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A customer is not paying, what can I do?
Customers not paying for goods or services can cause significant cash flow issues for a business which often result in additional debt recovery costs. Having credit control systems is essential if a business is to minimise its bad debts. Unfortunately, it is likely that a business will experience a customer who either disputes a debt or is not able to pay it at some point. So, what can a business do when a customer does not pay?
Invoicing and terms of business or sale
In the normal course of business, terms of business or sale should be agreed with the customer in advance of the provision of goods or services. These terms will include payment terms (i.e. 30 days from invoice date).
Invoices should state the payment terms, so the customer is clear on its contractual obligations.
If an invoice is not settled by the payment date, contact the customer and establish the reason. There may be a genuine reason for non-payment and be mindful of the customer relationship.
Late payment interest & debt recovery costs
You can claim statutory interest if a business is late paying for goods or services.
The interest you can charge is 8% above the Bank of England base rate. You cannot claim statutory interest if there is a different rate of interest agreed in the contractual terms.
You can also charge a customer a fixed sum for the cost of recovering a late commercial payment on top of claiming interest. The amount you can charge depends on the amount of debt. You can only charge the business once for each payment.
Debt recovery costs are as follows:
|Amount of debt||What you can charge|
|Up to £999.99||£40|
|£1,000 to £9,999.99||£70|
|£10,000 or more||£100|
Send a new invoice if you decide to add interest and a debt recovery charge to the money you are owed.
If the debt is disputed, then efforts will need to be made to resolve the dispute to the satisfaction of both parties. In some instances, the parties may require mediation.
What is mediation?
Mediation is when an impartial person, trained in dealing with difficult discussions between two opposing sides, attempts to help both sides overcome a dispute and agree a settlement.
There can be a fee for mediation, but this tends to be cheaper than instructing a solicitor and taking legal action to recover a debt. The mediation fee is based on the value of the disputed debt.
Customer ‘on stop’
Where a debt remains outstanding, the business should consider placing the customer ‘on stop’, meaning no further goods or services are to be provided until the debt is settled. Not only does this protect the business from incurring further costs and potential bad debts, it can also act as a means of leverage. This can sometimes result in payment.
Retention of title
Some business’ terms of sale include a retention of title clause. Generally, this means that if an invoice has not been settled in full, title to the goods has not passed to the buyer.
If this is the case, it may be possible to recover the goods. In this case, a credit note can be issued to the buyer and the goods potentially re-sold.
If you are unsure about the retention of title position, obtain legal advice from a solicitor.
The customer has still not paid, what can I do?
If the customer has still not paid, the company will need to consider debt recovery options.
It is important at this stage that the company considers all options available, keeping in mind the value of the debt and likely costs to be incurred to recover it. The amount of time to be diverted in resolving this issue should also be factored in. It is also recommended that the business investigates whether the customer has the ability to pay.
If the customer is insolvent, then there may be little chance of recovering the debt. Legal action to recover the debt should therefore be considered as a last resort and it may be advisable to obtain professional advice from a solicitor or Insolvency Practitioner.
Letter before action
A letter before action is a legal requirement which is issued to formally request payment of the debt. This should include a date to settle any debts with you before you commence legal proceedings. The letter should set out clearly the amounts due and any other relevant information.
The next step in the debt recovery process is to commence legal proceedings against the customer. This is known as a Court claim.
This is a formal process where the customer is sent Court documents requiring them to pay the debt, plus interest and debt recovery costs. The customer can pay the full amount, pay the amount they consider they owe and issue a defence for the balance or defend the claim.
If the debt is less than £10,000, it will be dealt with by the Small Claims Court.
For claims above £10,000, the claim will be subject to the ‘fast track’ or the ‘multi-track’ system. This is likely to be a more formal hearing, and it’s likely that you will want to take legal advice before pursuing such a claim.
The Court will review the claim and any defence and decide whether a County Court Judgment is to be made.
What is a County Court Judgment?
A County Court Judgment or CCJ is a Court order that is registered against a debtor who has failed to pay or failed to respond to the Court action taken against them.
If the customer does not comply with the terms of the CCJ, the claimant can take enforcement action against the debtor.
It is worth noting that CCJ records are held for six years which will affect the debtor’s credit score and ability to obtain finance.
How do I enforce a County Court Judgment?
If the debtor fails to comply with the terms of a CCJ, you can ask the Court to enforce the judgment.
A County Court can instruct Bailiffs who are able to enforce debts below £5,000.
Debts over £5,000 can only be enforced by a High Court Enforcement Officer. Enforcement of CCJs over £5,000 can be transferred from the County Court to the High Court.
If the debtor fails to settle the debt within 7 days, the Bailiff or High Court Enforcement Officer will look to seize goods which can be sold to pay the debt.
Another option is to ask the Court to make a charge against the customer’s land or property.
If the customer is an individual, you can apply to Court for an attachment of earnings order. This requires the individual’s employer to deduct money from their wages until the debt is cleared.
The Court can also freeze money in the debtor’s bank, building society or business account. The Court will decide if money from the account can be used to pay the debt.
A debtor is entitled to apply to Court for a Stay of Execution. The debtor will need a valid reason for this to be considered by the Court.
What is an application for Stay of Execution on Judgment?
A stay of execution is a procedure in which the County Court or High Court suspends the enforcement of a CCJ or High Court Writ to consider a payment agreement or to have a hearing.
The debtor can also request an interim stay of execution. This will mean that the Bailiff or High Court Enforcement Officer cannot take any further action while the Court considers the matter. In the Small Claims Court, this will often be dealt with without a hearing and instead will be dealt with by correspondence.
The Court will request confirmation from the creditor as to whether the proposed payment is acceptable and may request evidence in support of payment. The Court will then decide whether the debtor should be allowed to make payments in instalments or whether the debt should be paid in full.
The Court will then set a hearing date if the CCJ is to be set aside.
What is a High Court Writ?
A High Court Writ or a High Court Writ of Execution is a method creditors can use to enforce non-payment of a debt after obtaining a County Court Judgment. The most common writ is the ‘writ of control’. Obtaining a High Court Writ gives the creditor access to High Court Enforcement Officers who have greater powers than a County Court Bailiff.
How is a High Court Writ enforced?
A Notice of Enforcement will be served on the debtor, providing 7 clear days to settle the debt. If payment is not made, a High Court Enforcement Office will attend at the debtor’s address. If payment is not obtained, either in full or a payment plan, High Court Enforcement Officer’s powers allow them to take control of goods. This can be by way of removal or a controlled goods agreement. Any goods removed from the premises will be sold at auction and the proceeds used to settle the debt. 7 days’ notice must be provided before the sale is due to take place. This allows the debtor one last chance to settle the debt.
A debtor is entitled to apply to Court for a Stay of Execution. The debtor will need a valid reason for this to be considered by the Court.
If the debt is more than £750, then you could consider serving a statutory demand. This is a legal document which demands payment within 21 days.
If the customer is a limited company and they fail to dispute the debt or settle it, a winding-up petition can be served.
If the customer is an individual or sole trader and the debt is over £5,000, a bankruptcy petition can be served.
The statutory demand route is generally used with a view to issuing a winding-up or bankruptcy petition against the customer.
If a customer manages to get the demand set aside or get an injunction against a petition, the company could be made to pay the customer’s legal costs.
What is a winding-up petition?
A winding-up petition issued by a creditor is a legal action taken against a company that owes them more than £750.
Once a winding-up petition has been presented to the Court, it will be endorsed and a hearing date set. The petition must then be served on the debtor at its registered office.
Unless the Court otherwise directs, notice of the petition must be published in the London Gazette no less than 7 business days after the petition was served on the company nor less than 7 business days before the hearing. The 7-day delay allows the debtor to pay the debt if it does not dispute it or, if the debt is disputed, it gives the debtor time to apply to court for an order restraining the advertisement.
Once advertised other creditors may support the petition. If the petitioning creditor’s debt is paid, the supporting creditor can become a substituted petitioner.
The petition is then in the public domain and may have catastrophic affects on the debtor. The debtor’s bank may freeze its accounts which could prevent it from trading. Suppliers may also want to cease supply.
The debtor could apply to Court for a Validation Order. This permits the debtor to make payments in the ordinary course of business between presentation of the petition and the hearing.
At the hearing the Court will determine whether a Winding-up Order is to be made. The Court considers the debtor’s financial position and whether it should be placed into Compulsory Liquidation. If a Winding-up Order is made, the debtor is placed into Compulsory Liquidation and the Official Receiver acts as Liquidator.
This is an expensive option for creditors and is considered the last resort. In liquidation, the debt will rank for payment in accordance with a statutory order of priority.
What is a Winding up Order?
A Winding-Up Order is a Court Order which places a company into Compulsory Liquidation. On the making of the Order, the Official Receiver (a civil servant of the Insolvency Service) is appointed Liquidator. The Liquidator’s statutory duties are to:
- Realise company assets;
- Carry out an investigation into the company’s affairs;
- Settle the costs of liquidation;
- Distribute surplus funds to creditors in accordance with their legal entitlements.
A company has gone into liquidation owing me money. How do I get my money back?
The debt will now form your claim against the company in liquidation and will rank for dividend in accordance with a statutory order of priority.
Your claim will need to be lodged with the Liquidator. In due course, the Liquidator will confirm the likelihood of a dividend to creditors. Due to the costs of Liquidation, a dividend to creditors may be unlikely.
Is it possible to claim back VAT on a bad debt?
If you are VAT registered and you invoice a customer but they don’t pay, you can reclaim the VAT you charged and paid to HM Revenue & Customs as bad debt relief providing that certain conditions are met.
Conditions for claiming bad debt relief can be found here: https://www.gov.uk/guidance/relief-from-vat-on-bad-debts-notice-70018#claiming-bad-debt-relief
Debt recovery can be a lengthy process and may not always result in payment. Additional costs can be suffered by the business, so it is essential that any decisions to commence legal action are based on accurate information and where there is a real prospect of recovering the debt.
A company could decide to engage the services of a debt collector or solicitor to help save time and maximise recovery. However, this will incur additional costs. Where possible, the company should attempt to resolve any outstanding debts itself and outside of legal proceedings.
Legal proceedings should be considered as a last resort and legal advice obtained where appropriate.
If a company suffers a bad debt or is experiencing cash flow issues, obtaining professional advice from a licensed Insolvency Practitioner at the earliest stage is recommended. Obtaining advice at the earliest point will maximise the options available and best potential outcome.
Approved Recovery specialises in helping small businesses overcome financial difficulties. We consider all options available and help directors determine the best way forward. We will support management allowing them to focus on the day-to-day running of the business and help manage any problematic stakeholder and creditor relationships.
We also have long standing relationships with other professionals such as solicitors, debt collectors and agents, so we’ve got you covered.