Case Study: The Importance of Robust Contracts and Terms for Enforcing Debt

In today's competitive business environment, having a solid credit and debt management strategy is essential for maintaining financial health. This case study is taken from a client of ours and illustrates the challenges faced by a company in recovering aged debt and highlights the necessity of robust contracts and terms for debt enforcement.

Scope of Work

Middleton Taylor was tasked with recovering an aged debt of AED 28,756.88 from an internationally renowned interior design company, led by a well-known celebrity. The debt was related to various works carried out in 2022.

Documents Received:

·        Statement of Account

·        Outstanding invoices

·        Quotation dated 13 September 2022

·        Formal email requesting payment (date unknown)

Collection Methods

Various methods were utilised to recover the debt, including telephone calls and WhatsApp messages. However, attempts to reach the known mobile numbers were unsuccessful as they were either switched off or unobtainable.

Further investigations revealed that the respondent was a director of 12 companies in the UK, of which 11 were struck off for failure to submit accounts and were subsequently dissolved. The one active company had a notice for compulsory strike-off issued on 30 May 2024.

Additionally, the respondents had recently been issued with County Court Judgments (CCJs) in the UK for GBP 60,000 and GBP 40,250, respectively. They had also divested their main property in the UK, stating that Dubai would be their main residence.

Case Study Deduction

The lack of official documentation made the recovery process difficult. Although the respondent's trade license was active and had been renewed in April of this year, the absence of critical documents like a current address, active contact numbers, and strong contractual terms hindered effective debt collection. This could have been avoided by having proper credit and debt management systems in place and undertaking robust due diligence on the client at the start. There was a clear strategy of defrauding customers, and every business needs to be cautious of this with every client.

The client is proactive and now understands the necessity for robust in-house credit and debt management systems. Middleton Taylor were then engaged to use their expertise company wide to implement proper systems to ensure such scenarios never happen again and this is a good example of the added value and risk control that Middleton Taylor bring to businesses.

Credit Process Re-engineering Proposal

This case underscores the need for more robust credit and debt documentation processes. To avoid similar issues in the future, businesses should implement comprehensive procedures that include:

Know Your Customer (KYC) Processes: Thorough KYC checks should be conducted to verify the identity and credibility of clients before extending credit.

Account Opening Forms: Ensure that all necessary information is collected during the account opening process, including personal data of the authorised signatory.

Active Trade License: Verify that the client's trade license is active and up to date.

Known Address and Contact Information: Maintain current addresses, landline, and mobile numbers for all clients to ensure reliable communication.

Strong Terms and Conditions: Draft clear and enforceable terms and conditions that outline payment expectations, penalties for late payments, and the jurisdiction for dispute resolution.

Jurisdiction Clauses: Include clauses that specify the jurisdiction for any legal actions, such as the DIFC Small Claims Tribunal (SCT), to streamline the legal debt recovery process if necessary.

Conclusion

This case study demonstrates the critical importance of having robust contracts and terms to enforce debt recovery effectively. By implementing comprehensive credit management processes, businesses can safeguard their financial interests and mitigate the risks associated with extending credit.

At Middleton Taylor, we are committed to helping businesses develop and implement strong credit and debt management strategies. Contact us today to learn more about how we can support your business in securing its financial future.

Forewarned is forearmed.