Cash flow issues can cripple a business. Late payment of invoices is becoming increasingly common and can be a significant burden on staff time and management time while chasing payments.
Unfortunately, in some situations the problem can go beyond just late payment, to a significant risk of a business receiving no payment at all, so what tools are available to businesses chasing monies due to them?
Letter of demand
A good starting point in seeking payment of a debt is writing a clear and concise letter of demand.
- The letter should set out details of the contract or arrangement giving rise to the debt, the full amount outstanding and give details of how this amount is made up, including specific invoices.
- If the contract provides for interest on late payment, then an up-to-date figure of the interest incurred, plus details of future interest can be helpful to put pressure on the debtor to pay the debt quickly.
- You may be entitled to charge interest pursuant to the Late Payment of Commercial Debts (Interest) Act 1998, which imposes an implied interest rate of 8% a year on late payment under business to business contracts, and provides for a fixed sum and reasonable costs for recovery of the debt.
Statutory demands can be an extremely powerful tool. However, strict rules apply and they must be used carefully.
- A statutory demand is a formal written demand for payment of a debt in a prescribed form (which will change on 7 April 2017, when the Insolvency (England and Wales) Rules 2016 come into force).
- If a debtor fails to comply with the statutory demand within 21 days of service then the debtor risks having insolvency procedures commenced against it. Therefore this method of debt collection can exert significant pressure when used appropriately.
- A statutory demand can only be served in respect of a “liquidated sum” i.e. a clear, fixed sum which is properly due. If this is not the case, or if the debt can be shown to be disputed and/or the debtor has a cross claim, then using a statutory demand will be inappropriate and will carry serious risks.
The statutory demand process is normally used as a precursor to insolvency procedures (but is not compulsory when the debtor is a company), as failure to comply with a statutory demand can be used as evidence that a debtor is unable to pay its debts. If the debt is undisputed then the threat of a winding-up petition against a company can be a good method to persuade a company to pay a debt because of the embarrassment it can cause the debtor, or at least reveal if the debtor is truly unable to pay.
- Bear in mind that, insolvency procedures are not designed as a debt collection method and all creditors are grouped together. The creditor who issues the winding-up petition will have to meet the initial costs of the insolvency process.
- In the right circumstances, a winding-up petition can actually be a more cost effective method of pursuing a debt than issuing a civil claim in the courts (on which see below). However, if the debtor is truly unable to pay its debts then it is unlikely that you will recover all of your money.
If the debt is likely to be disputed and there is a genuine dispute regarding liability or amount, then you should consider whether to issue a civil claim in the courts. In some cases this will be the only way to resolve matters, either by settlement or in obtaining an enforceable judgment against the debtor.
- Litigation can be expensive, and you should consider carefully whether the level of the debt justifies the costs of issuing a claim. The courts are moving to fixed recoverable legal costs in certain circumstances and there is always a risk you will not recover all of your costs in any case.
- A court claim is a formal process, and once commenced cannot be exited easily. There is a strong emphasis on parties settling a matter at all stages, including before a claim is issued, and there are costs consequences for unreasonably refusing to do so.
- However, if the claim is successful, a judgment debt is a powerful asset that can open up different methods of enforcement such as obtaining a charging order on the debtor’s property.
On 1 October 2017, the Pre-action Protocol for Debt Claims will come into force. This will apply to circumstances where the debtor is an individual, including sole traders. Watch out for our next legal update on the new protocol and how it might affect your debt collection strategy.
If your business is experiencing problems with customer debt, and you would like to discuss any of the information detailed above, please contact a lawyer in the Dispute Resolution team on 01322 623700.