Fiona Gaskell – Partner at Clough & Willis Solicitors..

Business Insights

..discusses what businesses can do when they face having to chase bad debt from customers

Managing debts is crucial for every business’ survival. In a previous piece for The Business Post, I wrote about how companies can protect themselves from bad debt, but sometimes – despite all your best efforts – work can remain unpaid which is when more aggressive steps must be taken.

The first step for commercial debt recovery undertaken by solicitors is the preparation and service of a pre-action letter which is often referred to as a ‘seven-day letter.’ It takes this name as, unsurprisingly, it is the usual time allowed for the debtor to respond. Such a letter will usually set out details of the debt, a time for the debtor to respond and a threat to issue proceedings if the debt is not paid in full. Statistically, they do deliver a high percentage recovery rate. This may be because a debtor will assume that if a creditor has taken the trouble to instruct a solicitor that they will take the next step to issue proceedings if the debt is not paid or at least a proposal to pay has been agreed. Instructing a solicitor to send a pre action letter is an effective and low cost way of putting pressure on debtors to pay and one which I would always recommend.

If a debtor ignores this type of letter, then you will have to decide whether to issue proceedings. This may depend on the amount of debt in question, but also whether the client has any insurance on the debt which may require them to issue proceedings in order to make a claim.

Some clients will have a general policy of always issuing proceedings for debts over a certain figure and not bothering at all for debts of a modest value, for example in the hundreds of pounds. If proceedings are issued, the client will have to pay a court fee which is dependent upon the value of the claim - this can be recovered from the debtor if the claimant obtains a judgment. The claim form also allows a claimant to claim fixed costs for the preparation of the claim form by a solicitor, but these do not cover the true costs of issuing proceedings and most solicitors will charge more than the fixed costs and the excess cannot, usually, be recovered from the debtor. However, a claimant can claim interest upon the outstanding debt in accordance with their terms and conditions of business or statutory interest or interest pursuant to the Late Payment of Commercial Debts legislation which can also allow the recovery of some costs. This is too big a topic to go into here, but a solicitor would be able to provide more detail.

In situations where the debtor knows that they have little prospect of defending the claim, they may well contact the client either to make payment in full, sometimes seeking to avoid paying the claim fee and fixed costs or to enter a proposal to pay by instalments. Some creditors will insist upon payment of all their expenses, including interest, whilst others may consider accepting the proposal.

It is difficult to advise a client in such a situation without knowing something about the debtor’s financial position as they may be seeking to reach agreement to pay by instalments with one creditor whilst they are paying off other creditors in full and may be at risk of going out of business. This is where it can be useful to know as much as possible about your customer and, where the customer is a limited company, to have a director’s personal guarantee.

It is very important for most businesses not to have any judgments registered against them as this will affect their ability to obtain credit and may have a detrimental effect upon their relationship with their bank. The threat by a claimant to enter judgment in the absence of payment in full may well be sufficient to improve an offer of payment or even ensure payment in full.

Sometimes, as an alternative to the issue of court proceedings, it may be appropriate to serve a debtor with a statutory demand. This is a formal demand for monies due and should only be used where the creditor knows that there is no dispute about the debt. The demand is a document usually generated by the creditor’s solicitor and can be served upon an individual, a limited company, or a limited liability partnership - although the minimum amount of the debt differs according to the identity of the debtor. Generally, the demand is personally served upon the debtor who has 21 days in which to make payment. After this time, the creditor can issue a bankruptcy petition or a winding up petition against the debtor. The mere existence of a petition can result in a business being unable to operate as in most cases their bank account becomes frozen once their bank become aware of the petition.

For many creditors, the service of a statutory demand is designed to grab the attention of the debtor and make them understand the seriousness of their position and prompt payment or at least an offer of payment. Creditors seldom benefit from a debtor being adjudged bankrupt or wound up. Having said that, the service of a statutory demand itself can be highly effective, is not hugely expensive, and has the effect of producing a much quicker response from a debtor then court proceedings which can allow a defendant to submit a defence which they know has no prospects of success. Statutory demands work best when served upon a business that wants to carry on operating but may have some cashflow problems or who is bullying a supplier or contractor by not paying and gambling upon the creditor being frightened of offending the debtor in case they lose their business.

Chasing debts can be daunting, but there is support out there. My advice is to do your research and find an experienced solicitor who can help you. Also always remember that a customer who does not pay is NOT a good customer.