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Exploit your bargaining power when negotiating with a debtor

When negotiating with someone who owes you money, do make concessions for nothing. You should insist on a substantial quid pro quo when giving a debtor leeway, to ensure that the debtor cannot engage in further delaying tactics or raise bogus defences to your claim

A company or close corporation to which your business has been selling goods suddenly has trouble paying you, and runs up a debt of over R1 million. What should you do?

If you take a soft approach, and continue selling to this customer, hoping that payment of the arrears will be forthcoming, the debt may grow even larger. But a hard approach may not work either - if you issue a summons and take judgement, you may find that you push your customer into bankruptcy and that you end up standing in a long queue with other creditors, hoping for some small liquidation dividend. Or the debtor may raise a trumped-up defence to your claim, and tie you up in litigation for years.

A pragmatic option may be to hold discussions with this customer, so as not to force him into bankruptcy, and allow the arrears to be paid off in instalments, while continuing to do business with him.

That is what an overly indulgent creditor did in the recent High Court decision in Shories Investment CC v TGR Construction CC [2008] ZAKSHC 90.

But what transpired from that point is a salutary lesson to any creditor in a similar situation.

In this case, the creditor continued to do business with the close corporation that already owed him nearly R2 million, but reached an agreement that the debtor would pay off its arrear debt by way of instalments.

The debtor then exploited the situation, claiming that the new goods that had been supplied by the creditor, since this agreement, were defective, and had caused the debtor to suffer substantial damages. The debtor claimed that it was entitled to set off those damages against the original debt and made no further payment toward the arrears.

The creditor, no doubt furious that his goodwill gesture of continuing to do business with the debtor and agreeing that the arrear debt could be paid off in instalments, then applied to court for the debtor, a close corporation, to be wound up on the grounds that it was unable to pay its debts.

The close corporation opposed the application for winding up, claiming that the debt in question was disputed.

Happily for the creditor, the High Court held that the grounds on which the debt was disputed had been trumped up and were not bona fide, and ordered that the close corporation be wound up. But it was probably not a satisfactory result for the creditor, as the costs he had incurred in the litigation would just have been added to the original debt, and he may have recovered little in the consequential liquidation.

This litigation could have been avoided

In hindsight, the creditor could have avoided this expensive and protracted litigation by being more astute and hard-nosed. What lessons can therefore be learned from this judgement?

Firstly, it may indeed make good business sense to allow your hard-pressed debtor to pay off the arrear debt by instalments. But you should not give away this valuable concession for nothing.

Instead, you should exploit your negotiating strength to insist that the debtor give you an unconditional acknowledgement of debt - or better still, a signed consent to judgement that you can file at any time if any instalments are missed.

You would also be wise to insist that the debtor agree not to invoke any set-off between what he owes you now and any claim he may have against you in the future.

You should also try to pressure the debtor into giving you security for the amount owing - either a personal suretyship, or a notarial bond over movables, or both.

If the creditor in the case of Shories Investment CC had protected its interests in this way, the debtor could have been speedily put into liquidation as soon as it defaulted again, and the creditor would have minimised his losses.

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