Debt recovery litigation: a guide for SMEs on collecting unpaid debts

Anyone who has ever run a small or medium enterprise is likely to have experienced the problem of unpaid invoices. Unpaid invoices and debt are significant problems for SMEs. They nearly always impact upon cash flow and cash flow is the lifeblood that most small businesses rely on to keep going. There are many instances of SMEs having been driven to ruin by the level of unpaid invoices.

While there are means of enforcing invoice debts, in practice, taking legal action against a client for an unpaid bill may mean getting satisfaction in the short term but losing the client forever. This is a real cleft stick for SMEs.

Initial steps

Business debt recovery is more than just issuing a claim. There are measures that an SME can take which often do work and which fall well short of going to court. First, once any particular invoice remains unpaid after its due date, they can send a polite, friendly reminder to the client. This sometimes prompts settlement but, if it does not, a marginally less friendly follow-up should be sent.

If the friendly reminders fail to secure a settlement, then there is the option of sending a formal letter before action. This will set out the details of the unpaid invoice, refer to the fact that it remains unpaid and point out that unless settlement is forthcoming within, say, seven days the business will commence legal action for recovery of the outstanding sum plus interest thereon.

On the topic of interest, businesses have a right to charge interest on unpaid invoices, calculated from the date the payment was due. This is known as statutory interest and can be charged at 8% over and above the Bank of England base rate. The right to charge interest should be mentioned in the SME’s terms and conditions or set out on the invoices.

Of course, collecting the interest is beset by the same dilemma that exists in respect of the whole unpaid debt but the thought that it is payable may just focus the mind of the debtor to get the invoice paid as soon as possible.

Still no response?

If none of the friendly reminders work and even the formal letter before action appears to have landed on stony ground, then it is time to move to the next level. At this stage, anything the SME does may result in losing the client forever so, before taking any further irrevocable steps, the SME creditor should carry out a careful cost/benefit analysis. Is it worth risking ruin to keep a client who doesn’t pay anyway? What if the client is not paying because they are in financial difficulty themselves? This often turns out to be the case. If so, then some further investigation is warranted before taking the next steps. If the client has no money, then nothing is to be gained from enforcing against them and the cost of such enforcement amounts merely to throwing good money after bad.

Another, but related, consideration is the cost of enforcement not just in terms of fees but also in terms of time, effort and intellectual and emotional energy – all things which the SME could be using to gain other clients and grow the business. Even if the SME succeeds in getting the invoice paid eventually, it could be something of a Pyrrhic victory.

Legal action

If, following a cost/benefit analysis, the SME decides to enforce, then it may be worthwhile asking a debt recovery solicitor to send a letter threatening imminent legal action for commercial debt recovery. This is true even if a formal letter before claim has already been sent. Most people want nothing to do with solicitors and claims and the solicitor’s letterhead carries much more of a threat than anything from the SME itself.

If that still does not work, and the SME believes that the client has the wherewithal to pay, then the final step is to issue a court claim. This can be issued through your local county court. Debt recovery litigation can also be [conducted online][3]. Note that if the claim is worth less than £10,000 it will mostly be allocated to the Small Claims Track in which case, the SME will not be able to recover legal costs.

If the client does not file a defence or dispute the claim, then the SME can usually enter judgment within a month. If the case is defended, however, then the general time frame until resolution is 12 to 18 months.

In some cases, it may be possible to issue a bankruptcy or winding-up petition against the client if you believe them to be insolvent. However, this is a serious step with potentially serious consequences and should never be taken without legal advice.

In any event, if you are or run an SME and you need to enforce against a client for an unpaid invoice, you really should speak to a specialist debt-recovery solicitor who can assess the circumstances and guide you forward in the most cost-effective way. [3]: https://www.moneyclaim.gov.uk/web/mcol/welcome

For further information and trusted legal advice regarding [debt recovery][4], get in touch with us at Carlsons Solicitors. [4]: /debt-recovery