Rising rates of inflation, a weaker pound, the economic and political uncertainty surrounding Brexit, drops in consumer spending – all these factors can squeeze a business and disrupt a good cash flow.  What should you do if your business finds itself in a situation where your customers are not paying you, which then has a knock on effect on your own cash flow?
Here are some tips on the steps to take.

Ideally, any contract with a supplier or customer will have clear agreed terms on what the process is should there be non-payment of an invoice.  This can include agreed interest rates, consequences of a breach of contract, retention of title or charges over any goods which may have been supplied.  Ortolan Legal can help review any existing contracts you may have or advise on any future deals to give you the best possible protection in these circumstances.

Assuming no such contractual terms exist and the payment is due and payable solely from an invoice with no agreed payment date, there is an implied obligation to pay within 30 days of getting the invoice or receiving the goods or service.

If the customer still has not paid, there are then several options available.  First is obviously to speak to your customer and ascertain what the problem is or if the debt is disputed.  It may be that you can agree some sort of payment schedule and extend payment over a longer period of time.  This obviously depends on the customer relationship and their behaviour over the period of your dealings with them.  Any agreement should be documented by the parties and executed as a deed where possible.

If any attempts to agree a payment plan between parties are not successful, then the next step is to either use insolvency proceedings or a county court action to try and resolve the situation.

Insolvency Proceedings

Insolvency proceedings can be a useful tool in debt recovery. A company or an individual is deemed insolvent if they are unable to pay their debts as they fall due (or if their liabilities are greater than their assets for a company). 

The first step in debt recovery through insolvency legislation is to issue a statutory demand.  Generally this can be used when the debt is more than £750 for a company and £5000 for an individual.  There is no standard form for the statutory demand since the new Insolvency Rules came into force in April this year, but certain information must be included for it to be valid.  It is vital that the creditor can prove the statutory demand was correctly served, especially if the statutory demand is used as a pre-cursor to any future insolvency procedure.

Often the serving of a statutory demand is enough to illicit a payment from the debtor.  If however it is ignored, a creditor can present a petition for the winding up of the company after three weeks have elapsed from the date of the statutory demand.  A winding up petition should not be presented where the debt is genuinely disputed.

Again, the threat of winding up petitions can often result in the debt being paid quickly or if not, the process from presentation of a winding up petition to receiving an order can be relatively fast and the directors then are no longer in charge of the company and its day to day dealings.

A liquidator is then appointed to take control of all the company’s assets and your claim is ranked along with all other creditors, some of whom may have security and you may come quite low down the order when it comes to being paid.  Usually in a liquidation any payments are as a percentage on the pound so it is unlikely you will be paid in full.

A creditor in these circumstances must understand that if the debtor company has few or no assets or many secured creditors, there is a high possibility that they may not receive anything in a liquidation and actually incur costs; or that it can take months or even years for a distribution to be made out of the liquidation estate.

Court Proceedings

An alternative to insolvency proceedings would be to issue a letter before action, which gives the debtor a window of time within which to clear the debt.  This window is usually 7 days and has proven to be an effective tool in getting outstanding debts paid.

If the letter before action does not illicit the desired response, then the next step is to either issue legal proceedings through the county court. If no interest rate on late payments was agreed in the contract, there is a statutory interest rate of 8% plus the Bank of England base rate (currently 0.25%) as set out in the Late Payment of Commercial Debts (Interest) Act 1998.  This legislation also allows for the compensation of creditors and the reasonable costs of collecting the debt, both of which are calculated on a sliding scale based on the value of the debt in question.

There are different routes through the litigation process, including alternative dispute resolution but assuming the litigation is successful, a judgment would be made against the debtor company which is then enforceable. 

This article only gives a very brief overview of possible debt recovery tools. There are many options to pursue and much depends on the arrangements you have in place with the debtor in question.  For more detail or specific advice, please do not hesitate to contact us at Ortolan Legal where we can help with any debt recovery questions you may have.