Why You Shouldn't Give Up on Unrecoverable Receivables
Unrecoverable receivables often arise when a debtor lacks the financial means to settle their debts. In such cases, businesses may choose not to initiate legal proceedings, considering the debtor's insolvency. However, overlooking such receivables without evaluating civil, criminal, and tax implications may not always be the best course of action.
Approaches to Handling Receivables
Receivables management includes methods such as email reminders, certified letters, and formal demand notices, followed by debt collection procedures and legal actions. Typically, corporate disputes involve:
- Assessing the debtor’s financial status through a credit bureau.
- Initiating asset and receivables attachments.
- Filing a civil lawsuit.
However, given the time and costs involved, businesses may decide against litigation or pursue settlements when the debtor is insolvent.
That said, proper consideration of civil, tax, and criminal implications is essential in choosing the right course of action.
Civil Implications
- Statute of Limitations:
The statute of limitations for most business receivables is five years. Filing a lawsuit interrupts the statute of limitations, making it possible to enforce claims later if the debtor regains financial stability.
If no legal action is taken within five years, the debtor can invoke the statute of limitations, rendering the receivables irrecoverable.
Tax Implications
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Corporate Tax Deductions:
The Corporate Tax Act allows businesses to deduct the value of bad debts if the debts meet specified conditions. However, the National Tax Service requires companies to provide evidence that they pursued all necessary legal actions, such as filing lawsuits, to recover receivables.
Without such actions, even objectively unrecoverable receivables may not be deductible for corporate tax purposes.In short, to claim tax deductions for bad debts, businesses must provide objective evidence that all feasible recovery efforts were made.
Criminal Implications
- Potential for Breach of Fiduciary Duty:
If a business opportunity exists to recover a receivable, but the company’s representative deliberately refrains from filing a lawsuit, claiming insolvency or personal judgment, they could be held liable for breach of fiduciary duty.
This could lead to legal consequences for failing to act in the company’s best interest.
Recommendations
To mitigate risks, it is essential to:
- Assess the debtor's financial situation: Investigate the debtor’s financial capacity and assets.
- Evaluate recovery costs and potential outcomes: Balance recovery costs against the likelihood of successful collection.
- Consider legal actions for statute of limitations and tax purposes: Ensure appropriate legal measures are taken to suspend the statute of limitations and substantiate tax claims.
- Factor in criminal liability risks: Avoid situations where negligence could be construed as breach of fiduciary duty.
Even if receivables seem unrecoverable, pursuing legal and procedural steps can safeguard your business from further liabilities and help optimize financial outcomes.
