Converting overdue receivables to cash is one of the most common problems seen in many businesses. When I say overdue receivables, typically I mean:
- i) overdue for more than 180 days, or
- ii) when your Auditors are going to or already requesting you to provide for doubtful debts.
Providing for doubtful debts does not take away your ability to recover them. It is merely an accounting treatment. In such cases, you can make an unspecified provision to comply with the Accounting Standards and simultaneously take actions to recover the same.
Some of the tools and techniques to deal with overdue receivables are as follows:
- New reporting requirement for the amount payable to MSMEs: One of the recent provisions of the Companies Act provides that every company who has any amount payable to MSMEs outstanding for more than 45 days has to report it to the Registrar of Companies every six months. To avail this benefit, eligible companies need to register themselves as MSMEs, provide their Registration Certificate to the company, and use this provision to tell the debtors that they can’t delay your invoices.
- Insolvency and Bankruptcy Code (IBC): You may approach an IBC professional to use their services to send a notice to the debtor who is holding up your payment. There is a high possibility that he will turn up because otherwise, the penal provisions of IBC can be quite damaging to this person. If there are other such creditors like you who this debtor has not paid, you can even seek winding up of the company provided it is done as per the provisions of the law. So, IBC can be another tool for recovery but understand that it is a Brahmastra, and so you will have to use this tactic sparingly. But usually, when an IBC professional writes a letter, we hear by talking to all these IBC professionals that most of the time, the other party opts for an out-of-court settlement.
- Installment: I strongly recommend offering an installment plan if your invoices are large to pay in one installment. Installment can be with or without interest, and you can always choose how much interest you want to apply. So, instead of taking the brutal action of going in for litigation, you can look at discussing with the other person about this easy exit.
- Interest Invoice: Despite having it in the contractual terms, more often than not company doesn’t send the interest invoice to its debtors. Interest is compensatory in nature for the delay in making payment, and it must be invoked. You have to send the interest invoice along with GST as this interest will be treated as a trade income. Although sending an interest invoice is another way of exerting pressure to release the payment, you may back it up with an installment option.
- Barter: One other thing that you can think of is a barter system. Guage if you can utilize something from the company and monetize that. Suppose the company produces certain articles or items that are of interest to you. In that case, you can buy them, or if you believe that you will be able to monetize that article, you can ask him to supply that article or that kind of service.
- Credit Note: In situations where the above approach cannot be used, it may be worthwhile to close the chapter by giving a credit note so that you at least get the GST credit you must have paid earlier and minimize the loss.
Two important things which anyways you need to ensure are:
- Whether the company has utilized the GST that you have given
- If your invoice is subject to TDS, whether the other company has given the TDS credit in its quarterly returns?
If the answer to the above two is positive, it means that he has already accepted your invoice and the liability to pay it. This will stand by in the IBC platform because having taken full credit of your GST, paid full TDS, and accepted full liability will make it very difficult for the company to provide a valid justification for non-payment of dues. So, there are things that you need to build up. You need to build up your arguments, and then you need to act. In the end, you got to apply the pressure, and at the same time, you also need to give him exit options. When something becomes overdue, chasing that money in a finite amount of time available with the company is important yet challenging. The company can spend this time on opportunities to earn new money or chase old money. You got to find out which one will be more appropriate for you.
Hoping for a quick recovery!