Australian Credit Law Bulletin - Vol 10, No 7, November 2009
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the Australian bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Helping customers to survive
Case study of a business failure and its implications for creditors - Credit staff are good people
But what if you find yourself collecting debts you think are wrong? - What is going on in your debtor’s head?
Your debtors may not have cash to pay, but look hard at their non-liquid assets
1. Helping customers to survive
An amended version of this article first appeared in MG Business (Mercantile Gazette) in April 2009.
You might wonder if an article on April 1, 2009 in the Melbourne newspaper, the Age, was an April Fool’s joke. It wasn’t. Firstly it’s real, and secondly, it’s not funny. It explains how in 2007, Land of Leather was a conservatively-run, debt-free British chain of furniture stores. It had profits of 16 million pounds after exceptional items. By August of last year, things weren’t looking so good, with a loss of 400,000 pounds after exceptional items. However, it still had 15 million pounds sitting in the bank and no debt, so it looked pretty safe.
“In the four months to the end of November, turnover was down to 40 million pounds - about half the running rate of the two previous years - and the company lost 5.3 million. In January the administrators moved in, all the cash had gone, no one could be found to buy the business and all the stores are being closed.
“Remember that this was a profitable, debt-free business with plenty of cash in the bank. Demand crashed and it couldn't reduce its fixed costs [particularly the rents on its 109 stores] fast enough to match that fall.” (http://business.theage.com.au/business/landlords-do-deals-as-sales-dive-20090401-9j1c.html)
Of course, you should also remember that this is a UK chain, and the UK has been hit much harder than Australia because its financial sector is a huge part of its economy and because UK banks took on a lot more risk than Australian banks did. But even so, it's scary to see how fast a good business can fail when sales dry up.
The article in the Age was explaining why Australian landlords should be, and are, offering big rent reductions to tenants, to help them survive. This is not just an issue for landlords, it’s an issue for creditors of all sorts.
Ideally, businesses which are in trouble should go to their bank early, while there is still hope, and go with a viable plan. Part of that plan, for many businesses, would include the renegotiation of leases to cope with the changing circumstances. Commercial landlords must surely be able to see that it’s in their interests to help tenants to survive, even if that means a lower rent.
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2. Credit staff are good people
This article first appeared in MG Business in July 2009
I can recall, at a seminar some years ago, a credit controller – I’ll call her Agnes – telling me that the company she worked for was a high pressure sales business. She had had old ladies on the phone weeping over the fact that they had committed themselves to a contract for several thousand dollars that they couldn’t afford, because they were scared of the salesman. Clearly, Agnes was unhappy about the tactics the business was using, and her role in collecting debts for them. “What should I do?” she asked me. This is an issue of ethics, and it put me in a difficult ethical position. It looked to me as if Agnes wanted me to tell her to quit her job. Running a seminar means trying to answer people’s questions, but on the other hand, businesses don’t send staff to my seminars so that I can tell them to quit.
We’ll come back to this question, but before we do, I want to look at why most credit staff should hold their heads up high and look the world in the eye. There is often a degree of discomfort among credit staff about what they do – they feel that some people may assume that their jobs involve nastiness; that if you collect overdue accounts you must enjoy inflicting pain!
The way people see you affects the way you see yourself, so some credit staff feel a degree of embarrassment or discomfiture at their role. They are often a little coy about what they do. When they meet someone at a party and they get the “what-do-you-do-for-job?” question, they often prevaricate. They mention the company they work for but not the job, or they say they work in accounts or customer service, rather than collections.
Having spent a lot of time with a lot of credit staff, I can confidently state that almost all those I meet are decent human beings doing a job which is reasonable and fair. The ethical dilemma that Agnes found herself in does not apply to them so there should be no question of them feeling ashamed or embarrassed or guilty.
Clearly, everyone wants to do a job that they feel good about. It’s important therefore that credit staff don’t feel that their job is something to be ashamed about. Here are some points that might help you think about how you feel about yourself, your role, and the business you work for.
First, if you work in a credit role, you probably have to believe that, in general, people make their own decisions and have to live with them. When they contract with your business, they have to meet their obligations. If you can’t accept that proposition, you may well be in the wrong job.
Second, in a credit role, you usually get a clear view of a business’s problems because they result in customers not paying, but the real issue is not how you feel about working in credit management, it’s how you feel about working for the business concerned. If you worked for a company that sold heroin to kindergarten pupils, it shouldn’t be the credit management aspect that concerned you.
Third, credit management should generally be seen as a form of customer service. When you call an overdue customer, you usually don’t know why the bill hasn’t been paid. There may be a dispute or some problem with the goods or service which has to be resolved. A big part of many credit roles is getting the right people to talk to each other to sort these issues out. Or they may not have the money, in which case you need to try to find a way to get the debt paid. Your job is to find out what the problem is, and then help to find a solution. Only when reasonable attempts haven’t worked would you be forced to try to compel the debtor to pay by using debt collectors or the court process. Collecting money is generally about solving problems, not bullying people into paying.
Fourth, the quality of dispute management is often a useful way of assessing the quality of a company. Every business gets disputes and complaints from customers sometimes. The law sets guidelines in respect of products and services sold and things businesses tell customers during the selling process. If a business gets an unreasonably high number of problems, or consistently deals with them poorly, this is likely to come back to haunt it. Aside from damage to a business’s reputation, it will ultimately find itself losing cases in the courts.
Fifth, your colleagues and your bosses are fallible, just like everyone else. They make mistakes and bad decisions. The fact that they sometimes get it wrong usually only means that they are human, not that they are evil. You have to try to help them get it right. You have a responsibility to try to steer them in the right direction. Managers guide and train staff, but staff can also guide and train managers (or they can sometimes).
Sixth and finally, you are the one who has to do your job and live with yourself. And that brings us back to Agnes… What would you do? If you work in credit chasing debts that you think are in some way wrong, you have to examine your own conscience and make your own decision. And of course, you have to think about how you are going to pay your mortgage and feed your family if you quit. Based on what Agnes told me, I suspect she may have chosen to move on. It might be a harder decision to make in today’s economy.
These issues are seldom black and white. If you work in a gas station that sells cigarettes, for example, you are probably contributing to some customer’s early deaths, but should you quit your job because of their decision to smoke?
But to come back to my main point, working in credit management doesn’t make you a bad guy. There are plenty of customers out there – business and consumer – who will be forever grateful to the credit staff who helped to sort out their disputes or made them face up to their problems or helped them work their way out of their financial difficulties.
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3. What is going on in your debtor’s head?
This article first appeared MG Business in February 2009
I’ve had a big burst of reading credit management-related court cases over the holidays. It’s important for me to keep up with new credit law decisions, but in reality, the main reason I read them is for the stories of debtor and creditor behaviour so I can better understand what’s going on in their heads.
For example, over the last couple of days, the debtors I’ve read about have ranged from, at one extreme, a man whose wife was badly injured in a car accident in Queensland. A brain injury has kept her “in a persistent vegetative state” since the accident. The husband became insanely obsessed with writing letters seeking “justice” from an insurance company. A $300,000 payout he received has disappeared; no-one knows what happened to it and he denies that he ever received it. The case was about government agencies taking control of the remaining assets of a man who refuses to look after himself.
A completely different case was an Auckland property developer who had guaranteed projects worth $28 million and who claimed to have assets of only $15,000. His creditors had voted in favour of a formal scheme of arrangement to let him off half of his debt and let him pay the rest at some time in the future. One of many problems with this was that he and the insolvency practitioner he had appointed had failed to tell some of his major creditors about the meeting.
Here’s another tale of a debtor, this one from personal experience. I’ve disguised important details to mask identity. “Mrs Smith” is a nice person, and intelligent, but always struggling for money. She was always badly in debt and was often pursued by creditors. When I knew her well, as far as I could see, she tried to do the right thing by them, at least as she got older and more responsible.
She worked very hard – long hours in several jobs, with a few little business ventures on the side. The reason she was always in debt was that she was always buying things. Her purchases were often wonderful bargains, but they weren’t always things she needed right at that time, and they were never things she could easily afford. She saw most of them as long term investments or things that she would need and use some day. Although she was intelligent, she had blind spots, and she was always able to rationalise the purchase of “investments” even though her pressing issue was immediate cash flow, not long term security.
Banks refer to people who buy using their credit cards but pay off the card before the interest kicks in as “freeloaders”. Mrs Smith was never a freeloader. Her credit cards were always close to the max and she paid huge amounts of interest on them. She found it very hard to pass up a bargain. Her friends tried to help but there was an addictive element to her actions. The obvious answer was to stop buying things. Sometimes, when things had got particularly desperate, she’d stop buying for a while, but then she’d catch up a bit and start spending again. Good advice wasn’t enough to change her behaviour.
Another option, of course, was to sell some of the things she had bought. Instead of working so hard and getting nowhere, she could have cleared her debts by selling some assets. However, she found it hard to part with her treasures. Also, she was too busy working to find the time to do it! She sold a few things but when it came to the really valuable things, she was more likely to give them as presents (“heirlooms”) to her adult children than to turn them into cash.
Finally, it reached the point where a shrewd creditor insisted on a substantial payment and pinpointed a particular asset that needed to be sold. She stopped working long enough to see what was required, worked through the process and sold this asset, which had appreciated considerably. For a brief moment, her debts were cleared and she had cash in the bank. Soon she found more treasures to spend the money on, but let’s end the story there.
My first point about this tale is that if you were one of Mrs Smith’s creditors, you couldn’t have easily understood what was going on. The temptation would have been to categorise her as a ratbag, or lazy, or something else which she wasn’t. In order to work out that there were saleable assets you would have had to have asked more questions and talked to her about her situation for longer than most of her creditors did.
Over the next few years, creditors will have to try very hard to understand their debtors. They will be seeing a lot of debtors, business and consumer, who have never had financial problems before. Credit staff have to invest time and attention to try to understand what’s going on in their lives and in their heads, so that they can then try to push them towards workable solutions.
My second point: there are going to be many people and businesses who, although not necessarily for the same reasons as Mrs Smith, will be asset-rich but cash-poor. There will be many people who have valuable assets – a vintage car in the garage, a block of land by the beach, equity in their own home, their prized collection of 1000 Matchbox cars – but banks aren’t lending and people aren’t buying. They can’t immediately sell it or borrow on it to pay the bills that were due yesterday, but that doesn’t make it worthless. Credit staff need to understand this opportunity. You would obviously prefer the cash, but if you can’t get it now, a security over something that can eventually be turned into cash is the next best thing.
One last important point: understanding your debtors, negotiating deals, and setting up securities is time-consuming stuff. Businesses have to give the credit team the support to do this. That may mean more staff. The way many businesses will deal with this in tough times is by moving underused sales staff into temporary debt collection roles.
