How to Manage Debt Claims Part One: Settlements and Pre-Litigation
COVID-19 has applied the brakes to much of the economic activity taking place worldwide. Unfortunately, many debtors are using the unstable economic conditions as an opportunity to default or postpone their payment obligations. Therefore, creditors should be vigilant on how to protect their cashflow in the midst such affairs. Without careful planning and prudent legal management, a creditor could find himself writing off a substantial amount of the payments with little to no recovery in sight. For some, this may result in insolvency or bankruptcy as well.
In this piece, we aim to provide guidance to UAE creditors on how to protect your financial interests. In this part, we focus on all of the tactics you could deploy to protect and enforce your legal rights before going to court. Following these steps could substantially increase your cash collections and debt recovery.
1) Legal Reminders
It is important for the finance team to get a clear understanding of which payments are falling due and ageing beyond a standard in your industry. Such defaulting accounts shall be identified and recorded for the avoidance of doubt and confusion. For each problematic debtor, you may prepare a legal reminder to be sent a few days after the critical point of ageing of the payment. This reminder will put the debtor on notice of the current pending payment and also clearly establish the total amount owed to the creditor, along with the basis for such payment (whether it is in contract or otherwise). It is crucial for the reminder to be drafted in a specific legal format to accommodate all the pertinent information because the reminder may be used as evidence of the debt and its amount in court.
2) Legal Demand Letter
Should the debtor fail to comply with the legal reminder, the next alternative solution is to send a legal demand letter requiring payment within a certain time period (usually 7 days). This letter will provide an outline for the basis for the debt, describing the nature of the delinquent payment and demanding an immediate settlement of the outstanding amounts. Again, this letter should follow a legal format, in order to be preserved as documentation in the event of a future court claim against the debtor. However, this letter does not need to lay out the entire legal basis of your claim, as it is a precursor to the final legal notice you will send to the debtor if the payment remains unpaid.
3) Legal Notice
Finally, for those debtors who fail to satisfy the payment after the reminder notice and the demand letter, a detailed legal notice must be prepared and sent. This may, depending on the requirements of the situation at hand, be sent via the notary, email or registered mail. It is safest to send the notice by both methods of delivery where a read or delivery receipt available, in order to ensure that all legal requirements are met. This letter must also clearly establish the legal basis for the debt, such as the contractual basis and the legal implications which follow under the UAE commercial law and even the criminal law in an instance of a dishonored cheque. This notice must also mention that any further failures to satisfy the debts will result in legal action being brought against the debtor. This firm notice shall act as the final opportunity for the debtor to resolve the debt amicably and out of court. Therefore, the importance of this document should not be underestimated.
The above notices are useful tools in notifying the debtor of the outstanding dues and reiterating the liability for non-payment. However, if the debtor is unable or otherwise unwilling to pay, the notices, if phrased bluntly or offer no opportunity for the debtor to reply or attempt a settlement, may be ineffective. At this point, many debtors may have serious cash flow issues which can lead the courts to suspend a part of the due debt by reason of such factors being beyond the debtor’s reasonable control. Therefore, it is important that the notices are drafted in a suitable language to encourage settlement.
4) Settlement Discussions and Mediation
Most dispute resolution forums such as the Dubai Courts encourage parties to settle before going to court, when possible. Various governmental and non-governmental bodies such as law firms also offer mediation services to allow amicable discussion and settlement of debts. It is important to leave an avenue open for these kinds of discussions in the communications to the debtor, without compromising the creditor’s legal rights. If done successfully, mediation can prevent litigation altogether and allowing the amicable settlement or restructuring of the payments due, thereby saving the creditor’s cash flow and business.
If a settlement is agreed upon, it is important to document this via a detailed settlement agreement. This will discourage future litigation proceedings and in any case, increase the creditor’s chances of recovery should the case be nonetheless referred to the court. Having the debtor sign a document which clearly outlines the debt amount and the payment plan indicates the debtor’s acknowledgement of the debt. This is one of the strongest pieces of evidence which can be introduced to the court.
Great caution must be exercised when drafting the notices or holding settlement talks with the debtor. It is always recommended to ensure that such activity is carried out pursuant to the legal requirements and where necessary, with the assistance of an experienced legal advisor.