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 2018 there was a 32% increase in the number of County Court Judgments (CCJs) issued against businesses.
That's over 10,000 court judgments per month registered against businesses in England and Wales, with an average value of £3,072 each.
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.
Know your customer.
Make sure you know who you are doing business with. Be aware of the size of the organisation and whether they are a partnership, sole trader, limited company or PLC. Check if they use a trading name and if the person instructing you has the authority to do so on behalf of the business you will be ultimately be invoicing?
Limited company checks.
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. Then throughout your relationship recheck periodically and be alert to warning signs such as overdue accounts, charges being registered against them or large drops in cash reserves which may indicate their business is struggling.
Whenever possible try to request payment in advance or at least a deposit. Invoice as soon as the order is completed or agree to do so at regular intervals if it's a lengthy job.
Don't hide your payment terms.
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.
Get it in writing.
For large or regular transactions consider getting a 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.
Documentation and a paper trail.
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.
What to do when a client doesn't pay?
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.
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.
When you are owed money, hindsight can be a wonderful thing.
All too often in the rush to complete a business transaction or lending money to a friend in need, you won't think to put in place a legally binding agreement that formalises the arrangement beforehand. After all, you have every intention of holding up your end of the deal and so assume the other party will too.
But if payment doesn't happen and your deal starts turning into a dispute over what is owed, you may need to consider what legal avenues are open to you to get your money back.
The success of any legal action will then depend on what evidence you can provide to show that the debt is owed.
Can you take someone to court for owing you money?
Yes, but the 'burden of proof' will be on you as the Claimant to show that the amount you are claiming is due. Court should be your last resort in attempting to recover your money and so you should be confident that you have a strong case, sufficient evidence and follow the set pre-action procedure prior to issuing a claim (e.g. sending a letter before action, attempting mediation etc.)
Ultimately the decision on who owes what will be down to a judge's ruling based on:
Owed money but no contract!
In the absence of a written contract or agreement being in place, there are various other pieces of information that you may be able to secure which can provide evidence that the money is due.
Bounced cheque or returned direct debit
While the use of cheques is diminishing, hundreds of millions of cheques are still issued every year. If your debtor has sent you a cheque that bounced or agreed to a direct debit that has been returned, it is often all the evidence that you need to prove a debt is owed.
In law a cheque is considered a 'promise to pay' and so can be used as a clear admission that money is due.
Most businesses use invoices to request payment so providing copies and proof of them being issued to a customer or supplier will go a long way in proving that a debt is owed, even if they aren’t directly attached to Terms of Business or a contract.
Furthermore, if you provided regular statements of the amounts owed and showing overdue, then these will also be useful evidence.
Evidence of chasing debts
Once a payment is overdue you will have hopefully contacted the person or company to chase the debt.
Emails, letters, texts or messages exchanged on social media (Facebook, Twitter etc.) can all be used to help prove a debt is owed and overdue.
If the other party has responded to you apologising or asking for more time, then this admission will be extremely valuable in proving that they don't dispute that they actually owe the debt. So, it's important that you save or screenshot these messages in the event they are needed.
Loaned money without a contract
Without an I.O.U. or a loan agreement in place, proving that money provided to someone was a loan that needs to be repaid can be difficult. This is because often money given to friends or family is considered a gift and so isn't required to be paid back.
Enforcing a verbal agreement that money is owed will hinge around providing evidence to show that the cash was transferred as a loan along with any repayments e.g.
Witnesses to the arrangement
When little or no documentation exists to prove a debt, having an independent witness to a verbal contract can be invaluable.
For example - with a business transaction, did an employee take the order over the phone, deliver goods or perform a service where payment was verbally agreed with the customer? If money was lent to a friend, was another person present to witness the agreement of how/when they were going to pay you back?
But even if an independent witness isn't available, you as a claimant can also present your version of events to the court in a written witness statement. Any witnesses may then need to attend court should the claim go all the way to a hearing.
Debt disputes with no contract.
Without a written agreement, there should still be plenty of information that you can pull together to prove what you are owed. However, if the other party disputes the amount, or that any debt is owed at all, then you may have a fight on your hands that needs to be settled in court.
It will then be down to the evidence you can gather and how your claim is pleaded to convince a judge that you are entitled to the money owed in the absence of a legally binding written contract. So, obtaining legal advice on the evidence needed for a debt recovery claim and your prospects should be your starting point.
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.
Catalyst Law are team of legal professionals with over 20 years' experience helping businesses and people with their legal problems.
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