Writing off trade payable

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A company facing a legal notice for unpaid trade payables wants to write off the debt, claiming the creditor didn't meet conditions. As an auditor, you need to advise that simply writing off the debt won't erase the liability, especially after a legal notice has been issued. The creditor retains the right to claim payment, and attempting to dispute it post-notice can lead to reputational damage and bankruptcy proceedings. It's crucial to ensure liability is denied before a demand notice is issued to avoid these issues.

Bharat Kulkarni

Bharat Kulkarni (Querist)
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07 April 2024 A company that has received a legal notice to pay money by from their creditor. the creditor claim is recognised as trade payable. The company wants to write off the debt to save liability. what process as auditor i should follow and is any declaration is required from company?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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08 April 2024 What do you mean by write off a debt? unless and until you are declared bankrupt, the liability stays.

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Bharat Kulkarni

Bharat Kulkarni (Querist)
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08 April 2024 Sir the company is not bankrupt. it wants to avoid the liability of payment to the party that has given them legal notice to sue them for non payment. They want to write off the debt saying that party did not comply with condition, so that they are not legally bound to pay and they can claim that the debt was never recognised. However, since there is a existing notice, as a auditor what should I ask theclient to submit for this entry?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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08 April 2024 it does not work that way. If there was no dispute on the payment as on the date of notice, you cannot claim dispute after that. Passing the entry or not will not change the nature of debt. The creditor has the right to claim his money and in case of your inability to pay, he can go ahead with the bankruptcy proceedings against the company.

As an auditor, better to suggest to the company that it settles the matter. Otherwise, unnecessary reputation risk and costs that are associated to a bankruptcy proceedings.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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08 April 2024 basically, you need to deny liability before the issuance of notice of demand. Else the debt is not disputed and liability exists. No accounting entry would change that. and as a CA, you need to ensure that you give the right advice in such cases. many complaints have been filed and disciplinary proceedings are open against them in such cases.

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