Debt Recovery: What Means Are More Effective?

Which methods of debt recovery are effective today?

Due to recession the problem of debt recovery has become a popular discussion issue in mass media and a subject of a heavy attention of state authorities. Today collection is riding the second wave of its popularity (the first one was in 2004 when the first collection agencies were founded in Russia shaped by Western example). Collection became attractive for entrepreneur who mind making money on recession. Moreover it is not just the former bank lawyers and internal affairs body staff who are trying to enter the collection business that was a common practice in this field. Among those who wish to develop a new business there are representatives of industries which radically differ. In recent months I faced an initiative to found a collection company taken by the staff of real estate agency (trying to develop new business lines), trade organization (for a start intending to collect from its debtors and developing as a collection market participant in time). Again the situation was hypercharged by reporters which in the first recession months were vying in presenting collection and legal services as a rare business which will gain on recession and the creditors longing for recoveries make long queues in front of the doors of collection agencies, law firms and arbitrazh registries.

Here emerge the fair questions: «How well founded is the collection rush?» and «Will the Russian entrepreneur facing non-payments of counterparties and requiring expert assistance on this issue gain in this situation?»

Preventive Measures

In the situation when the number of non-payments increase the preventive measures are still actual, i.e. advise the lawyers were always providing to their clients. Particularly, more attentive and scrutinuous approach to enterprise contract work: how to check over the client's good faith and solvency; how to draft and execute a contract and primary accounting documents in a legally intelligent way; which means of payment and securing obligations are to be chosen. The practice proves that a problem of non-payment can be eliminated already while choosing a counterparty and executing an agreement. Moreover, contracts and primary accounting documents executed in a legally unintelligent way entail the impossibility to defend one's rights in court.

Pre-Judicial Work

If however the unjustified debts incur the problem may be solved in pre-judicial procedure. Judicial proceeding is a long-term and expensive procedure (even more if a company does not have an in-house lawyer capable to deal with this issue and advise of an outside counselor is needed). The practice proves that receivables can be successfully collected in pre-judicial procedure. It is important to draft a legally intelligent claim describing the negative effects for the counterparty if he fails to meet the payment obligation and offer a compromise scheme for debt recovery. Pre-judicial procedure is essential when the amount of debt is incommersurable with legal costs.

Pre-judicial procedure is widely applied by companies which have large portfolios of uncontested debts (bank loans, housing services, rent, communications services debts, etc). This is the principal competency of the most Russian collection agencies, activity to which the collection is geared. Being vastly experienced in the field collectors are able to detect a debt situation and precisely determine when pre-judicial procedure won't bring any result and a court application is required.

Judicial Debt Recovery, Enforcement Of Judicial Decisions

Action for debt recovery and subsequent enforcement of judgment are the most evident and popular remedies for violation of rights. It is no mere chance that today the arbitrazh courts are snowed under actions for debt recovery.

The problem is accentuated by the fact that in Russia it is often impossible to secure execution of judicial decisions because a debtor has not any enforceable property. Moreover, unfair participants of civil circulation invented various techniques for avoidance of obligations: assets siphoning off, processing of transactions on behalf of a legal entity which has no assets. The reform on enforcement laws in recent years and current revision of corporate law objectively failed to entail any changes efficient to get through this problem. Creditors still risk not to receive the money due despite of their victory in court.

Accordingly lawyers and collectors are really popular as they are familiar with the backstage of enforcement and capable of combining legal and «non-traditional» means for enforced recovery.

«Non-Traditional» For Enforced Recovery

When pre-judicial procedures, judicial proceeding and enforcement do not yield any result or judicial proceeding is economically inadvisable, «non-traditional» means for recovery falling beyond the scope of classic legal means are likely to be used. The armory of professional collector include: information and reputation action on debtor, PR-support of enforcement procedure, initiating of criminal charges against unfair debtor, cooperation with debtor (advise and assistance on development of debt recovery schemes). Such means for recovery are used as supplement to either pre-judicial, judicial or enforcement procedure. Moreover their application (except for the latest one) is conditioned to unfair conduct of a debtor, avoidance to negotiate with creditor.

Information and reputation action on debtor deems use of means of legal «blackmail» with respect to business reputation. Having collected information on debtor's business contacts (business partners, counterparties, affiliates) recoverer notifies the debtor that on default of payment claim and further avoidance of negotiations the information on unfair conduct will be disclosed to interested parties and all of the business partners. In this situation it is important to take account of and eliminate all the risks of bringing for liability for harm to business reputation. In order to evade actions for compensation of harm caused to business reputation the only information which should be disclosed is the information on debtor which credibility recoverer can evidence in writing. Furthermore, debtor is notified on possibility for PR-support of enforcement procedure.

PR-support of enforcement procedure deems wide coverage of situation in mass media and business circles (associations of entrepreneurs, professional associations). For this purpose recoverers prepare and disseminate press releases, hold briefings and press conferences, publish commercial materials in mass media. By way of example we refer to regular press conferences «Bad Faith In Business» which have been held by INTELLECT-S Collection Agency since 2007. By press coverage of judicial or enforcement procedure recoverer often forces debtor to begin cooperation.

To influence a debtor recoverers can initiate criminal charges against him. The Criminal Code of the Russian Federation provides for liability for deliberate evasion from debt repayment (Art. 177 of the Criminal Code of the RF); actions of a debtor may be qualified as swindling (Art. 159 of the Criminal Code of the RF), deliberate non-execution of court's judgment (Art. 315); illegal actions against property subjected to attachment or forfeiture also incur criminal liability (Art. 312 of the Criminal Code of the RF).

Cooperation with debtor can be also efficient. However this means of dispute settlement is only applicable when a debtor is not willing to get in contact. Intelligent and experienced collector-lawyer having received comprehensive information on debtor's state of affairs is able to assist him in development of debt problem solution.

Much to creditors' regret the «non-traditional» means of recovery listed above are not yet sufficiently used on the Russian debt market. On a regular basis they are practiced just by a few collection agencies and law firms. As a rule lawyers limit themselves by classic legal means. And most of collectors reduce their activities to pre-judicial arrangements for the same tenor individual debts and support of enforcement procedure (without handling of problem debts of commercial organizations and using nonlegal recovery catalysts). In recovery cases success is made by ability to combine legal means, information technologies, knowledge of psychology without prejudice to debtors' rights and professional ethics.

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