Chasing debts is rarely an enjoyable activity when running a business, and you can be forgiven for not jumping on every overdue invoice the moment your payment terms have expired.
If an approach of just tolerating late payments sounds familiar, you're not alone. Research from ABFA has found that small businesses now wait an average 72 days for payment which is 11 days longer than in the peak of the 2009 recession!
But when weeks turn into months which then turn into years, you may worry that you've missed your opportunity to take formal action. However, you may be surprised how long you have to pursue a debt before it is legally 'statute barred'.
Statute Barred Debts
Being 'statute barred' means that the defined time period you have to use certain legal avenues to pursue a debt has expired. While this doesn't mean that the money is no longer due, or the debt no longer exists, it does restrict your legal options when pursuing a debt.
The time limits that formal court action must be made by are detailed in the Limitation Act 1980 and court action is usually defined as a debt claim being issued at the county court.
There are different time limits for different areas of law, but when the relevant time limit has passed, this act is able to be used as a defence by the debtor to prevent you obtaining a county court judgment (CCJ) against them.
How long do you have to claim unpaid invoices?
Most invoices and debts fall under the definition of a ‘Simple Contract’ in the Limitation Act, meaning you have six years to commence legal action to recover the debt in England and Wales.
If money is owed in relation to a deed (i.e. a mortgage or property) then the limitation period is 12 years.
If you have already been through the court process and managed to obtain a court judgment (CCJ) against the debtor, then no limitation period applies to enforcing the judgment.
You will also need to consider any pre-action steps that have to be taken before you issue proceedings such as the Pre-action Protocol for Debt Claims that may require you giving up to 30 days' notice before starting court proceedings.
When does the limitation period start for a debt claim?
For simple contracts the Act states that the limitation period will expire six years after the 'cause of action'. A 'cause of action' can be thought of as when a breach of your agreement has occurred.
For example, this could be when:
How to claim unpaid invoices
Dealing with a debt that was incurred several years ago may seem like a complex process, but if you have documentary evidence that the amount is due it should not prevent you from pursuing the money owed to your business.
A solicitor will be able to advise you on your legal options to recover your debt, including sending a letter before action, issuing a claim and potential limitation defences. Also if the debt isn't disputed you may be able to claim late payment interest and compensation which can be significant on long overdue debts.
While six years may seem a long time, the sooner you act the more chance you have of recovering the amount owed and avoiding your debt claim being statute barred.