How to recover debts

By: Neil Sorrell

Date: 11 June 2012

unpaid invoice stamp{{}}If your customer has not disputed the debt, yet continues to fail to pay, you can take action in court to recover up to £5,000 with minimal costs under small claims legislation. Speed is of the essence. Chasing debts can be done politely without immediate recourse to the law (try the unpaid invoice timetable below).

If your own efforts to collect payment continue to be ignored after a month after the invoice was due, consult a legal professional.

Early on, ask the debtor if they dispute the invoice. If there’s no reply, this will weaken any later argument they try to make, such as saying the work was sub-standard. The judge will wonder why they didn’t say this earlier.

If a customer refuses to pay because they say something wasn’t up to scratch, try to settle without legal proceedings. Meet up and be willing to compromise if they have a fair point.

If a debt is under £5k then you can sue in a County Court under small claims legislation. All claims must now be issued in Northampton County Court, so it’s no longer possible to get it dealt with over the counter at your local Court.

Losing parties are only very rarely ordered to pay more than fixed costs and interest. Usually the losing party is not asked to pay the winner’s legal fees. Fixed-fee arrangements can help keep costs down.

Court proceedings depend on whether the debtor defends the claim. If they do a court hearing will be set. A judge will preside over the hearing, but they are usually quite informal. Written evidence is submitted in advance. On the day both sides are given a chance to describe their case and a judgment is announced at the end.

Consider the strength of your case on paper before taking a claim to court. Make sure you’ve got what you would expect to see to prove a case (eg a purchase order document, signed delivery note, valid invoice). Anything that confirms that payment will be made such as emails from the client is also helpful. Make notes of conversations held. If your paper trail is weak, try to find a resolution outside court. The judge will decide the case on the balance of probabilities, which is different to criminal judgments that have to be beyond reasonable doubt.

If the debt is above the £5k limit for small claims take extra care deciding whether to issue legal proceedings. The court process is the same, but if you lose you may have to pay the other side’s legal fees too. You need an experienced debt recovery specialist to analyse the merits of your case upfront.

There are always risks when taking legal action against a debtor. A solicitor will usually fall short of saying you are sure to win, but ask their opinion about your chances. Balance that probability against the benefits of success.

Be extra careful with overseas debts. Unless the terms and conditions of your contract make specific reference to disputes being conducted in these shores, then you will probably have to instruct an overseas lawyer to handle the case locally in accordance with the country’s own laws. This can leave you feeling seriously out of the loop.

Unpaid invoice timetable

1 Make a polite call the day after an invoice was due to be paid.

2 Seven days later call again and ask if there are any disputes. Make a note of the date, time and contents of that call. This kind of paperwork is important should you ever need to take legal action.

3 If no payment is received after seven more days write to the client and inform them the matter will be passed to a solicitor if the invoice remains unpaid.

4 If another week elapses pass the debt to your legal advisor. It tends to be the headed paper used in a letter from a law firm, not the words, that carry the weight so ask the solicitor to use whatever wording they find most effective.

Unpaid invoices are usually best passed to a solicitor once they’re a month late, but taking polite action throughout that time will get most debts paid before that stage.

A final note

You are legally entitled to charge interest on a debt from the moment it becomes due, even if you don't mention this right in your contract. If you want to charge more than the national interest rate you must outline the percentage in your T&Cs. Around eight per cent is usually considered reasonable. 

Compensation can also be sought in the sum of £40 for a debt of less than £1000, £70 for a debt of £1000 or more, but less than £10,000 and then £100 for a debt greater than £10,000. This is covered under The Late Payment of Commercial Debts (Interest) Act 1998 as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002.

 Neil Sorrell is the debt recovery manager at Sussex law firm Mayo Wynne Baxter Solicitors

 

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