Recovering an Unpaid Debt
Introduction
No matter how good your credit control procedures are, at some point you may find that you have a business or commercial customer who has simply failed to pay an invoice, despite your best efforts to pursue them for payment.
In these circumstances there are several different types of action that you can take to secure payment of the debt. These include using a mediation or arbitration service to help you and the customer reach a negotiated settlement, using a debt collection agency, or instigating court action or insolvency proceedings.
Most small businesses that are attempting to recover payment from a larger business also have the option of complaining to the Small Business Commissioner, who will investigate the case on their behalf.
Here we explain the issues to consider before taking debt recovery action, the various options for securing recovery of the debt and the basics of late payment legislation.
What to consider before taking recovery action
Recovery action must be based on commercial decisions and you should carefully weigh up the business factors involved before committing to any course of action.
What is the reason for the customer's failure to pay? It may be because there is a problem with the invoice. It may be because the debt, or part of it, is being disputed on reasonable grounds. How strong is the customer's claim and how strong is the case that the debt is actually due?
What is the value of the debt, or the disputed element of the debt, and how does this compare to the value of your relationship with the customer, which is likely to be damaged if you take recovery action?
What has been done to chase payment? This could include calling or emailing to say payment is overdue; charging interest on overdue invoices and stopping supplying that customer; and reminding them that you can take recovery action.
Is the debtor likely to be able to pay the debt and the associated recovery costs? It may be that they have no assets and cannot pay.
If a court rules in your favour, how easy will it be to enforce the judgement?
In some cases it may still be worth pursuing a debt in order to establish a reputation in the marketplace and encourage other debtors to pay. This choice should be based on a purely commercial judgement that this is in the best interests of your business and not used as a way to prove a point of principle or for personal satisfaction.
Options for recovery
Mediation and arbitration
The Office of the Small Business Commissioner encourages small businesses dealing with an unpaid debt to try and resolve cases without court proceedings wherever possible, either by negotiating directly with the customer or by using a mediation or arbitration service. This can also help avoid unnecessary legal costs.
Mediation services do not decide the outcome of disputes. They help the parties to clarify options and reach an agreed solution between themselves. With arbitration, however, the two parties agree to be bound by a solution determined by the arbitrator.
Mediation fees start at around £50 per hour for debts up to £5,000. Arbitration can be more costly, for example the Business Arbitration Scheme run by the Chartered Institute of Arbitrators charges a fixed fee of £1,250 (excluding VAT) for debts between £5,000 and £100,000.
Debt recovery agency
Debt recovery agencies (some of which are operated by specialist solicitors) focus on collecting debts and are set up with staff and processes dedicated to doing so. A letter from a debt recovery agency is often enough to generate payment from many debtors.
Agencies charge a commission, which is usually around 10% of the sum recovered.
You should always use an agency that is registered with the Credit Services Association.
The Small Business Commissioner
Small businesses (those with fewer than 50 employees) can usually complain to the Small Business Commissioner (SBC) about unpaid debts owed to them by larger business customers (those with 50 employees or more).
The SBC will consider evidence from both parties and decide what would be a fair outcome. Its recommendations are not legally binding. However, the SBC has the option to publicise the poor payment practices of larger businesses, which creates an incentive for them to co-operate.
The SBC does not deal with payment disputes in the construction industry, or with complaints where the debtor is a public sector organisation or a supermarket.
Legal advice
A short appointment with a solicitor can establish the best legal option for the situation. This might not always involve going to court. Sometimes a formal letter from a solicitor can be enough to prompt a customer to pay what they owe.
Small businesses in England and Wales can get a free 30-minute consultation through Lawyers for Your Business, a service available through the Law Society.
Court proceedings
In England and Wales claims for debt recovery should be filed with your local county court. Alternatively claims up to a fixed value of £100,000 can be started directly on the Money Claim Online website.
Once the court's judgement has been made, it will need to be enforced. This can involve seeking further court orders (and incurring further costs).
Insolvency proceedings
If you can prove that your debtor is insolvent and that your debt is over a threshold amount, you can petition the court to order the liquidation of the debtor (if it is a company) or file for their bankruptcy (if the debtor is an individual).
You can ask the court to collect payment from the debtor if they do not pay after receiving the court order.
Although this is a powerful threat there is a danger that you may run up costs in pushing a debtor into insolvency. If they are liquidated or bankrupted this will not ensure that you get paid. There will be insolvency fees and secured creditors to pay before any money is available for paying normal trade creditors.
Take advice from a licensed insolvency practitioner or your solicitor before starting this sort of action.
Claiming interest and compensation for late payment
Under the Late Payment of Commercial Debts Regulations 2013, you have a statutory right to claim interest at a rate of 8% above the Bank of England's base rate if a business or commercial customer is late paying what it owes you.
Under the Regulations, the meaning of 'late payment' differs according to whether the customer is a business or a public sector organisation.
If the customer is a business, payment is considered to be late if it is not received 60 days after the date on which goods or services are delivered to them or the date on which they receive an invoice, whichever is later. If the customer is a public sector organisation, payment is considered to be late after 30 days.
As well as the right to claim interest, there is also a right to claim compensation for late payment.
The amount that can be charged is normally:
£40 for debts under £1,000.
£70 for debts of £1,000 to £9,999.
£100 for debts of over £10,000.
However, it is also possible to claim 'reasonable' additional costs, for example the cost of using a debt recovery agency.
Hints and tips
Ensure that you have good credit policies and procedures in place so that your billing arrangements and payment terms are clearly documented and accepted by the customer.
Make sure you invoice customers regularly and monitor their payments closely. This will help prevent problems arising in the first place and allow you to identify difficulties as early as possible.
Always send a final notice stating that recovery action will be taken if payment is not received within a specified time.
If you are having difficulty in collecting a debt, seek confirmation from the debtor that the balance is acknowledged as being due (even if they are seeking to delay payment). This can then be used to challenge any later attempt to dispute that the debt is payable, or as evidence to support a claim of insolvency.
Contact Ashored for help and support with your credit control processes.
