Lessons We Can Take From the Debt Recovery Procedures of Recent Years
01 April 2014
Practice Area: Debt Recovery
For many local businesses recent years have been about ‘weathering the storm’ and trying not to succumb to a major client or customer becoming insolvent. Unfortunately few businesses have escaped unscathed on this front and if they have it was often more by luck than by design. With clients and customers ignoring credit terms or simply refusing to pay, severe cash flow problems have arisen. Businesses may baulk at the thought of the additional expenses of employing a lawyer to recover debts but often, without the threat of legal proceedings, invoices will remain unpaid.
Prompt payment of invoices is essential for a healthy cash flow. Invoices should always state a period for payment, and after this date, if payment is not received, in many circumstances statutory interest can be charged under the Late Payment of Commercial Debts (Interest) Act 1998. Once the date for payment expires, the organised Credit Controller will place a telephone call to the debtor, followed by a reminder letter. If this fails then passing the matter over to your lawyers promptly should be an early step taken. Thereafter if simple correspondence from the solicitor does not prompt payment, the two main options for recovery are County Court or High Court proceedings if the debt is disputed, or alternatively insolvency proceedings if the debtor is a risk to other creditors and indeed is insolvent.
The jurisdiction of the County Court is any claim up to £30,000. With the County Court (Amendment) Rules (NI) 2013, any award for costs on a successful claim, or defence, is on a scale and creditors will be advised of their cost risk before proceedings are issued. The High Court, therefore, is for any claim over £30,000.
If a disputed claim is for less than £3,000 the claim can be issued in the Small Claims Court. The Small Claims Court’s main attraction is that the application process and the hearing itself are very informal and the strict rules of evidence associated with the superior courts do not apply. Businesses should be aware that parties to an action in the Small Claims Court are not entitled to recover costs (save for the court fee), meaning that if the matter becomes defended costs can quickly accrue and it becomes an economic decision as to whether there is merit in pursuing the claim. Often it makes sense for a Business to run its own Small Claims Actions and to get used to doing so regularly. The Process is designed to be relatively straightforward and for self-representation.
If the debt is (a) undisputed, (b) over £750 and (c) the debtor is a real risk to other creditors (in that they cannot pay debts as they fall due) a statutory demand can be issued against the debtor. In essence, this allows the debtor twenty-one days to pay the outstanding sum or the creditor can issue a Bankruptcy Petition (personal debtor) or Winding-Up Petition (company debtor).
The legal costs involved in these processes coupled with the real risk that the ultimate outcome will result in the debtor being adjudicated bankrupt or wound-up with no prospect of any dividend to the creditor, will on occasion result in businesses deciding that it is not worth pursuing the debt and writing it off. It is often surprising how quickly a debtor finds the means to pay once served with a Demand threatening Insolvency!
Often it is impossible to recover a substantial sum or sums in one fell swoop. Businesses should be open to the idea of collecting debts by entering into payment plans with their debtors, striking a balance between what the debtor can afford to pay and what is a reasonable period to allow them to make such payments.
Now that the economy is showing signs of recovery businesses should look to their outstanding invoices once more. With local business now looking to target new markets, debt recovery may become more difficult with businesses increasingly dealing with cross-jurisdictional issues and conflicts of laws. Thankfully for Northern Ireland businesses, we have parallels with the UK legal system as well as our place within the European Union, which mean that for matters which go to the courts there are less barriers than might otherwise have been the case.
A common plea from businesses that cannot pay their invoices is that they are awaiting payment from one of their own clients or customers who have let them down. Effective credit control and debt recovery processes mean that it is less likely to be your business that suffers.
One thing that will apply across the board is that even in times of economic prosperity, effective credit control and debt collection will be a necessity for any business.
If you have any questions about the content of this article or about debt recovery procedures please contact a member of our team.