Letter before action or statutory demand

In an ideal world there would be no need to instruct a solicitor to recover money on your behalf. Unfortunately, and for many reasons, many businesses find themselves in need of assistance in recovering debts, but what are your options and which process is right for your business?

Most businesses will have an in-house credit control system, but again these efforts do not always prove fruitful.

When you decide that the debt has been outstanding for long enough, or a contract has been breached, contacting a solicitor is a good course of action. They will discuss your options, prospect of recovery and advise whether you could or should take your case further.

More often than not instructing a solicitor can prompt your debtor to pay faster. If your solicitor issues a formal 7 day claim letter or statutory demand specifying a timeframe for repayment before legal proceedings are issued, the debtor may act quickly to avoid going to court.

However, it is advised that you first attempt to resolve the matter amicably with the customer, perhaps negotiating payment options before contacting a solicitor, particularly if you value the debtor as a customer. Just don’t leave it too long.

What is the difference?

Letter before action

A letter before action is the last letter you should send before commencing legal action to recover a debt. A final demand letter formally reminds and requests your customer one last time to make payment before you take legal action. This letter details all the necessary information including the date the debt should have been paid, any interest that is to be paid, and how long the debtor has to pay before legal proceedings will take place.

Statutory Demand

Statutory demands are not a debt recovery procedure per se, but they are often (mis)used as such. Properly used, a statutory demand is a way to prove that a company cannot pay its debts as they fall due and are therefore cash flow insolvent. If a debtor fails to respond to a statutory demand, it can have serious consequences on its business and the creditor will be at liberty to bring a winding up petition (or bankruptcy petition in the case of an individual).

A statutory demand is not supposed to be used as a debt recovery procedure for disputed debts. If the creditor serves a statutory demand for a disputed debt, or refuses to withdraw it if a dispute is raised after it is served, then the creditor may have to pay the debtor’s legal costs for setting aside the statutory demand against an individual or for an injunction preventing the presentation of a winding up petition by the creditor.

The costs payable by the creditor on setting aside or the granting of an injunction can range from £2,000 upwards even if, ultimately, the debt is owed. It is important for a creditor to realise that withdrawing the demand is not an acceptance that the debtor does not have to pay, but is merely a recognition that there is a genuine dispute or triable issue for a court to decide.

Although correct at the time of publication, the contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.