Whether you are a business or an individual, when money is owed to you there's usually a clear deadline specified for when payment is expected to be made. For example, your business invoices will have a payment period detailed on them, and if you've loaned money to a friend then you will have an agreed repayment date or schedule.
But if this date passes and no payment has been forthcoming, can you claim interest on the money owed to you?
Can I charge interest on money owed?
Your legal right to charge interest on an outstanding debt depends on a few factors which we'll cover in this guide. These include:
Interest on business debts.
The ability to charge interest on an overdue invoice or order will depend on the status of your customer and the contractual terms you have agreed that deal with any late payment. If you have a contract in place that contains a provision or clause for interest to be charged, then this should be sufficient to add interest to the overdue amount at the agreed rate.
If there is no specific contract in place with your customer that dictates interest charges, you may still be able to claim interest via legislation known as the Late Payment of Commercial Debts (Interest) Act 1998 if your customer is also a business (limited company, sole trader etc.).
Late payment of commercial debts.
This late payment legislation permits you to charge 8% interest plus the Bank of England base rate on overdue debts owed by your business customers (B2B). You can begin charging interest as soon as payment becomes overdue, and if no payment date was documented or agreed payment is classed as late 30 days from the customer receiving your invoice or delivery of the service/product.
There are some exceptions and additional items that can be claimed as part of this legislation, so please read our full guide on claiming interest on unpaid invoices. Alternatively you may wish to instruct business debt recovery solicitors who will be able to calculate your late payment interest and compensation entitlement on your behalf.
Business to consumer debts.
If the customer whose payment is overdue is an individual and not a business, there is no statutory right to charge interest on the amount. So, unless you have an agreed contract or terms of business in place that specifies additional charges will be made in the event of late payment, no interest is able to be added to the debt until court proceedings are started.
When dealing with debts incurred by consumers (and sole-traders) it is also important to comply with the Pre-Action Protocol for Debt Claims. Failure to do so before commencing court proceedings may result in sanctions being imposed on you, likely in relation to court costs.
Quick Reference - Interest on Debt Claims
* Based on statutory annual interest entitlement and the base rate, details correct as at December 2020.
Interest on personal debts.
If you are owed money as an individual such as through a private sale, shared bills or a personal loan, there is no entitlement to claim interest on the debt unless you have a signed contract or agreement that permits it.
For example, in the case of lending money ideally you will have documented the arrangement in a loan agreement which should have a provision for any interest and what occurs in the event of the borrower defaulting on their repayments.
Without a written contract interest is not able to be added to a personal debt prior to court proceedings being started.
Interest on court claims.
Regardless of the status of the debtor and the absence of a right to contractual interest, if you get to the stage of issuing a court claim to recover the debt, interest will often be able to be added to the amount owed.
Section 69 of the County Courts Act 1984 permits interest to be added to most non-commercial debts at the rate of 8% per year. This is a statutory interest rate and you can usually claim it from the date the debt was due up to the date you issue the claim.
At the point of issuing court proceedings, other court fees and costs can also be added to the amount that is being claimed. However note that as with any other element of a claim, interest is awarded at the discretion of the court.
The applicable interest is just one of the items that needs to be considered and calculated as part of a court claim for a debt. Therefore, it is always advisable to seek early legal advice if you are contemplating pursuing a substantial debt.
With any monetary transaction like a loan to a friend, invoice from a business, or a refund from a tradesperson, there will always be a chance that the other party will fail to pay you.
Just getting back what is owed to you can be difficult enough, but if you then also lose touch with the debtor, the complexity of your problems will increase significantly.
When a business owes you money it's generally a straightforward matter to track them down, as when a business is still trading their contact details can be found online or via their advertising. But for debts owed by a person it can be a much more difficult task to trace an individual.
Regardless of having the debtor's mobile number, email address and social media details, the most important information you will need when considering legal action is their address.
Legal options for debt recovery.
The first stage in taking formal debt recovery legal action is sending a Letter of Claim (also known as a Letter Before Action) to the debtor.
The purpose of this letter is to outline the exact amount that is owed, the reason you believe the debt is due, provide a reasonable timeframe for payment to be made in full, and in the event payment is not received in this timeframe, warn that court proceedings may be started without further notice.
The Letter of Claim should be posted to the debtor at their current address. While a copy can also be sent via email it must be sent in the post and be clearly dated. Sending this letter is an important 'pre-action' step and is required to comply with the various pre-court action protocols.
Should the letter not result in payment the next stage is issuing court proceedings. Again, this will require the debtor's current address for the court to successfully serve the Claim Form and for you to start any subsequent enforcement action.
Therefore, finding the current address of the debtor is critical before considering legal proceedings.
How to find a business that owes you money?
Businesses are generally easier to locate an address for, as most businesses want to be found by their potential customers. Their trading address will usually be on their website, used in their advertisements or documented in any agreements or terms and conditions you may have been given.
Failing these checks, the next places to try to locate an address are on the various business listings that are available online:
How do I find a person who owes me money?
Individuals can be much more difficult to locate an address for as there will be significantly less information about them online or in the public domain.
A first step is to ask any friends or business associates that you may have in common if they know the debtor's current address. Note that while you may know the workplace of the individual, legal correspondence for a debt owed by them personally must be sent to their residential address and not to their employer.
There are then some free and low cost directories available online which may help trace an individual such as the BT Phonebook and 192.com. However, the results provided by these directories may be limited and outdated so it is not recommended that these are solely relied on.
The most reliable method of tracing an individual's address is to instruct a professional tracing agent. These can be found online and will offer various tracing packages depending on the depth and timeframe required for the search. Also, many tracing agents offer a no trace no fee service which can be helpful in the event an individual cannot currently be located.
What if you can't find an address for the debtor?
If you've tried all of the above and still can't locate a business or residential address, your options will now be limited.
However it is worth bearing in mind that you generally have six years to start court proceedings on an outstanding debt. So there is nothing stopping you repeating the above searches every few months to see if the debtor resurfaces.
Tracing someone who owes you money.
Being owed money but having no address for the debtor adds a further level of complication to taking legal action. However, with a little DIY investigation work and perhaps paying a small fee for some professional tracing assistance, most debtors can be found.
Once you have located the debtor you then need to be confident that they have the assets or funds available to repay the debt. If you were struggling to locate a business because it has closed, or an individual has moved due to their previous home being repossessed, you will need to think carefully about your chances of recovering the debt before incurring the cost of pursuing them through the courts.
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. The Department for Business, Energy & Industrial Strategy found that over half of small businesses wait one month or more beyond their agreed terms for an invoice to be paid. With a fifth of SMEs waiting longer than two months!
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. So can be thought of as a legal time limit for invoices and other debts.
The time limits that formal court action must be made in the UK are detailed in the Limitation Act 1980 and court action is usually defined as a debt claim being issued at the county court or money claim online system.
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.
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.
Once you have been through the court process and successfully obtained a court judgment (CCJ) against the debtor. You will generally then have a further six years from the date of the judgment to enforce it.
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 a business 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.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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