Even a generous payment arrangement can’t be open-ended

A German client was faced with a customer who failed to pay. First the customer avoided my client, then he invented excuses and finally he admitted that he owed money but said that he was unable to settle the debt in a single payment. He wanted to arrange to pay in instalments. What should you do in this situation? Agree to it? Start court proceedings or file for insolvency?

In this case, we agreed to a payment arrangement that allowed for the debt to be paid in instalments. If payments were not made on time, the entire amount would immediately become payable on demand. Late payments would also lead to a penalty. I also got the owner/director of the debtor company to give a pledge of his shares in the company. A pledge was also granted over all the company’s stock, fittings and goodwill. The agreement also stated that late payments would result in higher interest.

We excluded any possibility of debate about the amount owing by getting the debtor to acknowledge the amount that we had calculated but agreeing that if the payment arrangement was followed to the letter then at the time of the last instalment my client would waive payment of the difference between that amount and the lesser amount calculated by the other side.

The agreement was that monthly instalments would be paid over a period of approximately 18 months. For the first eight months payments were made on time, but then things went wrong. We immediately made a demand for the entire amount, which had become payable on demand, the penalty amount and interest at the agreed commercial rate.

Within a few days, the unreliable debtor was on the telephone asking to go back to the payment arrangement as if there had not been a breach. We agreed to this, reasoning that quick payment was the main thing.

Some time later, there was another breach. This time, we refused to drop the penalty and the discount arrangement ceased to be part of the deal. In the end, with some pressure, the full amount was paid.

Being flexible about a payment arrangement need not mean that there’s no obligation to pay, just as long as the terms are clear.