Bad debts recovery – What method to choose

The article titled: “Bad debts recovery – What method to choose” from Lawyer Nguyen Huu Phuoc, is published on Sai Gon economic times, dated 09 February 2012.

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During the business life cycle of enterprises, they will sooner or later face the problem of one or more customers do not pay for the provided goods/services for many different reasons, and in not a few cases, losses due to the “soaked” debts will constantly increase their competitiveness decline, even lead to a risk of bankruptcy for the enterprises. However, not all enterprises know how to recover some or all of the bad debts quickly, efficiently and least costly.

There are a number of common ways to recover bad debt as follows: (i) forgive the debt to the debtor enterprise, (ii) reduce the debt for the debtor enterprise provided that the debtor shall pay right away the remaining debt (iii) sell the debt to factoring companies, (iv) order service from companies providing debt recovery services, (v) assign the lawyer’s office/law firm sue the debtor to court so that the enforcement agencies can support the debt recovery, or (vi) hire the gangsters to recover the debt. The selection of one of these ways depends on many factors such as the legal mechanism for implementation, solvency of the debtor, the costs to recover the debt, cash flow of the creditor enterprise.

Forgive the debt

The debt forgiveness should be considered if the debtor enterprise is unable to pay even for those loans with very small value and the costs that the creditor enterprise has to pay to recover the debt is estimated equal to or higher than the amount to be recovered. For example, Company A in Mong Cai is the debtor of the company B in Saigon with the debt amount of three million Vietnam dong. It is not be feasible for the Company B if they send staff from Saigon up and down several times to Mong Cai to recover the debt because of high travel costs while the possibility of debt recovery is very low. Company B cannot order the service from a company providing debt recovery services or lawyer’s office/law firm to recover the debt because the fees paid to the service companies or the lawyer’s office/law firm is maybe higher than the amount recovered.

Reduce the debt

However, for a debtor enterprise that owes the debt with very small value but has the ability to repay the creditor, the enterprise may consider a debt reduction provided that the debtor enterprise shall pay right away in one time the amount of the remaining debt. This can help the creditor enterprise clear up the bad debts, have more capital source for re-investment, use its capital more efficiently as well as not to spend costs and time for debt recovery

Declare the debtor enterprise bankrupt

In case of large debt and the debtor enterprise does not have much liquidity, reducing the debt for the debtor enterprise to pay quickly the remaining debt, sell the debt to factoring companies or order service from enterprises providing debt recovery services is not feasible because no one is enthusiastic to participate in the matter due to its low possibility of debt recovery. In this case, it is best to ask a law firm or law firm specializing in enterprise bankruptcy to submit application requesting the bankruptcy procedures to the debtor enterprise and try to soon get a court decision declaring the bankruptcy of the debtor enterprise. Despite knowing that the procedures for bankruptcy of the debtor enterprise will not have much meaning when the debtor enterprise has no solvency or already have many secured debts, but the creditor enterprise should do so whether it has to bear costs to lawyers as it would be advantageous for the creditor enterprise in another point of view. Accordingly, based on the judgment of the court, the creditor enterprise can ask for the debtor enterprise to be declared bankruptcy under the provisions of enterprise bankruptcy law. Meanwhile, the creditor enterprise will have the chance (however small) to partial recover the bad debts through the implementation of procedures for public sale of the remaining assets of the debtor enterprise under the bankruptcy procedures.

Sell the debt

The sale of the debt to factoring companies has its advantages. First, because the factoring trading has been formed very early in Europe and therefore the business enterprises in this sector has accumulated much experience in the management of bad debts of enterprises. Secondly, the factoring trading has been allowed by Vietnam’s laws so creditor enterprises should not be afraid of law violations. Thirdly, the factoring companies can pay ahead of time all or a portion of the debts of the debtor enterprise and all risks of unrecoverable debts will be born by the factoring companies. Fourthly, with the feature of specialty finance companies, the factoring companies can reduce the activities of accounting of the creditor enterprise as well as secure the debt recovery and determine the payments to the creditor enterprise. Fifthly, factoring companies also help the debt identified in a comprehensive analysis as well as identify the abnormalities, which make recommendations to the creditor enterprise.

Order service from companies providing debt recovery services

The ordering service from companies providing debt recovery services is another way that the creditor enterprise may consider because of the advantages of this approach. First, debt recovery service has been recognized by the law of Vietnam through the fact that a number of companies operating in this field are properly granted business registration. Secondly, companies providing debt recovery services can issue VAT invoice for the fee of their services so the creditor enterprise can put this into its deductible expenses. Thirdly, with the availability of professional expertise combined with the knowledgeable staff in debt recovery, the companies providing debt recovery services can track out the property that the debtor enterprise may disperse and hide which is difficult to detect through the litigation channel. Fourthly, by understanding the business philosophy of enterprises is that they are afraid of losing prestige with customers, debt recovery companies will apply the lawful tactic “long rain, long existence of penetration” making the debtor enterprise tired, afraid of losing face so that it has to pay the debt. Finally and most importantly, the majority of debt recovery companies often do not charge a fixed fee or charge only a very small initial verification fee, and charge service fee for the recovery of debt only when the debt recovered, so if the debt is not recovered the creditor enterprise does not have to spend additional expenses for debt recovery. The main disadvantage of using the services of debt recovery companies is that their service fee is quite high, from 5-35% of debt amount recovered and even in a difficult situation the debt recovery fee may be up to 50%.

Take legal action

Another way that some creditor enterprises are considering is to assign the lawyer’s office/law firm to sue the debtor to court to recover the debt. One of the main advantages of this approach is that by using the lawsuit to court, the lawyer of the creditor enterprise in the proceeding may consider asking the court to accept the application of interim urgent measures that are permitted by the law, such as seal or do not allow to transfer assets, freeze bank accounts of the debtor enterprise or prohibit some people in the management board of debtor enterprise to exit. These things will create significant pressure on the debtor enterprise, especially the debtor enterprises that are operating their business normally. The second advantage is that the lawyer’s offices/law firms usually charge fee on a fixed basis and the fee is not too high so that if bad debts are recovered the costs for debt recovery are not high. The third advantage is that the lawyer’s offices/law firms can issue VAT invoice so the cost for hiring lawyers can be included in reasonable and valid costs of the creditor enterprise. The last advantage is that the staffs working for the lawyer’s offices/law firms have extensive experience in dispute resolution and proceedings so they can review records and documents involved and give some legal suggestions to the creditor enterprise to see whether this case is a true debt recovery or an implicit contract dispute. If it is a contract dispute, whether the creditor enterprise will be counterclaimed by the debtor enterprise and whether the success of the counterclaim is high. These advices are very important for the creditor enterprise because sometimes it is not sure that the nature of the case is a debt recovery or a contract dispute, because in many cases the legal action for debt recovery fails and the creditor enterprise is even counterclaimed and has to compensate for the debtor enterprise, as well as spends court fees and attorney fees.

Hire the gangsters

If the creditor enterprise look for the final solution as relying on the gangsters, this action should not be taken and should be avoided, because the creditor enterprise cannot control the activities/behaviour of the gangsters and if they kidnap, beat, or distrain properties of the debtor enterprise, the creditor enterprise will not only take the risk of being unable to recover the bad debt and pay costs to the gangsters but also take the risk of joint civil liability if the debt recovery acts violate the law and the head of the creditor enterprise may also be prosecuted for criminal liability.