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It can be extremely frustrating if you are owed money. Unpaid invoices can have a serious effect on cash flow and can be a significant challenge for any business.
Steps to minimise bad debts
What steps can you take to avoid bad debts occurring in the first place?
- Make sure that you have terms and conditions that clearly set out payment obligations.
- Consider whether to ask for payment in advance or on delivery.
- Have effective credit controls in place to maximise the possibility of recovery of unpaid debts.
- Implement a procedure to follow up late payers by phone, email or letter.
- Take action promptly.
Formal action
If you have tried contacting your customer or negotiating payment and have exhausted your options, it may be appropriate to consider taking formal action to recover the debt.
Our expert solicitors can help you pursue your debts. We can help you with:
- Insolvency proceedings including issuing a statutory demand and winding up petition or bankruptcy petition
- Writing a letter before action and issuing court proceedings
- Enforcement of money judgments.
Before taking further steps, you should review your agreement with your customer to consider if any relevant dispute resolution provisions apply. You must follow any agreed process.
Insolvency proceedings
Where your customer owes you £750 or more in the case of a company or £5,000 or more in the case of an individual, and there is no dispute, but your customer has not paid, it is worth considering insolvency proceedings.
The first step is to serve a statutory demand on your customer seeking payment within 21 days. If payment is not made, it is open to you to present a winding up petition in the case of a company, or a bankruptcy petition in the case of an individual on the grounds that your customer is unable to pay its debts.
This is a serious threat and can be an effective method to encourage your customer to pay.
If payment is not made and you press on, it is vital that the requirements for presenting a petition are observed, as failure to do so can result in a petition being rejected.
Insolvency proceedings must not be commenced where the debt is disputed on substantial grounds or if there is a counterclaim, set-off or cross demand which equals or exceeds the debt. This is not a high hurdle. A court can penalise creditors who proceed with insolvency proceedings despite the debt being disputed.
It is also important to note that if a winding up or bankruptcy order is made, it is likely that you will be an unsecured creditor and there is a risk that you may not recover anything.
Letter before action and court proceedings
A letter before action sets out the basis of the claim including details of the agreement, a summary of the facts, what you want from your customer, how the outstanding balance was incurred, how the amount is calculated and whether interest is claimed and if so the rate and the amount.
Typically, the letter will set out a time by which your customer must provide a full response or pay and a warning of any consequences if they do not comply.
It is important to note that each letter before action should be tailored to the specific circumstances.
The letter before action should comply with the relevant protocol:
- The Pre-Action Protocol for Debt Claims which applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader).
- The Practice Direction Pre-Action Conduct and Protocols for any other claim, including a claim for payment of a debt made by a business against another business.
The purpose of a letter before action is to facilitate transparency and open communication between parties, with the aim of resolving a matter.
If there is a dispute or your debt is below the threshold for insolvency proceedings and your customer ignores you or does not respond positively to a letter before action, the next step is to issue proceedings.
Before a claim is issued, it is important to consider the financial position of your customer. If your customer is in dire straits, there may be little point in issuing proceedings, as even if you obtain a judgment or are awarded a sum of money, your customer may not be able to pay.
Once the claim is issued, your customer will be required to respond within a certain time. If your customer does nothing or admits the debt, you can request judgment. If your customer defends the claim, careful consideration will need to be given to the defence. In certain circumstances, where the matter is straightforward and your customer’s defence lacks merits, it may be possible to apply for summary judgment.
If the matter proceeds to trial, directions will be given for evidence, including disclosure of documents, witness statements and expert reports (if appropriate). A trial will be listed where the matter will be determined. If judgment is obtained, this may affect your customer’s credit record.
Enforcement of money judgments
If you have a judgment but your customer still has not paid, you can take enforcement action.
Options include:
- Obtaining information
- Taking control of goods
- Attachment of earnings order
- Charging order
- Third party debt order
- Bankruptcy or winding up petition
The most appropriate enforcement method will depend on the particular circumstances of your customer.
We can help
To have the best chance of recovering debts, it is vital to act quickly. We can help you pursue your customers for unpaid debts. We can advise you on the most effective strategy to recover your debts and guide you through the process. To speak to a member of our Debt Recovery team, please call 01689 887887.