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Markel Insurance

05 Jun 2020

What to do when a client doesn’t pay: The process and tips for getting paid

Never has the old saying ‘cash is king’ been more true than in the current climate brought on by Covid-19. There is undoubtedly a balance to be struck by businesses between maintaining a good relationship with their clients (ensuring long-term income) and receiving prompt payment for the goods and services provided (preserving short-term cash flow). Whilst payment plans and deferred payments will be the right solution for some businesses, for others legal action will be necessary.

First steps

Where an invoice is outstanding, the first step a business can take is to send a late payment reminder letter to the client, reminding them that payment is due, and requesting that they pay as soon as possible. This can be followed by a more forceful late payment demand letter, requesting payment within a set time period (e.g. seven days) and intimating a claim for interest.

If these letters do not prompt a response, a formal letter before action should be sent to the client notifying them of an intention to issue Court proceedings to recover the outstanding sum. This will maximise your prospects of recovering your legal costs at the conclusion of the matter. There are stricter rules governing the amount of information that should be provided to individual debtors (including sole traders), as well as the period of time before issuing a claim.

If the debt remains unpaid, there are then two distinct options: Court action or insolvency proceedings. Careful thought should be given before any ‘nuclear’ option is pursued though, including a cost/benefit analysis, taking into account the prospects of ultimately securing payment, the impact on the commercial relationship with the client, along with the costs and management time necessary to take matters further.

Court action

A claim can be issued at Court against either commercial or individual debtors. A claim form must be filled out, including particulars of claim with details of the debt. These documents are then filed at Court along with an issue fee.

Once a claim has been issued, the Court will serve it on the debtor, who will then be required to acknowledge the claim within 14 days and to respond fully within 28 days. Unless the debtor admits the whole of the claim, a defence must be filed, alongside which the debtor can make a counterclaim. The Court will then provide directions through to trial, which will include the claim being allocated to the appropriate track.

It is important to note that if a claim is for less than £10,000, it is likely to be allocated to the small claims track, where only court fees and fixed costs are likely to be recoverable from the debtor even if the claim succeeds.

Insolvency proceedings

Alternatively, if a commercial client is unable to pay a debt of more than £750, businesses can petition the court for a winding-up order. The threat of insolvency often prompts debtors to pay immediately, but if the company goes into liquidation, debtors may be entitled to a dividend. However, the government has imposed restrictions on winding-up petitions at present – prior statutory demands are not permitted to be used until at least 30 June 2020, and petitioners presenting on other grounds must prove that the company has not been affected by Covid-19, or would have been unable to pay its debts anyway.

For individual debtors, if the debt owed is more than £5,000, a business can present a bankruptcy petition to the Court. If a bankruptcy order is made, the debtor’s assets can be taken and sold to pay their debts.

Enforcement

If the debtor does not respond to a Court claim and judgment is entered against them, or where a debtor does not make payment after a judgment has been obtained, a business may take enforcement action. Note, this will involve further costs and does not guarantee a recovery. Options include: execution against goods owned by the judgment debtor, an attachment of earnings order or a charging order over a property owned by the debtor.

Tips

  • Track your invoices and chase promptly when they fall overdue

  • Seek to engage the debtor by telephone – What are their reasons for non-payment?  Are any financial difficulties likely to be short-term or terminal? Is there a viable compromise to be reached?

  • Do you have any leverage to secure payment e.g. trade credit terms

  • Carry out a cost/benefit analysis – does the debt justify further action?

  • Before issuing, send a protocol compliant letter before action

  • Be open to compromise – a negotiated settlement will invariably be better for a business in the long-run than protracted and uncertain litigation
For further information and advice on collecting unpaid debts, contact Mark Rankin or call us on 0371 705 4006.

Our COVID-19 Hub contains a range of information and resources to best support our clients during this difficult time. To receive the latest news and insights by email sign-up here.

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