While most commercial invoices are generally settled as expected, some UK businesses occasionally find they are in the uncomfortable position of being owed payment – and may not know what to do next about business debt.
This situation can have many variables, depending on the size of the bill, the debtor’s financial situation, the likelihood of recovering the owed funds, and more. It can therefore be difficult to know whether legal action is the right course to take, and how the process would work.
In this article, we will look at some points to consider when deciding whether to take legal action against a company or individual that owes a debt to your business, and the steps in the process that would need to be taken.
Should I take my debtor to court?
Assuming your business has undertaken the usual actions to try to recover the debt in the first instance (such as reminder letters and phone calls to enquire about the payment), you might now be considering taking legal action against your debtor. However, whether or not it makes sense to take them to court will depend on the particulars of the situation.
Firstly, the size of the debt will determine the process by which your case will be heard in court and whether or not you will be able to recoup your legal fees. A debt of less than £10,000 will usually be assigned to the small claims track and dealt with by the County Court – in which instance your ability to recover legal fees may be limited.
Larger debts will be dealt with in either the Fast or the Multi track of the County Court, with the result that the proceedings are likely to be a good deal more complex (and potentially expensive). However, you may be able to recover some of your legal costs if ultimately successful.
Therefore, deciding whether or not to undertake legal action is a matter of weighing the size of your debt against the likely legal fees, to evaluate if it makes better sense to pursue the debt in court or to take another approach.
Another factor in deciding whether or not to take the debtor to court is their financial position, if you have access to this information. If they are insolvent, there is probably little to be gained by throwing good money after bad (especially if there may already be other county court judgements against them). There may simply be no money there to recover.
In some cases, the non-payment of the invoice(s) may be due to a dispute over the goods or services you supplied (perhaps a disagreement about the quality of the goods, whether they were delivered on time, or some other point of contention used as a justification for the withheld funds). If there are unresolved issues like these, it may be more difficult to recover the debt in court.
In all cases, it’s usually best to consult an experienced solicitor who will be able to help you determine the right course of action for your unique situation.
The Letter of Claim
Not all business debt problems need to go all the way to court to be resolved. In fact, the majority are settled via other means before that becomes necessary.
Enlisting the help of an expert debt solicitor early in the process is a very sensible first move. This specialist will be able to draft a Letter of Claim, sometimes known as a Letter Before Action, to send to the debtor, most likely for a very reasonable fee (often £10 or less).
The Letter of Claim is a precursor to any formal legal action, notifying the debtor of your intent to pursue the matter if they do not make payment within a reasonable time period (usually seven business days). It sets out the amount owed, any interest added, and the legal fees you would expect them to cover for you if you went to court. This letter is an essential first step in the legal process, and without it you may have difficulty recovering costs later.
It is quite common that receiving this letter from the creditor’s solicitor is sufficient to startle a debtor into action (who may have forgotten about the debt, or been quietly hoping that if they ignored it it would go away) – and in many cases motivates them to resolve the situation and pay up.
Compromise and negotiation
Of course, in many cases the non-payment of an invoice is due to the most obvious reason: the debtor just cannot afford it.
In these cases, it hardly makes sense to waste more funds trying to recover money they simply do not have – and if you are interested in preserving a future commercial relationship with the customer at all then demanding the full amount right away may not be the best approach to take.
Sometimes, a debtor may be facing financial issues that are only temporary, and it may benefit you in the long run to be flexible with them during a cash-flow crisis.
Negotiation to reach an agreement of part payment, rescheduling the debt, or opting for another similar solution can be a good approach in these situations. You might be able to recover at least some of your outstanding funds, and avoid the stress and expense of taking them to court.
It may also be the case that your original contract included a retention of title clause (meaning the goods technically continue to be your property until they are paid for). If so, you might be able to recover some of the delivered stock as an alternative way to recoup some of your money.
If the non-payment is due to an ongoing dispute, you may find it useful to appoint the services of a professional mediator. This neutral third party will be able to act as a go-between for you and your debtor, hearing each of you in turn and going back and forth between you to guide the negotiation to a point of agreement.
Dealing with a debt recovery issue can sometimes be a stressful experience requiring a lot of attention and funding to sort out, but it’s a great deal easier with good professional help.
In all cases, an experienced solicitor will be able to guide you through your options and help you find the best course of action for recovering your missing funds – and before too long you’ll be able to get back on track and continue to work with your paying customers.
Ailsa Fairchild is the Head of Debt Recovery at Girlings Solicitors – a long-established law firm in Ashford, Canterbury and Herne Bay. She has extensive experience in all forms of commercial dispute resolution/litigation and has worked in this area for over twenty years.