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Leasing Company Work with Debtors

Leasing company interaction with collection agencies and law firms.

The leasing companies has faced (or will face in the nearest future) the same challenge as did the banks half a year ago - a considerable if not mass numbers of defaults in payment due under the executed agreements.

Being independent advisers we do have a feedback: we constantly advise businessmen on issues connected with debt collection as well as with optimization of various debts effects.
We feel that the situation in the economics could be defined as «crawling»: actually all the industries suffer a gradual but considerable decrease of turnover, profit, sales volumes, etc.

It means that the «recession bottom» is not hit yet therefore the leasing companies will have more and more «troubled» clients.

The leasing companies (unlike the banks) are comparatively better prepared for processing the big numbers of debtors: at least using the standardized legal procedures.
As a rule even middle-sized leasing companies are keeping continuous computerized debtors records, monitoring and rapid adjustment to breaches of the leasing agreements (phone calls, reminders, claims, etc.).

Legal departments of the leasing companies have enough capacities to process themselves all the required typical procedures (filing actions on leased property vindication, debt recovery, etc.).

Moreover compared to banks the leasing companies have advantage of better habilitation to negotiate with clients (they are more flexible): in order to execute any agreement a leasing company has to bring together three or four participants, take into consideration their interests as well as the interest of the bank.

However historically the leasing companies do not have a specialized staff (or separate subdivisions) whose task is effective work with a considerable number of debtors, particularly businessmen debtors.

Having faced such a challenge the banks experienced first-hand the incapacity of their existent divisions to work effectively with a great number of debtors.

Bank economic security service proceeding from appropriate to it practices is fit to work just individually with each debtor, that is, the security staff is unable to handle a big number of debtors due to its finiteness in time and human resources. Moreover compared to banks not all the leasing companies maintain an adequate and efficient security service.

The legal department is not ready to handle a big number of debtors due to the following reasons:

  1. Work with debtors mostly comprises communication and negotiations, in other words, the field that is totally beyond the sphere of traditional (formal) legal profession.

    Nevertheless the leasing company lawyers (though the execution procedure of leasing agreement is more complex compared to credit agreement, it requires interest balance of three or four people involved in the scheme) in their activities presume the execution procedure of leasing agreement in a leasing company to be for the client a signing procedure for an adhesion contract: an agreement template drafted by the leasing company.
  2. Legal techniques presume individual work with debtor: a separate action has to be filed against each debtor, court hearings are held individually for each debtor, on different time, by different judges, etc. Consequently, the legal techniques are not sufficient to satisfy the needs of work with a large number of debtors.
  3. As a rule the extra task of work with debtors set for the lawyers does not exempt them from their regular tasks (contract preparation and examination, filing actions, participation in court hearings on current cases, etc.), that's an additional reason the legal department is not able to handle a large number of debtors due to lack of time and human resources.

Apart from the legal department unreadiness to handle a large number of debts in this particular case it is necessary to consider a system-level problem: the legal techniques do not actually work in the situations where the mass or «conveyor-type» processing of various clients is required: the legal techniques always assume an individual work with debtor.

Moreover the legal techniques are usually time-consuming (on the average procedures in arbitration court last for half a year) and cost-based (a state duty is collected for each action). Allothe leasing companies are servicing the business solely, the legal techniques do not guarantee the efficient performance of the judicial decision (debtor – legal entity can simply be in default of any property except for the leased property by the time the court decision is given effect).

There is a key difference in situation of the leasing company debtors and bank debts: the leasing company debtors compared to the principal bank debtors are businessmen.
This fact presuppose a different technique for work with the leasing company debtors called corporate collection: a cross-sectoral technique for legal profession and PR, in fact it is a «pinpoint» work with the debtor's professional reputation in front of his clients and counterparties. A corporate collection presupposes evaluation and informing the debtor (specific business owners, top managers) on possibility of legitimate targeted dissemination of information (audiences, particular organizations and persons) on debt and the effects of its collection.

Interaction with debtor and dissemination of information are performed in compliance with restrictive regulations provided by civil (art. 152 of the Civil Code of the Russian Federation) and criminal legislation (att. 129, 163, 330 of the Criminal Code of the Russian Federation).

In practice we believe that the leasing companies will inevitably come to the same conclusion as did the banks half a year ago: the efficient work with a large number of debtors is not possible unless it is effected by the specialized subdivisions which principal and the sole objective is a constant work with a large number of debtors.

Work with a specialized subdivision is possible in one of the two following options:

  1. Development of an internal specialized subdivision within a leasing company.
  2. Outsourcing of this functionality to collection agency.

Advantages of internal subdivision:

  1. It is easier to control it as it acts in accordance with the company's internal policy.
  2. It provides the confidentiality of the information on the leasing company activities.
  3. Such a subdivision can be formed by the staff with decreased workload (sales department, the very named leasing department), in other words, it is possible to avoid personnel reduction and lay-offs.

Advantages (for leasing company) of outsourcing functionality to collection agency:

  1. A specialized subdivision staff widely experienced in work with several clients at the same time (banks, mobile providers, housing organizations, credit customers cooperatives) as a rule (on the average) are more skilled, qualified and informed and compared to the internal subdivision personnel with the similar functionality.

    For example: as a rule the leasing companies do not have enough of execution proceedings specialists – just because there was no need in them previously, on the contrary in collection agencies required these specialists from the beginning.
  2. Work with external subdivisions are more cost-efficient for a leasing company: it is a collection agency which bears the personnel expenses and costs related to the lease of premises, equipment, software, communication, etc.
  3. Collection agency is charged with management: professional recruitment, organizational management, result control.
  4. Leasing company reduces its reputation risks in view that it is not the leasing company itself who work with lessee but an independent collection agency (this point is really crucial for banks).
  5. Collection agency has some moral and psychological advantages: first of all, it is able to go it strong with a debtor and be tough with him (on the contrary the leasing company due to used by it client approach is interested in client retention, that's why it is to a lesser extent is ready to take decisive measures with regard to debtors); for the debtor the fact of handing over the issue to the collection agency points on the seriousness of the leasing company's intentions (other type of debtor's attitude).

Except for the properly collection functionality the leasing business requires legal support to train their personnel to work with debtors: they require focused training on how to work with debtors through various seminars and trainings – this is the way chosen by the banks (for example, in may 2009 INTELLECT-S held a seminar on legal entities collection for one of the federal banks).

Banking Law, Business Transactions, Collection Services, Special Branch Proposals

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