we regularly help to resolve such matters. Below are a few areas to consider. 

Risk mitigation begins with conducting due diligence on prospective new customers, partners or joint venturers before commencing business, setting appropriate credit limits, updating them periodically, and requiring a sound, signed agreement. 

A sound purchasing or manufacturing agreement should clearly specify the scope of work, payment terms (e.g., 30 days, 60 days, etc.), payment schedule (e.g., deposit, milestones, etc.), interest or penalties for late payment, and any discount for early payment. Of course, the dispute resolution provision is essential (e.g., jurisdiction, venue, governing law) and the agreement may authorize recovery of attorney fees for the prevailing party.    

Invoices should be clear, complete and accurate; delivered promptly to the correct individual and address. If timely payment is not received, one should notify the debtor and ask if there’s a problem. The delay may be due to nothing more than someone being on vacation or misplacing the invoice. One should send further communications, remaining professional, but gradually increase the directness of demands. Explicit threats can be counter-productive, particularly with valuable business partners, but implicit threats (merely stating the consequences of late payments) can be effective. 

If problems persist, make phone calls to the debtor, request confirmation of sums due and commitment to payment dates. Accept modified payment schedules if necessary, but insist upon a short time-frame, with large payment up front. If debtor’s Finance persons fail to act, contact their Legal Department, executives, or retain a law firm to send a firm demand letter. 

When all else fails, litigation often provides the desired results. The place of litigation should be stated in your agreements, but if not one may have to choose where to sue. Asian companies suing U.S. defendants may prefer to sue in Asia, but if the plaintiff prevails outside the U.S. and the defendant has assets only in the U.S., the plaintiff must get the judgment “recognized” in the U.S. in order to seize those assets. In the U.S., recognition of foreign judgments is decided on a state-by-state basis, with most states recognizing a foreign judgment if it is final, binding, non-appealable and the defendant was afforded due process. However, recognition of Taiwan judgments is less certain, so it is generally preferable for Taiwan plaintiffs to sue in the U.S. for the greater ease of enforcement.

Often a creditor may start legally seizing the debtor’s assets prior to trial, by filing a Motion for Writ of Attachment. For the Writ to issue, a plaintiff usually must establish that (a) the plaintiff will likely prevail at trial, (b) the attachment is not being sought for an improper purpose, and (c) there is a clear and definite formula for computing the amount of damages. If the Writ does issue, not only may the creditor begin executing upon the debtor’s assets, and force the debtor to take the claim more seriously, but the Writ has the effect of converting the creditor into a secured position, giving it priority over unsecured creditors.

If the debtor appears to be insolvent, there may be actions available against its officers, directors or shareholders. It may be possible to pierce the debtor’s corporate veil and impose liability on its principals, if it failed to observe corporate formalities, co-mingled corporate and personal assets, or acted as a sham entity to defraud third-parties. Actions may also be available for actual or constructive fraud, if the debtor transferred assets with the intent to hinder, delay or defraud creditors, or made transfers for less than reasonably equivalent value when it was insolvent. And in some cases, actions may be available against the debtor’s officers or directors for breach of their fiduciary duties. While directors usually owe such duties only to shareholders, when a company is insolvent such duties may be owed to its creditors.

Finally, when trouble arises, promptly contact qualified legal counsel, as a creditor’s position can deteriorate rapidly when not handled properly. Many firms, such as ours, offer free initial consultation and a wide variety of fee arrangements, from fixed fee, to percentage of recovery, to discounted hourly rates with bonus upon recovery.  

The above is general information only and is not intended as legal advice. Available options and strategies for any particular case will depend on the facts and law of that particular case.

 Please contact me for a free consultation if you wish to discuss your particular case.

Chris Neumeyer - [email protected]