Having a good debt recovery process in place is vital for any business. It is important that action is taken promptly to recover what is owed but also to be pro-active to ensure maximum recovery when the time comes, so why not make it your New Year’s resolution to improve your debt recovery process and save costs.
This article details a few ways in which you can maximise your debt recovery.
Check the interest rate within your terms and conditions
Many businesses include a right to recover interest on late payments within their terms, and some will even include the interest rate to be charged. More often, the interest rate applied is less than the interest rate you are entitled to recover under the Late Payment of Commercial Debts (Interest) Act 1998 (the Act), which is set at 8% above the Bank of England’s base rate.
The Act only applies to contracts between businesses but the County Court Act 1984 and Senior Courts Act 1981 allow you to charge interest at 8% (this is fixed so not above the base rate) when claiming against individuals.
The Act also allows you to recover fixed compensation for late payment from business customers. The amount recoverable depends on the value of the debt.
You do not need to include the Act in your terms and conditions for it to apply, but it does no harm; it is important that you remember that you have this right when seeking to recover debt. The interest and compensation needs to be claimed in the letter before action otherwise you cannot recover those amounts during court proceedings.
It takes some time to contact customers that have outstanding invoices and to draft the letters, therefore, you should consider adding in to your terms and conditions the recoverability of administration costs and/or legal fees in the event of unpaid invoices.
The ability to recover compensation under the Act helps to cover the administration cost but the costs incurred may well outweigh what you are entitled to under the Act.
A well-drafted clause within your terms and conditions could mean that your costs are covered.
Think about credit limits
You may want to consider setting credit limits for customers, especially if they are a new customer or new business, or generally have a bad credit rating.
Be aware of your time limits
All debt recovery is subject to a limitation period, which is usually 6 years from the date the debt became outstanding for most debts.
Before court proceedings can be issued, the relevant pre-action protocol must be followed. If you are pursuing debt owed by an individual then the Debt Protocol will apply, otherwise, it will be the general Pre-Action Protocol.
The pre-action protocols require a letter before action to be sent, which sets out what you are claiming for and why, including interest and compensation. If you are sending a letter before action to an individual, they will require 30 days to respond to that letter. If you are sending a letter before action to a company, they will usually require 14 days to respond to that letter.
If the pre-action protocol is not followed, you could be penalised on the recoverability of your legal costs by the court.
Court proceedings or Statutory Demand?
This is an important question.
Where you are seeking recovery for an undisputed debt, serving a statutory demand may be a more effective option than commencing court proceedings. Typically, it can be more impactful as it comes with a threat of bankruptcy or a winding up petition. You can serve a statutory demand for an undisputed part of a debt and deal with the disputed part separately.
To serve a statutory demand a company must owe you more than £750 and an individual must owe you more than £5000. The statutory demand will give the debtor 21 days to resolve the debt, after that time you can apply for bankruptcy or winding up of the company.
If the debt is disputed, you will need to consider issuing court proceedings so that the dispute can be resolved. Depending on the value of the debt owed, you may be able to recover your legal costs as generally the losing party pays, but typically the cost recoverability is around 60-80%. If the debt is less than £10,000 you will only be entitled to fixed costs which change depending on the actual value of the claim but will be a maximum of £100.
Whether a statutory demand or court proceedings are going to be successful will depend on the financial circumstances of your customer.
Companies House is a good place to start with companies but this is only a snapshot of the company’s position and can change at any time. If the accounts are showing a negative balance, it may not be worth throwing away good money, time and effort to wind the company up only to receive nothing in return.
Background checks and pre-sue reports should be considered to determine what assets are available if, for example, you were to enforce a court judgment.
Debt recovery package
We always recommend that you seek advice promptly to get the best results.
Instructing a third party to manage your debt recovery is a possibility and we offer a debt recovery package that allows you to step away from the process and deal with running your business. If you would like to discuss this package, please do not hesitate to contact us.
We will happily assist with reviewing your terms and conditions and reviewing cases to determine their prospects before formal action is taken. We offer a free 20 minute consultation to discuss any debt recovery action you may have.
Happy New Year from Howes Percival!
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.