3 minute read
Creditors’ Rights and Remedies
Dealing with unpaid accounts
By Jonah Waxman, Litigation Associate at Lawrence, Lawrence, Stevenson LLP
Business relationships are built on trust. While handshake deals may no longer be the norm, the expectation that each party will act in good faith to fulfill their respective contractual obligations has only become more entrenched as written agreements have become more commonplace.
What, then, is to be done when one party attempts to avoid their contractual obligations?
We might narrow our focus to situations involving customers who have recently refused to satisfy their accounts for services rendered. Perhaps you’re a company that has done work for this customer time and again, with only this recent invoice being met with empty promises to pay while they plead for accommodations during difficult times. These examples are only becoming more ubiquitous in the context of the COVID-19 pandemic, which has disrupted businesses and business relationships alike.
Early and timely communication, setting out each party’s expectations, is critical to mitigating against this unfortunate situation. A clearly defined contract, which has been vetted by both parties (and their respective counsel), might set out in detail a customer’s obligation to pay even when times are difficult, and what interest is owed in the context of late payments.
Another potential way for the company to clarify its expectations is to bill regularly, and not send sporadic accounts. The former prevents the customer from feigning surprise, either by the bill itself or by an unexpectedly large amount (which could have otherwise been delivered more frequently in smaller sums as the project developed). This has a further practical advantage: delivering regular accounts may alert you sooner to issues with payment, thereby preventing your company from investing money into a customer otherwise unable or unwilling to pay for services rendered.
Should the need arise to commence collection proceedings, there are two primary legal considerations that you’ll want to consider:
1. Why has the debtor refused to pay? 2. How long has the debt been outstanding?
Both would have implications for the merits of your claim. As soon as the situation arises, you should consult with a litigation lawyer who specializes in debt
enforcement as soon as you are able, so that you may obtain the appropriate and timely legal advice.
The legal process through which you would potentially collect on your outstanding account is called an “action,” which involves you suing the debtor in Court. The time and cost of getting your action before a judge depends in large part on how the debtor responds to your claim.
Assuming you are successful in obtaining judgment against the debtor, you would potentially be entitled to claim back the amount owing, plus a portion of your legal fees. All litigation is, by its nature, costly and unpredictable, and the ultimate decision on your entitlement to reimbursement will be with the presiding judge, assuming you are not able to settle beforehand.
This suggests a final consideration: will you practically be able to collect on that judgment? The enforcement of your rights depends on the debtor’s financial status, and your status as a secured or unsecured creditor. If you are one of many unsecured creditors, you may go through a lengthy and expensive litigation proceeding solely to obtain a paper judgment against the debtor. You should consider these very serious practical considerations when determining whether a lawsuit is in your company’s best interests, or if it is first advisable to try and resolve the debt more amicably. This is especially so if you believe your business relationship with this customer to be worth saving, and not worth the expense of sacrificing for the sake of whatever is owed to you on the existing accounts.
Please note that none of the above is intended as legal advice, and you should consult a lawyer so that you may discuss your individual circumstances and the specific rights and remedies that may be available to you.
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