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Henco de Kock : Debtors Not Pay? Cash Flow Problems?

Dynamic Debt Solutions, aside from providing debt collection services, in a nutshell,provides its clients, most of whom find themselves in financial distress, with a solution. his is achieved by identifying certain obstacles and providing a solution as to how to overcome these obstacles.

The economic reality is that your company probably owes money to a supplier or service provider, as a result of debtors that are unable or simply unwilling to meet their commitments and pay you on time, or at all.

This has caused companies across South Africa to experience severe cash flow problems and has essentially lead to the liquidation of multiple companies, notwithstanding the fact that many of these companies had a substantial asset portfolio. The liquidation of listed companies such as Protech Khuthele Holdings Ltd and Sanyati Holdings Ltd and their affiliated entities are good examples. These companies experienced sudden cash flow restraints due to nonpaying debtors.

This creates a domino effect. Let’s use the classic case of Company B can’t pay Company C because Company A owes him money as an example; say Company B is placed under liquidation due to the cash flow restraints caused by the non-payment by Company A. Let’s further assume that Company C was a supplier and holds no security for its claim against Company B. Bear in mind that concurrent creditors, which are usually your suppliers, stand last in the queue as far as payment in respect of pre-liquidation claims are concerned. A liquidator is appointed and succeeds in collecting the debt that is due by Company A, but Company C is a concurrent creditor, its claim ranks at the bottom of the list of payments to be made. As a result, Company C is unable to pay Company D and due to nonpayment by Company C, Company D is unable to pay Company E and so the cycle continues.

Avoiding Bad Book Debt
The agreement with your customers and/or clients should be your first point of reference. If the payment terms are strictly 30 days, you should keep your debtors to it. Monitor and track payments.

If your book debt reaches 90 days, chances are that you will experience cash flow problems soon enough. So be persistent and strict; the baby that makes the most noise is always attended to first.

Once a debtor has reached 90 days you should consider taking action. The most common remedy in South African law is to issue summons and obtain judgement.

Once judgement is obtained it is registered against the debtor and remains valid for a period of 30 years or until such time as and when the judgement debt is settled. It is common that the debtor would propose a down payment arrangement as he would in all probability not have the wherewithal to settle the judgement debt by way of lump sum payment. You can then either obtain a writ of execution, and instruct the sheriff to attach and auction off assets equal to the value the judgement debt or decide to allow the debtor to down pay the judgement debt. Should the judgement debt not be satisfied the next step would normally be to apply for liquidation, which will put you, as a concurrent creditor, in a less than desirable position.

In many instances the nonpaying or slow paying debtor may be your biggest client or customer, in this case instituting legal action straight away may very well cause the end of your business relationship.

What Should Be Done?
Secure your debt! As soon as you come to the conclusion that a certain debtor may not be able to meet its commitments to you, you should consider strengthening your position by obtaining security over the debtor’s assets. Should you then have to institute legal action you will be in a comfortable position to do so. There are various forms of security that can be obtained inter alia:

Movable Assets As Security:
• Pledge
• General notarial bond
• Special notarial bond

Financial Instruments As Security:
• Cession in Securitatem Debiti
• Out-and out cession

Immovable Property As Security:
• Special Mortgage of Immovable Property as set out in the Deeds Registries Act 1937.

Separate Legal Entity:
• Suretyship

Tel 086 155 2288

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