For any business, cash flow is a vital need and therefore, ensuring invoices are paid on time is critical. However, there will unfortunately be times when a customer fails to pay your invoices and therefore, it is also important to know what options are available to you to recover outstanding payments.
It is always sensible to engage with the debtor at an early stage. By encouraging payment and trying to work together, you may help to maintain future working relationships and also keep your own costs to a minimum. It is always worth considering payment plans where the customer is struggling financially. However, if this is not an option or you require payment as soon as possible, then you may need to take formal action.
Where a company owes more than £750, or an individual owes more than £5,000, and that amount is not contested by the debtor, you can look at serving a statutory demand on the debtor.
A statutory demand is a good way to ‘flush out’ a response from a debtor. It is the first step to petition to wind-up a company i.e. putting it into insolvency, or making an individual bankrupt and will often encourage fast payment, as the debtor only has 21 days to respond or risk being made insolvent.
One advantage of a statutory demand is that it is a stand-alone process and the creditor does not have to commence insolvency proceedings if the demand is not responded to. As a result, a statutory demand is a quick and cost effective step and does not involve court proceedings from the outset. A statutory demand should not be served where there is a genuine dispute regarding the unpaid invoices.
Where the debtor is an individual, the statutory demand must be personally served on the debtor; in other words, given to them in person. Service on a company must take place by leaving the statutory demand at its registered office.
If the debtor does not respond within 21 days, the creditor can present a petition to wind-up a company or bankrupt an individual. This should occur within 4 months of service of the statutory demand to avoid the creditor being criticised by the court.
With a statutory demand against an individual, the debtor also has a period of 18 days from service in which they can apply to the court to set-aside the demand, if they believe they do not owe the amount claimed. If the debtor part-pays the outstanding debt and reduces the amount below the lower limits detailed above, the creditor cannot present a petition. For the remaining outstanding amount, the debtor must pursue the creditor via the court. However, the debtor should first consider the inconvenience, time and potential cost of pursuing relatively low sums via this route.
Where money is owed by a company to company or an individual to an individual, the first step to court proceedings is what is known as a ‘Letter before Claim’. This letter is sent to the debtor and sets out the details of the amount owed and why it is owed. The debtor has 14 days to reply. If it fails to do so, the creditor can issue court proceedings against the debtor.
However, where the creditor is a company, including a sole trader or public body and the debtor is an individual, the Pre Action Protocol for Debt Claims applies. This requires that a ‘Letter of Claim’ must be sent and which should contain far more detail, including the amount of debt, details of the agreement between the parties and when it was agreed. The creditor should also include a copy of the statement of account, a copy of the agreement if one exists and a copy of the Information Sheet and Reply Form provided with the protocol.
The creditor has 30 days to respond to the Letter of Claim. If the creditor responds that he/she is seeking legal advice within that timeframe, the debtor must allow the creditor a reasonable period for advice to be obtained. The creditor should not commence court proceedings until 30 days from receipt of the Reply Form, or 30 days from the creditor requesting further documents. If the debtor replies that he/she is seeking debt advice but which cannot be obtained within 30 days, the debtor must explain the reason for the delay and the date by which advice is expected.
Once the 30-day timescale has passed and where there has been no response, the creditor can issue court proceedings.
Creditors are always advised to follow the Pre-Action Protocols to avoid being criticised by the courts. If court proceedings are issued without first sending a Letter of Claim, the court may stay the proceedings to allow the Pre-Action Protocol phase to take place.
If court proceedings are required, it is important to understand what costs you may recover. If the debt is for a sum of £10,000 or less, then it is likely that the claim will be assigned to the Small Claims track. For cases on the Small Claims track, the usual cost rule of loser pays winner’s costs does not apply and a successful party will normally only recover fixed costs of around £80, plus any Court fees incurred as part of that process. Therefore, the legal costs you might incur could easily exceed the level of the debt you are seeking to recover.
The small claims procedure is designed to be straightforward to enable you to represent yourself if you so wish so as to avoid the unrecoverable cost issue.
For claims in excess of £10,000, then in most cases, costs will be recoverable by the successful party. However, costs are always at the discretion of the court and it is rare for a successful party to recover all of their costs.
For more information or assistance with such matters, please contact Gardner Leader’s Dispute Resolution team.