“We’re still waiting for clearance of funds.” “The Manager is away at present and will arrange this on return.” “We didn’t receive your invoice, can you re-send this please?”
There are the types of messages that can make any business owner’s stomach sink.
Maybe you’ve had a long-standing client who suddenly stops returning calls, or a new customer promising payment that never arrives.
Whatever the scenario, unpaid invoices undermine cash flow and, if left unresolved, can put your business at risk.
What is the most effective way to recover debts?
The starting point in most cases is communication and keeping the lines of communication open.
It can help to have an internal system in place to enable you, as the creditor, to anticipate any potential issues regarding payment quickly and so that you can take swift action to put in place a means of recovering the payment.
The quicker you act, the more chance you have of recovering the debt.
- You should send written reminders to the individual or business that owes you money.
- You should call and try to speak with the person responsible for making the payments and try to identify what is the cause of the delay.
- If the debtor ignores these reminders or fails to engage in communications with you, then you need to issue a Letter Before Action (LBA) before you can commence legal proceedings.
- Issues legal proceedings in the appropriate court.
Why send an LBA?
The Civil Procedure Rules 1998 introduced specific Pre-action Protocols for debt claims.
These require creditors to send a formal pre-action letter to the debtor, setting out minimum information to allow the debtor to understand the basis of the debt claimed and respond to the claim before proceedings are issued.
The letter should identify:
- Who the debtor is
- Details of the payment claimed and a copy of the invoice(s)
- An explanation of how the debt has been incurred
- A deadline for payment
- A breakdown of any interest payable and an outline of how and why that is said to be due
- Details and methods to enable the payment to be made
- Contact details to enable the debtor to respond to the claim
- Reference should be made to any applicable Practice Direction and/or Protocol and ideally attached to the LBA. A warning should identify that if the debtor fails to respond and/or make the payment by a specified date, legal proceedings may be commenced and the creditor will ask the Court to order the debtor to pay the creditor’s legal fees associated with the claim.
An LBA can often prompt discussion and enable settlement without the need for court proceedings.
Have you tried negotiating to recover your debt?
If the debtor is experiencing genuine financial difficulty, for instance, because of seasonal downturns or delayed payments from their own clients, then negotiation may be an appropriate solution.
From a commercial perspective, it may be better to negotiate a structured repayment plan or agree a reduced sum to allow swift recovery of funds and to avoid the wasted costs of lengthy and expensive litigation.
However, you will need to document your agreed arrangement carefully to ensure enforceability and to protect your position in the event of default.
Can I issue a statutory demand?
If the debt is undisputed and exceeds the statutory thresholds (£750 for companies, £5,000 for individuals), you are eligible to issue a Statutory Demand.
A statutory demand is a formal notice sent to a debtor pursuant to s.268(1)(a) Insolvency Act 1986 that gives the debtor a set time to respond to satisfy the debt or reach an agreement to avoid steps being taken to wind up the company or bankrupt the individual.
Failure to comply with the statutory demand entitles the creditor to petition for the debtor’s bankruptcy or, in the case of a company, for compulsory winding-up.
Statutory demands are highly effective but must be used with caution. They are unsuitable where a debt is genuinely disputed, and defective drafting or service can invalidate the demand.
If you need help assessing whether issuing a statutory demand is the right action for your business, please get in touch with us.
When can unpaid commercial debts lead to court?
If all of your pre-action attempts have been unsuccessful in recovering the debt, you can commence court proceedings.
Proceedings can usually be commenced via Money Claim Online or through the Money Claims Centre of the County Court. Claims will be allocated to a particular track depending on their value and complexity and within each track, different rules apply. The different tracks are as follows:
Claims under £10,000 can be pursued via the County Court Small Claims Track.
Claims with a value of more than £10,000 and less than £100,000 can be pursued via the Fast Track and Intermediate Track.
Higher value and/or more complex disputes may be allocated to the Multi-Track and dealt with in the County Court or the High Court.
However, you should note that obtaining a judgment via the Court does not automatically guarantee payment.
If the debtor still refuses to pay, the creditor must apply to the Court to enforce it.
There are various methods a creditor may consider to enforce a judgment debt and the suitable method will turn on the facts of each case and information held by the creditor. Enforcement options include:
- Instructing bailiffs to seize and sell assets
- Applying for a charging order over property and then forcing a sale of the property
- Using a third-party debt order (e.g., freezing a debtor’s bank account)
- Attachment of earnings orders
- Insolvency proceedings (winding-up) in extreme cases
The choice of enforcement will depend on the debtor’s assets and circumstances.
How do you determine the most effective way to recover debt?
Selecting the appropriate course of action for debt recovery requires careful assessment of the debt, the debtor’s position and the commercial relationship between the parties.
Errors in procedure, particularly in relation to statutory demands or enforcement applications, can result in wasted costs and delay.
These actions can strain or irreparably damage commercial relationships, so you’ll have to decide if you are prepared to risk your business relationship if proceedings escalate.
Specialist advice ensures that the process is conducted efficiently and with the greatest prospect of recovery.
Remember, you are not powerless when faced with unpaid debts.
From pre-action correspondence to statutory demands to court proceedings enforcement, there are options available to achieve payment.
Contact our team for legal support in recovering a commercial debt.