This article has been written in conjunction with our insurer partner Markel.
When you run a business, no matter its size, there are many things you have to juggle – never more so than when it comes to cashflow. Particularly if you are providing a service, it’s likely some, if not all of the work/service will be carried out before you are paid, which can result in you occasionally having trouble getting a client to pay what they owe you. If this is the case for you, there are a number of measures you can take.
Outlined below are the steps you can take when a client hasn’t paid and some advice on whether these steps are worth taking.
There are many reasons for clients not paying for a product or service. Sometimes it’s due to a disagreement about what has been provided, but other times it’s down to something as simple as the client being under-resourced and running late. Here are seven reasonable steps you can take if your client hasn’t paid:
- If you have an invoice outstanding, send a ‘late payment reminder’ letter to the client, reminding them that payment is due, and requesting that they pay as soon as possible.
- Follow up with a more forceful ‘late payment demand’ letter, requesting payment within a set time period (e.g. seven days). You could also make a claim for interest.
- Send a formal ‘letter before action’ notifying the client that you intend 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, you have two options: court action or insolvency proceedings.
- Court action: A claim can be issued at court against either commercial or individual debtors. Fill out a claim form, including particulars of the claim along with details of the debt, then file these at court along with an issue fee. Once a claim has been issued, the court will serve it to the debtor, who is required to acknowledge the claim within 14 days and to respond fully within 28 days. The debtor either admits the whole of the claim, or files a defence alongside which the debtor can make a counterclaim. Any claim for less than £10,000 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 in the event of the claim succeeding.
- Insolvency proceedings: 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. Note that the government imposed restrictions on winding-up petitions until at least 30 September 2021 so check the latest guidance; 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.
- If the debtor does not respond to a court claim and judgment is entered against them, or if a debtor does not make payment after a judgment has been obtained, a business may take enforcement action, though this will involve further costs and does not guarantee success. 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.
Careful thought should be given before any ‘nuclear option' is pursued. We recommend you carry out a detailed cost/benefit analysis, taking into account the prospects of ultimately securing payment, the impact on the commercial relationship with the client, and the costs and management time necessary to take matters further. Payment plans and deferred payments will be the right solution for some businesses; for others, legal action will be necessary.
Tips for chasing a debt
- 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 are they 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.