Precautions and Legal Strategies for Securing Payment and Recovering Dues from Clients and Vendors

In long-term business relationships, companies must safeguard against potential losses from unpaid dues, particularly when clients enter the Corporate Insolvency Resolution Process (CIRP) or liquidation. The following legal strategies can help secure payments and minimize risks:

Primary Legal Strategies

Security Cheques

Obtain security cheques from clients, especially for significant transactions. If payments default, proceedings under Section 138 of the Negotiable Instruments Act for cheque dishonor can continue independently, holding directors, partners, or proprietors personally liable.

Retention of Title (ROT) Clauses

Include ROT clauses in sales contracts, ensuring the title to goods remains with the seller until full payment. This allows sellers to reclaim goods if the client defaults on payment.

Advance Payments or Milestone-Based Payments

Structure contracts to require partial or full payment upfront or at key project milestones, reducing the exposure to outstanding dues.

Letter of Credit or Bank Guarantee

Insist on payment through letters of credit (LC) or bank guarantees to ensure payment is secured by a third party, thereby minimizing reliance on the client's financial condition.

Regular Monitoring and Follow-Up

Implement a stringent credit control process to monitor overdue invoices, issuing reminders regularly to avoid long-standing dues.

Personal Guarantees

For high-risk transactions, request personal guarantees from directors or partners. This provides recourse to their personal assets if the company fails to pay.

Factoring or Invoice Discounting

Use factoring services or invoice discounting to convert receivables into immediate cash, transferring the credit risk to the factoring company.

Additional Strategies When Goods Cannot Be Reclaimed

If the goods sold are consumable, resold, or integrated into production, the following measures can help protect against losses and recover dues:

Credit Insurance

Secure trade credit insurance to cover potential losses due to insolvency or non-payment, ensuring continued cash flow.

Early Payment Incentives

Include early payment discounts and late payment penalties in contracts to incentivize timely payments and penalize delays.

Debt Restructuring

In cases of financial distress, negotiate debt restructuring agreements with clear repayment terms to recover dues before insolvency proceedings commence.

Promissory Notes and Liens

Obtain promissory notes or post-dated cheques and secure liens on other client assets to enhance legal standing in case of default.

By integrating these measures, businesses can safeguard against defaults, enhance their recovery chances, and maintain cash flow, even when goods are non-returnable.

Conclusion

In conclusion, safeguarding against unpaid dues in long-term business relationships is critical, especially when clients enter the Corporate Insolvency Resolution Process (CIRP). Once the moratorium begins, recovery efforts are significantly hindered, and operational creditors often face unfavorable outcomes in resolution plans. Therefore, implementing proactive measures—such as security cheques, Personal Guarantees, retention of title clauses, debt restructuring etc. —is essential for minimizing risks and protecting cash flow. By taking these precautions, businesses can better navigate the complexities of client insolvencies and reduce potential financial losses.