November 2004

How to deal with Debtors

Anyone that deals with the day to day running of a company knows that debtors are a continuing problem. Having supplied goods and services and sent invoices for their provision, it is not uncommon for the client/customer to say that they are not going to pay or for the invoice simply to be ignored. As a result, cashflow problems are experienced and other bills, for example suppliers etc, cannot be paid – a vicious circle. So, how do we resolve this major issue?

One way to avoid these problems is to request payment on account. Although this method can be unpopular with clients/customers it ensures that at least some, if not all, payment is received when due. It has become normal practice for many firms (having been left with no choice) to cease work until payment is received: a frustrating (for the Client) but effective (for the firm) method of credit control.

Another option would be to incorporate standard terms and conditions of business into every transaction, expressly providing for the recovery of outstanding sums due through Court or other action. Terms could include an interest provision, which would put off clients/customers from delaying payment, and if supplying goods, a clause that states that title remains with the business until full payment is received is another useful tool.

In relation to claiming interest, even if there is no express provision in your terms and conditions the Late Payment of Commercial Debts (interest) Act 1998 has now been amended (2002) to incorporate a statutory right for businesses to claim reasonable costs and up to 12% interest on late payment.

The above are proactive measures to try to reduce debtors, however, even with the above system in place there are always some debtors that simply will not make payment and therefore one must decide on the appropriate course of action.

Firstly, the sooner late payment is chased, the sooner one becomes aware of any problems. This could be by means of a personal phone call (which often has greater effect) or by letter. It is therefore imperative to maintain an effective credit control system that ensures all the correct documentation has been sent e.g. terms and conditions and invoices, and that can also identify when payments become due.

If payment remains outstanding having chased the client/customer, a number of options are available and include: 1. Court proceedings; 2. Winding-Up or Bankruptcy proceedings; 3. mediation/arbitration. In this article we shall concentrate on Court Proceedings and Winding-Up proceedings.

Court Proceedings

There are three options as to where a debt action can be commenced:

1. High Court. If the claim has a value of more than £50,000 it is likely to be issued or transferred to the High Court.

2. County Court. Claims for less than £50,000 will usually proceed in the County Court

3. Small Claims Court. Claims of less than £5,000 will be heard in the Small Claims Court (which is a part of the County Court).

The Small Claims Court is designed to allow people to represent themselves and thereby avoid legal costs. Even if legal costs are incurred by a party to the action, as a general rule, they will not be recoverable.

Once at Court if the claim is undisputed i.e. there is no defence, the Claimant can enter judgment and, if necessary, commence enforcement procedures to recover the money owed. If the claim is disputed various procedures need to be adhered to and it is likely that the claim will go to Trial. There are numerous judgments that can be made, however, the more common is either the Claimant wins, thereby getting judgment for the monies claimed, or the Claimant's claim is dismissed and both parties walk away.

As mentioned above, once judgment is granted enforcement procedures can be commenced in order to recover outstanding sums. Again there are different options of enforcement, which include (but not limited to): execution against the debtors goods; registering a charge against the debtors property; attachment of earnings order; a disclosure Order.

Winding Up or Bankruptcy Proceedings

Winding Up proceedings are commonly commenced by serving a Statutory Demand on the debtor. Statutory Demands can be used when there is no dispute that the debt is due or that there is at least £750 that is not disputed and it appears that the debtor cannot meet payment. The Statutory Demand gives the debtor 21 days to either make payment or come to an agreement as to a payment plan.

Quite often the threat contained in a Statutory Demand i.e. that the company could be wound up, is enough to make the debtor pay without any further action, or respond by detailing reasons surrounding non-payment in which case investigations as to how the situation has arisen and a compromise may be made.

If no solution can be found and no payment is forthcoming then either a Bankruptcy Petition (for an individual) or a Winding Up Petition (for a company) can be presented to the Court.

As can be seen, there are various methods available to recover outstanding sums due and the details above provide only a brief overview of some of these methods. If you would like further advice regarding debt recovery, please contact our office.