Unpaid invoices are unfortunately all too common a problem for an SME business owner. According to the Federation of Small Businesses, two-thirds of small businesses in the UK reported late payments in the final quarter of 2023, up from three in five in quarter three of the same year.
It is very frustrating to have delivered your services or goods to a client or customer, only to be waiting thirty days later with your invoice still unsettled. Unpaid or late commercial debts are detrimental to your business, given that they affect cash flow, create uncertainty and potentially prevent you from paying your staff and creditors.
What is Commercial Debt Recovery?
Commercial debt recovery is the process that involves recovering unpaid commercial invoices and debts from the party obliged to make payment. The usual procedure to recoup such debts is regulated by the Late Payment of Commercial Debts (Interest) Act 1998. When a payment is late, and the contract is covered by the Act, you can maximise the amount recovered from the non-paying party by also making a claim for interest and debt recovery costs.
In this article, we explain the steps you should follow when experiencing unpaid or late payments and what options are available to you.
First Step to Recovering an Overdue Invoice
It is crucial to make sure all the relevant information is included in your invoice; this will help speed up the payment process. So, your contact details, a clear description of what you are charging for, the amount charged, payment due dates, and correct references should all be present on the invoice.
If you have not been paid by a client by the due date, you should start the process of chasing up the invoice as soon as possible once the stated payment date has passed. It would be a good idea to try and first talk to your customer or client to understand why payment has been delayed as this is an opportunity to reach an amicable agreement and reach an acceptable schedule of payment.
If this is unsuccessful, you should then resort to sending an email reminder to politely remind the client that they need to pay for the work you have completed for them, otherwise, the situation may escalate.
If this still does not prompt a response, it will be necessary to send a more forceful late payment demand letter, requesting payment within a set period or/and to stop doing any further work for them until they have cleared their debt to you.
In many cases, this will solve the problem. However, if this doesn’t result in you receiving your payment, you have other options to settle a debt dispute that avoids going to court.
Options to Explore to Avoid Litigation
It is sometimes possible to resolve a commercial debt dispute via negotiations between the parties’ legal advisors. It will certainly involve some compromise to reach an agreement that both parties will accept but is likely to result in early settlement, saving on time and costs rather than embarking on long drawn-out litigation.
Our dispute resolution solicitors are experienced negotiators who regularly find workable practical solutions to commercial debt disputes. We can conduct such negotiations through correspondence, over the phone or in-person meetings.
Alternative methods of dispute resolution, such as mediation, which involves an impartial third party, are increasingly being used to aid commercial debt recovery. Mediation is less confrontational than other forms of dispute resolution so it is useful where parties want to preserve a trading relationship in the future. It can also produce excellent results in commercial debt disputes and is quicker, cheaper and less stressful than litigation. However, these are voluntary agreements, so neither party can be forced to adhere to the agreement, which may mean resorting to court action further down the line.
Arbitration is also an option to explore. There are some similarities between mediation and arbitration; however, the key difference is that in arbitration, the agreement that the third party helps you and the debtor reach is legally binding. As a result, it may be the ideal route to recovering the money that you are owed. Nevertheless, it is important to be aware that once an arbitrator has made a decision, you cannot then go to court.
Litigation – Things You Need To Do Before You Go To Court
Sometimes, litigation is simply unavoidable, especially where there are considerable sums of money involved or where the parties are unwilling to move on their position.
Seek Legal Assistance
Before proceeding with a debt recovery claim, you should always consult with a solicitor who specialises in helping, advising and taking action to recover money for businesses and individuals.
Our experienced dispute resolution solicitors can use several methods to attempt pre-litigation collections and are able, in most cases, to secure payment of your debt in the initial phase of the debt recovery process without the matter reaching court.
Send a Letter before Action
In many cases, a single letter before action from a solicitor is enough to prompt repayment or at least persuade an evasive debtor to participate in settlement negotiations.
A letter before action is a formal letter requesting that money is repaid immediately or within a reasonable timeframe with legal action being taken if payment is not received. You can send this letter yourself, but it is likely to be taken more seriously if your solicitor sends it. You can decide with the help of your solicitor on a date when legal proceedings should begin if you do not receive the payment, and the letter must specify this. The letter must also be dated and sent by post.
Where a business is trying to recover money owed to it by an individual, the letter before action is a crucial part of the process known as the ‘pre-action protocols’. The protocols require you to make a reasonable attempt to recover the debt before involving the court. It sets out what steps should be taken before a court claim is issued – and the court is likely to take into account the creditors’ observance of these rules (or lack thereof) when considering the claim.
The pre-action protocols do not affect business-to-business debts – they only apply in circumstances where a business is recovering money owed by an individual. Nevertheless, issuing a letter before action for business-to-business debts is also commonplace.
Find Out if You Have a Claim
If the due date, as set out in the letter before action, has passed and no payment has been made, the next stage of the debt recovery procedure is either issuing a county court claim or insolvency proceedings.
Your solicitor can advise you if you have a strong court case and sufficient evidence such as contracts, receipts and copies of correspondence.
Insufficient evidence could lead to you being burdened with expensive legal fees and no success in court. Even if you submit the claim yourself without involving a solicitor, you may still be expected to pay the debtor’s legal fees if you lose.
Obtaining a County Court Judgment
Applying for county court judgment can provide a strong incentive for a debtor to pay you. If you choose to proceed with court action, you will need to complete a claim form, which includes particulars of the claim with details of the debt. These documents must then be filed at court, either by post or online, along with payment of the issue fee.
The court will then serve the claim on the debtor who will need to acknowledge the claim within 14 days. They will also need to respond fully within 28 days. The debtor can admit the whole of the claim and promise payment, request more time or suggest payments in instalments. They can also oppose the claim and therefore will be required to file a defence. They can also make a counterclaim.
The law allows you to charge interest on debts in many circumstances. It may also allow you to recover compensation towards your costs involved in recovering an unpaid debt – unless an agreement already provides adequate provisions for interest to be paid on late payments.
Enforcement of the Judgment
If the debtor does not respond to the court claim and a judgment is obtained, or if they do not pay the debt after a judgment has been entered against them, a business can take enforcement action. The judgment is also placed on record against the debtor, which affects their ability to obtain credit in the future. Ways in which you can enforce a county court judgment include:
- an execution against goods owned by the debtor
- an attachment of the earnings order where payments are automatically deducted from the debtor’s salary
- a charging order over a property owned by the debtor
- insolvency or bankruptcy proceedings
Statutory Demands
A statutory demand is a legal document that can be issued to the debtor as a formal written request for payment of a debt. The purpose of this document is to serve as a last chance for them to settle the debt before more severe action, such as winding-up or bankruptcy proceedings are commenced.
A creditor can issue a statutory demand without going through the courts, or if a county court judgment has already been obtained, a statutory demand can be used to enforce it.
It is important that the statutory demand form is completed and served corrected, otherwise it can be challenged by the debtor.
Once the demand has been served on the debtor, they have 21 days (if they are a company) or 18 days (if they are an individual) to either make payment, agree to a payment plan or challenge the demand. If the debtor fails to respond to the demand or disputes the demand without valid grounds, you can start winding up or bankruptcy proceedings.
Given the serious implications of a statutory demand, both creditors and debtors should seek legal advice in respect of it. A failure to handle a statutory demand correctly from the outset can be extremely expensive for the parties involved.
Insolvency and Bankruptcy Proceedings
If a client does not respond to an official statutory demand of payment and the debt is not disputed, the court may be asked to issue winding-up or bankruptcy proceedings.
If a company that is registered in England or Wales cannot pay you a debt of more than £750, you can apply to have the company wound up. If it is an individual who owes you money, the debt owed must be more than £5,000 for you to be able to present a bankruptcy petition to the court.
The threat of a winding up or bankruptcy proceedings often prompts debtors to pay immediately without further proceedings being issued.
However, if a court must make a winding-up order, all the assets of the company will be collected and distributed amongst creditors. Similarly, if a bankruptcy order is made, the debtor’s assets can be seized and sold to pay their debts.
How We Can Help
We have a strong track record of successfully assisting businesses across a range of sectors to recover their debts efficiently and cost-effectively. We understand the need to retain positive working relationships in many circumstances and can help you explore non-contentious as well as other options for debt recovery. Get in touch with us today via email for more advice.
