Bad Debts - Pursuing Outstanding Invoices
When you suspect that a customer is unable to pay you an amount owed, UK accounting law requires you to 'provide' for the doubtful amount by creating a cost within your accounts. If it becomes clear that the debt is not recoverable, the money owed should be written off completely. These costs are allowable for tax purposes.
If one of your customers is declared insolvent, which effectively means they can't pay their debts, you can take steps to recover the money. The process is long (between six and 12 months, and sometimes longer) and you may receive only part of what you are owed or even nothing at all. Consider whether pursuing the debt is worth your time and effort. You will need to consider the size of the debt, the assets of the customer and the cost of pursuing a claim against what you are likely to recover.
If you have supplied goods, don't think that you can just turn up at the customer's premises and take them back - it is not a presumption in law that unpaid goods belong to the supplier. If you do decide to go ahead with recovering the debt, you will actually start in quite a passive role.
After your customer becomes insolvent an official receiver (OR) or insolvency practitioner (IP) will contact you (provided they know you are a creditor). A Company Voluntary Arrangement (CVA) is an arrangement between the insolvent company and its creditors. The IP will inform you of a creditors' meeting in advance, at which you will have the chance to vote on a repayment proposal, drafted by the IP, in accordance with the value of the customer's debt. The proposal needs a 75 per cent majority to be passed.
Once it is passed, creditors will not be able to chase debts in the normal way. They must abide by the repayment plan in the proposal. You should always try to attend creditors' meetings. These are organised by the IP and give you a chance to ask questions about the insolvency and, possibly, agree the best way forward. Attendance is one of the most pro-active steps you can take, although unfortunately there are no guarantees of your getting paid.
When a business goes bust, banks, the government, employees, HP/lease companies (sometimes) and landlords get paid first. Unsecured creditors, of which you are one, are low in the pecking order. Remember that the amount you eventually receive depends on how much money can be raised from the company's liquidation and how many other claims have been made. At this stage, if full settlements of unsecured creditors' claims are not possible, payments are made in proportion to the value of each creditor's claim.