Dealing with Disappearing Debtors and Empty Shells
The levels of debt owed to businesses by their customers and government has been mounting – no thanks to tough trading conditions and Covid-19 – meaning that owners and their legal service providers have had to become creative and proactive in their collection methods. So how does a business deal with disappearing debtors – or worse – empty shell entities?
Can you recall the number of times that a customer (juristic person or sole proprietor) has fallen in arrears with an account? Sometimes a simple phone call or an e-mail does the job and the account, or part thereof, is paid. But, more often than not, these days there is no answer or reply when you try to make contact regarding the account. Added to that, you may decide to pay a visit to their premises only to find it empty and locked. The debtor has closed shop, moved on and left – without settling your account.
Sometimes, the debtor can be located after a few phone calls, in order for you to serve court documents, but unfortunately, often the debtor cannot be found and the monies cannot be collected. If the debtor is a close corporation or a company, you can still serve summons at their registered address (easily obtainable) but when the debtor is an individual or a sole proprietor this advantage does not exist.
The inability to collect outstanding debts owed by our “dastardly disappearing debtors” is further exacerbated by the risk that your claim may prescribe (be unenforceable) if the debtor is not found, and the summons is not served within 3 (three) years after the debt became owing and payable. Naturally, it is not possible to serve summons if the whereabouts of a debtor are not known.
It gets worse. An additional challenge is the risk of the debtor (in the event of a juristic person) being an empty shell with no assets. This means that even if you are successful in serving the summons, even obtaining judgment, your victory is merely a ‘paper tiger’. Your judgment has no teeth because there is nothing to execute the judgement against.
How can we deal with these malicious magicians? Even though you cannot prevent debtors from evading payments and disappearing, there are ways of making it easier to serve a summons; preventing a claim for an outstanding debt from prescribing (and sometimes even find a debtor again); and greatly reducing the risk of instituting proceedings against an empty shell.
Naturally, to take advantage of any solutions, you will have to implement changes to your systems before entering into a contract with your customer. In other words, make pre-emptive changes to your “standard terms and conditions”.
This can be done by including an elected address where all notices and legal documents must be served on the customer and by putting certain securities in place such as sureties and cessions. In this way you can still serve summons on your fleeing debtor – even obtain judgment against the debtor when the debtor cannot be located – and recover your monies from the individuals behind the veil of the juristic person or that entity’s own customers.
When you include a clause containing such an address all legal notices, including a summons, must be served at that address and one may, after serving the summons at that address, obtain default judgment against the debtor if the debtor does not defend the claim. When you do this, the benefit is that now you have a period of 30 (thirty) years to enforce the judgment and collect the outstanding monies! The knock-on effect is that most financial institutions will now not grant any credit to any individual that has a judgment against their name. As a result, the debtor will be left with little choice but to come back to you to, either pay the outstanding monies or, bring a court application for a rescission of the judgement which, unless the debtor has a valid defence, will only be granted if the debtor either paid the full outstanding amount or if the creditor consented to it.
Businesses with high debt risk, such as those that provide for the delivery or lease of goods or services to customers, should definitely approach your attorney who will assist you to incorporate these solutions into your standard contract with your customers.