In October 2017 the debt recovery process for businesses owed money by individuals changed significantly.

Previously there was no specific pre court action process for recovering debts, but on 1 October 2017 the Pre-action Protocol for Debt Claims came into force.

A Pre-action Protocol sets out the various steps that the court expects both sides to take before commencing legal action. Issuing legal proceedings should always be a last resort, and so both parties need to have ideally first tried to settle their dispute without having to involve the court.

Whilst there are already Pre-action Protocols for other types of civil claims such as personal injury, professional negligence and possession claims, certain business debts will also now need to follow a set 'pre legal action' procedure.

The Protocol is designed cover businesses claiming repayment of a debt or unpaid invoices from an individual. However the definition of an individual includes sole traders, so the Protocol also applies to business to business debts when a sole trader is involved.

There are also a few exceptions where the debt protocol doesn't apply, mainly around claims where there currently is another Pre-action Protocol that exists (such as with mortgage arrears or construction and engineering disputes).

​Part 2.1 of the Pre-Action Protocol outlines its aims, however in summary they are to:
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• Promote early engagement and communication between the creditor and the debtor, ensuring the timely sharing of information on the amount owed to ascertain if any points are disputed;
• Encouraging the parties to settle the matter without court proceedings by considering paying by instalments or using alternative dispute resolution;
• Ensure both parties act reasonably and in a proportionate manner;
• If court action is unable to be avoided, support efficient management of court proceedings.

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While a primary goal of the protocol is to provide additional time and protections to consumers, it actually includes many business to business debts. This is because the protocol considers both consumers and sole traders to be individuals.

Failure to comply with the Protocol prior to commencing court proceedings may result in the court imposing sanctions against the creditor or claimant. The sanctions imposed are likely to be in relation to costs.​

To quote the Protocol: "If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol."

​If the debtor states that they are looking to gain professional debt advice, the creditor has to permit the debtor reasonable time for them to obtain this advice, at least a further 30 days. This may be longer if the debtor can provide a reasonable explanation as to why it will take additional time to obtain the advice.

If the debtor states on the Reply Form that they need more time to pay the debt, the parties should attempt to reach an agreement for the amount to be settled by instalments. If a payment schedule or agreement cannot be reached, the creditor must confirm in writing why it does not accept the debtor's instalment proposal.

Should a partially completed Reply Form be received, the creditor is expected to make contact with the debtor to discuss the content and obtain the further information necessary to understand the debtor's position.

A creditor ignoring the debtor's reply and their reasons is not an option.

​If there is a disagreement about the debt being owed or the exact amount, then the parties should consider mediation or any other forms of dispute resolution rather than commencing court proceedings. This may be a formal process with an ADR provider or may simply take the format of a documented discussion and negotiations.

After these negotiations if an agreement is still not reached, then the creditor should give the debtor notice of at least 14 days of the intention to now commence court proceedings.
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​The new Protocol creates a more formal and paper heavy procedure for your business to collect overdue invoices, as it requires that additional documentation and time is given to the debtor.

​Plus there is always the potential for persistent debtors to use the Protocol to further delay payment.

So as a business you need to stay on top of your credit control procedures and issue a Letter of Claim as soon as it is reasonable to do so. Also having a solicitor draft the letter in compliance with the Protocol ensures that you can move quickly to court action should payment not be forthcoming.

Wouldn't all companies love it if their customers paid invoices on time? You wouldn't need to spend time chasing debts and you could concentrate on actually running your business. However debtors will most likely be ever present.

Businesses can invoice clients early, wait patiently for payment, send chase emails and be optimistic that payment will someday finally land at the bank.

​But sometimes those polite little reminders, sending copy invoices and monthly statements are just not enough to deal with those customers who are adamant they are not paying.
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​​So what can you do to ensure your business is paid the money it is owed? How do you collect debts from customers?

​Choosing how and when you need to take formal action can be difficult and there are a few informal options at your disposal before starting legal action. After all, the last thing you want to do is spend time and money going to court for every invoice that is overdue by a few days.

But when you've exhausted the chasing letters and phone calls, we wanted to share our experiences and tips on how to collect debt from a customer, starting with establishing your legal position on the debt.
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While the vast majority of business debts won't require court action, it is important to establish your legal position and understand how to collect a debt legally.

​​In order to take a debt claim to court, you need to have some kind of evidence that the debt amount you wish to claim is due. In most cases a copy of your invoice, bill or order will suffice, however generally you should have evidence of:
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• the total amount that was billed and is now overdue for payment from your customer (i.e. you gave them a bill or invoice)
• proof that goods were delivered or services provided (i.e. delivery was made or the job was complete)
• previous informal communication with the customer making them aware of the debt (i.e. email or text messages chasing payment)
• formal advanced notification to the debtor informing that you intend to take legal action (i.e. a Letter Before Action or Letter of Claim)

With the above steps and evidence in place, you should be in a good position to start legal proceedings against the debtor.

However if the customer disputes the money is owed, for example because they believe the goods were faulty, you may need to take steps to investigate and resolve the business dispute before proceeding with formal debt action.
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Informal actions such as sending overdue notices, emailing the debtor's accounts team and speaking directly about payment should all be attempted yourself before you begin seeking assistance with recovering the debt.

​But once you do decide to go down a more formal route to secure a payment you have a few options:
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​Option 1 - Submit a debt claim yourself 
To make a court claim on your own you can use the HMCTS Money Claim Online service. It offers a process to recover the money your business is owed by walking you through the submission of an online claim and paying a court fee.

You need to be aware that these are court proceedings and so you should familiarise yourself with the 'pre action' rules along with what happens should you win your claim and receive a judgment. Ensure you read the associated Money Claim Online User Guide thoroughly before starting the claim process.
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Option 2 - Hire a debt collector
When you hire a debt collection agency they will start chasing the debt and in some scenarios begin the legal process to recover it through the courts. You should bear in mind that debt collection agencies don't have any special legal powers beyond what you can do yourself. Generally a debt collection agent will also take a proportion of any debt that they are successful in collecting to cover their fees.

Option 3 - Instruct Debt Recovery Solicitors
A Solicitor should provide some general advice on the process and your prospects along with a fixed fee of what they will charge. If their fees are more than the money you are seeking from your customer, then you'll be better going with another route. However experienced debt recovery solicitors should have a fee structure which complements the amount you are wishing to recover and the complexity of the issue (i.e. it will be more complicated if the debtor defends the claim or disputes the debt being owed).

In the majority of debt recovery claims, the initial solicitor's 'Letter Before Action' often does the trick and the customer will opt to pay their bill rather than face court proceedings from a law firm.

If court action is needed a solicitor can explain the risks and advise on items such as recovering court fees and any statutory late payment charge that can be made. For example, interest may be able to claimed on top of the debt (usually 8% above base rate) via the Late Payment of Commercial Debts Act.​​
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​​You may feel bad 'hounding' a customer about paying their debt or even getting a solicitor involved, but you shouldn't. You did your job and it is not your fault they have failed to pay you in a timely manner.

Being understanding to your customers while knowing your legal rights is what all responsible businesses should aim for.

Non or late paying customers are unfortunately a fact of life for most small to medium businesses. While at best delayed payments can be annoying, at worst they will have a measurable and detrimental impact on the smooth running of your business.

Recent figures via the Official Statutory Register of Judgments has given an insight into the potential scale of the problems around business debts and disputes that have been escalated to the courts.

The data shows that in the third quarter of 2020, and despite the pandemic, there were almost 16,000 County Court Judgments (CCJs) issued against businesses. The average value of each business debt is over £5,000, which is 79% higher than in the first quarter of 2019.

While there are fixed fee debt recovery services available to deal with most size B2B debts, needless to say it's more important than ever to make sure you have effective procedures in place for protecting cash flow in your business.

So, we wanted to share some of the proactive general advice that we've provided to our clients after helping them recover business debts owed to them.​

Is sounds simple, but make sure you know who you are doing business with.

Try to find out the size of the organisation and whether they are a partnership, sole-trader, limited company or PLC. ​What is their full legal name and do they use any trading names? Conducting a quick Internet search for these names may reveal information you need to be aware of.
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Make use of public services such as Companies House to verify your private limited company customers.

When first considering doing business with them, verify their registered office, company number and trading status. You can use this information to find who owns the business and verify that the person instructing you has the authority to do so on behalf of them.

​Then throughout your relationship put a reminder in to recheck these details periodically. That way you can be alert to any warning signs such as overdue accounts, charges being registered against them or large drops in cash reserves which may indicate their business is struggling.
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Check if your business customer is part of the Government's Prompt Payment Code (PPC) where those signed up are obliged to pay small businesses invoices within 30 days.

The current signatories can be found on the PPC website.
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Whenever possible try to request payment in advance. If this is not possible, attempt to secure partial payment (for materials etc.) or some kind of deposit.

With some larger business customers it can take a while for a new supplier to get onto their accounts systems. So starting this process as soon as possible can speed up future payments.

Invoice as soon as the order is completed, or on lengthy jobs gain agreement to do so at periodic intervals. Knowing there is a payment problem half way through a job is better than finding out at the end.
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Include standard payment terms within your T&Cs and on your invoices, ensuring they are clear and reasonable.

​Make customers aware of these terms before they order, when you provide a quote and when an invoice is at risk of becoming overdue. Your invoice should also include details on how to pay you, such as your bank account or online payment information.
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For large or regular transactions consider getting a specific contract drawn up and signed by both parties. At the very least ensure the main points of the order or transaction are in writing with evidence that it has been agreed by each party.

​If you ever end up having to consider legal action, good record keeping will pay dividends.

​Everything from the original order, proof of delivery and late payment chases should be kept. Your solicitor will want written evidence and a chronology of events to proceed with a claim, so keep copies of any emails and notes of any telephone calls.
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Implementing the above tips may help in reducing the chances and impact of late paying business customers. But even with the most vigilant owner, on-the-ball accounts team and strictest terms and conditions, you will still encounter customers that simply choose not to pay.

So your next step is to consider formal legal action to recover the amount owed, which usually starts with sending a Debt Recovery Letter Before Action.
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Having robust Terms & Conditions, a consistent approach to invoicing, and a clear paper trail will help you get what's owed to you that much quicker and assist your legal claim should you ever need to get a solicitor involved.