Debtor who's also a creditor won't pay

[KeyserSoze]

Hello,

We have an issue with one of our clients who owes us around £3,300 and won't or can't pay. This money is very over due, some from 2013 and the rest spread through 2014.

This client is also a supplier to us and we currently owe them a similar amount of money, although the money we owe them is only a couple of months old. Historically we've always owed them far more than they owe us, and rightly or wrongly this has given us a sense of security and means we haven't chased them too hard for payment.

When we started to chase for payment the problems began and essentially they've said they haven't got the money to pay us and they've been saying this for several months now. We've offered to pay them what we owe in full and for them to pay us in return but because they use factoring they've said that any payment we make doesn't free up any funds as "they've already had the money". Likewise we've offered to contra the money but apparently their factoring company does not allow contras.

We feel our relationship with them is no longer workable and we want to pay them, get paid ourselves and go our separate ways.

My question is whether there is some way to use the money we owe them as leverage to gain payment from them (even though they don't own the debt)? I realise that if they go bust then our debt to them will remain but there debt to us will not be recoverable, so we obviously want to avoid this.

Or are we better off paying what we owe ASAP and starting court proceedings?

Thanks for your help.

 

[john1989]

Just get current balances. If you owe them, pay them the difference. If they owe you, say you have deducted their invoices from the amount owing but there is still an amount outstanding that they need to pay and pursue if necessary.

 

[UK Contractor Accountant]

Normally a debt on factoring which becomes overdue more than 120 days will be re-assigned back to the customer anyway so you are fine with the contra action mentioned above.

 

[Ian J]

Normally a debt on factoring which becomes overdue more than 120 days will be re-assigned back to the customer anyway so you are fine with the contra action mentioned above.

Not necessarily as it's just as likely that the factoring company have recovered their investment in the debts whilst they remain on their books and still payable to them.

Best thing is to speak to the factoring company, tell them of your concerns and ask them to re-assign the debts, confirming it in writing to you and then you can contra them

 

[KeyserSoze]

Just get current balances. If you owe them, pay them the difference. If they owe you, say you have deducted their invoices from the amount owing but there is still an amount outstanding that they need to pay and pursue if necessary.

My understanding is you need consent from them to be able to do this. Am I wrong here?

 

[KeyserSoze]

Normally a debt on factoring which becomes overdue more than 120 days will be re-assigned back to the customer anyway so you are fine with the contra action mentioned above.

We're about to borrow a large sum of money to invest in some equipment. My business partner is particularly concerned that the factoring company will register some kind of late or non payment against us reducing our chances of securing the funding we need. Do you think this is likley?

 

[KeyserSoze]

Best thing is to speak to the factoring company, tell them of your concerns and ask them to re-assign the debts, confirming it in writing to you and then you can contra them

All invoices we get from this company are directly from the company not the factors. We've only been told verbally that they use a factoring company (as a reason not to pay us). We're pretty sure if we ask them which company they use they'll refuse to tell us. Is there anyway for us to verify that they are indeed using factoring and if so which company they use?

 

[Ian J]

Is there anyway for us to verify that they are indeed using factoring and if so which company they use?

PM me the name of the company and I'll check it out for you and if they use a factor that I know well I can also have a quiet word too if you wish

 

[KeyserSoze]

Thanks PM sent.

 

[Ian J]

I've answered by PM but for the sake of others who may be interested the supplier does have a charge registered to a factoring company but if there are no notifications on the invoices that they have been assigned then it looks like the company have a confidential invoice discounting facility which means that you can legally offset your account to them against theirs to you as you have not been notified of any assignment in writing.

What I forgot to mention in my PM is that they have recently filed their accounts for the year ended 31st October 2013 and they aren't very inspiring as current liabilities are twice the amount of current assets

 

[KeyserSoze]

Thanks that's very helpful.

How do we go about legally offsetting? Is there some official way to do this that we should follow?

I'm just thinking that at some point in the near future we're going to hear they've gone bust and I can see a situation where if we don't deal with this in the correct way, then the liquidators will expect to be paid, but the monies owed to us will be unrecoverable.

 

[Ian J]

You don't really have to do anything to "make it legal" If you pay by BACS just drop him a line by letter or email saying that you have paid your account of £x and deducted the amount of £Y that he owes you and have paid the balance

 

[KeyserSoze]

Thanks again.

I've done some digging since my last post and it seems it may not be that simple...

It seems there are different types of set offs. The type that seems to apply to us is an "Equitable Set Off". But this only applies in a situation where the 2 debts arose from the same transaction (ours did not).

If the company goes into insolvency it seems that the 2 debts would cancel each other out but I'm a bit hazy on this. Can anyone confirm this or shed some light on the set off rules in general?

Some links I found...

http://www.inhouselawyer.co.uk/inde...-your-cash-by-setting-off-debts-in-insolvency

http://www.murrellassociates.co.uk/article/i-owe-you-and-you-owe-me-lets-set-off/

 

[Ian J]

The links that you provided relate to more complex cases but yours is a very simple matter of he owes you money and you owe him money and whoever owes the lesser amount can offset the other debt and pay the difference

 

[KeyserSoze]

Hi Ian, thanks again for the response.

It's not that I don't believe you, but are you absolutely sure about that? (Sorry if this seems rude, it's not intended to)

It seems from those links that there are specific rules regardless of the complexity involved. I just want to make sure that if this client goes bust we won't have the receivers chasing us because we didn't follow the correct procedure and they see our debt as still owing.

I would have thought we would at least need some kind of acknowledgement from the other company that they've agree to this?

 

[Ian J]

If you are nervous just get your customer to pay his account in full as that predates the purchases that you made from them and logically should be paid first and then you can pay their account in full.

The reason that they don't want you to contra the account is because they won't want their factoring company to know that they are selling to people that they also buy from as that goes against the agreement that they have signed although the audit team should pick this up if they are doing their jobs properly.

In view of your nervousness It would be useful if someone else could add some input to the thread

 

[AllUpHere]

I don't think anyone else on the forum will be more knowledgeable or qualified than Ian to give advice on this thread.

If the OP wants another opinion, I don't think a forum is the way to go.

 

[Chris Ashdown]

Could you not write to both the factoring company and the client stating you were contra paying the amount stated and post by recorded mail.

Fully explain the age of the invoice outstanding and enclose copies, then at least you have a paper trail to come back to

 

[anhoang88]

Hi,
I think you shouldn't have to worry about the legal issue here.
As a customer they has breached their t&cs which should have included in their contract. Legally they should have paid you on 30 days (assume this is the payment term).
Contra entry happens all the time and all you have to do is to pick up the phone to let them know or email them. It would be great to get some confirmation that they acknowledge of your email.

Some company account payable and account receivable don't communicate to each other and by informing their credit controller know of your decision to contra this will force both department to act or at least responding to your query.

You also need to keep a good record of what you've done as an audit trail. The auditor may pick this up at the year end given that you've not done this kind of entry before.

Good luck