When customers don’t pay: How to reclaim possession of your goods
Non-paying customers can have a catastrophic effect on cash flow, impacting your ability to cover crucial expenses such as rates, salaries and rent. Smaller businesses, with neither the resources to chase payment nor extensive cash reserves to fall back on, are often disproportionally affected by the issue.
In this guide, the business dispute solicitors at Harper James explain how to reclaim possession of your goods from customers who don’t pay. We consider how to protect your position from non-payment risks, the steps you can take to address non-payment, and when reclaiming your goods can be a viable option.
How can businesses protect themselves from non-payment risks in the first place?
Dealing with non-payers is frustrating and time-consuming and detracts from your primary goal of making your business a success. The importance of taking proactive steps to protect your businesses from non-payment cannot be overstated.
Some examples of the types of measures you can implement to protect your position are as follows:
- Check your customer’s financial position
Before dealing with a new customer, you should conduct due diligence on their financial position. Poorly performing companies can pose a greater risk of non-payment, so if you want to do business with them, it’s sensible to take precautionary steps to mitigate the threat. For example, you could ask for payment upfront or take a deposit.
- Ensure your contracts are watertight
Robust contracts are the building blocks of your business and enable both parties to understand their rights and responsibilities. Incorporating express terms addressing non-payment not only safeguards your position, but also encourages customers to fulfil their obligations.
The terms that can help avoid non-payment issues include charging interest on late payments, detailing the procedure governing non-payment, and a right of termination if your customer’s financial position worsens.
- Implement effective credit control
Effective credit control is crucial in reducing the risk of non-payment. Larger businesses usually have a department dedicated to credit control, whereas in smaller businesses, responsibility often lies with the owner or finance director. Proactive credit control involves monitoring payments, chasing invoices and escalating problematic situations as necessary.
What steps can be taken when customers fail to make payments?
Time can be of the essence when faced with non-payment, particularly when the sums involved are significant. Practical routes, such as extending the time to pay or agreeing payment plans, are always preferable, but should they fail, you may need to consider more drastic action.
Potential options to consider when dealing with non-paying customers include the following:
- Suspending business
Refusing to do business with a non-paying customer until they clear their account can persuade them to prioritise payment, especially if your services are crucial to their commercial operations. You must check your contract before proceeding. Unless there is an express term permitting you to withhold your services, you may be in breach of contract.
- Serving a statutory demand
A statutory demand is a formal demand to pay outstanding monies within 21 days. You can serve a statutory demand on a non-paying company if they owe you more than £750. If they are individuals, they must owe over £5,000 before you can use the statutory demand procedure. If your customer fails to pay by the deadline, you can use the statutory demand to petition for their bankruptcy or winding-up.
Statutory demands are a potent tool in a supplier’s credit control armoury. The process is full of traps for the unwary. If your statutory demand does not meet strict legal criteria, it may be set aside, and you may be liable for the debtor’s legal fees.
- Issue Court proceedings
Whilst litigation should always be a last resort, it is sometimes unavoidable. If you have exhausted all other options and payment remains outstanding, you can issue Court proceedings to recover the sums. However, there is little point in obtaining a Judgment against a customer unable to satisfy it, so it’s essential to check their financial position first.
- Recovering goods
Taking back possession of the goods you have supplied to a non-paying customer can be a convenient, straightforward way of recouping your losses in appropriate cases. We explain the procedure in more detail below.
Is there a legal process for reclaiming possession of unpaid goods?
You can only reclaim possession of unpaid goods if your contract expressly permits it. In the absence of contractual entitlement, ownership of the goods passes to the customer on delivery.
The relevant contractual term is known as a ‘retention of title’ clause. The clause provides that ownership of the goods does not pass to the buyer until they have paid for them in full. A retention of title clause should permit you to enter the customer’s premises without trespassing and recover goods that can be identified as yours. To assist you in doing so, it’s a good idea to mark the actual goods, rather than the packaging, with your logo or a serial number if you can.
Savvy customers may seek to get around a retention of title clause by paying for specific goods they want to keep and not paying for others. This problem can be mitigated by what is known as an ‘all monies clause’. Under an all monies clause, you retain ownership of all the goods you have supplied to the customer until they have paid everything they owe. The customer cannot pick and choose which goods it pays for, and you do not need to tally up specific goods at the customer’s premises with unpaid invoices.
Whilst retention of title clauses give suppliers invaluable additional rights against non-paying customers, they are not without their limitations. They are of virtually no use if the goods are consumed immediately or are perishable. If the customer has sold the goods, they no longer own them, so any retention of title clause will likely be ineffective. You might be able to rely on the clause to recover the goods from the third party, but this is a notoriously difficult process, and you will likely need to involve the Court.
Some suppliers seek to extend their rights to include an entitlement to the proceeds of the sale of the goods. Clauses of this nature are difficult to enforce and require meticulous drafting. If the seller has combined the goods with others, the end product generally belongs to the customer, so your retention of title clause will only assist if your goods can be easily detached.
A retention of title clause is especially useful if your customer becomes insolvent. It enables you to reclaim your goods rather than having to claim in the insolvency as an unsecured creditor. You must notify the insolvency practitioner about the retention of title clause as soon as they are appointed. If you don’t, they may sell the goods before you have a chance to collect them. If the customer is in administration, you need the consent of the administrator or the Court to reclaim your goods.
Are there time limitations for businesses to reclaim possession of unpaid goods?
If your retention of title clause is valid, you remain the owner of the goods until the customer has paid for them. The sooner you act, the more likely you are to recover goods of any value. Any delay gives the customer a greater opportunity to sell the goods or incorporate them into other products, and the longer you wait, the more likely the goods are to be damaged.
You cannot recover any goods until the time limit for payment has expired. So, if your payment terms are 30 days, you must wait at least 30 days before reclaiming them. Where goods are perishable or intended for resale, this can render a retention of title clause of little practical use.
What can I do if the goods are damaged or missing when I go to repossess them?
Reclaiming your goods is only viable if they can be located and are in a reusable condition. If they are missing or damaged, you may need to seek recovery of the debt instead.
How can businesses maintain positive customer relationships while reclaiming goods?
The best way to maintain your customer relationships is through effective communication. You should ensure they understand the effects of the retention of title clause from the outset, so it does not come as a surprise down the line. If the customer is late paying an invoice, it’s a good idea to follow up with regular, friendly reminders before taking further action, provided doing so won’t prejudice your position. When you decide it’s time to exercise your right to reclaim the goods, you should try to arrange a mutually convenient time to collect them, rather than simply turning up unannounced.
These principles must be balanced against any risk that the customer might dispose of the goods or speed up the manufacturing process in a bid to avoid the effects of the retention of title clause. If the customer’s financial position deteriorates, you may need to act sooner rather than later.
Summary
Retention of title clauses provide a valuable additional layer of protection against non-payment. By reclaiming your goods, you can circumvent the need for Court action, and you are in a far stronger position if your customer becomes insolvent.
Retention of title clauses are not bulletproof. They must be carefully drafted to be effective, and even the most robust of clauses are of little use if the goods have perished, been sold or been incorporated into new products. The clauses must, therefore, be used as part of a broader credit control and risk mitigation strategy. Prevention is better than cure, and there is no substitute for thoroughly vetting new customers and operating proactive credit control procedures.
