“In this tough economic climate, many individuals or companies are finding their bad debtors list growing.
It can become a tricky balancing act to avoid spending more time and cost on recovery than the debt itself is worth.
This is especially difficult for small companies who don’t have huge resources for chasing debts.
Unless dealing with a long-established client or business partner, before entering into a deal it is always good to do your due diligence in order to check out their financial ability to pay.
If it is a company you are contracting with, ask for their last-filed accounts or check on the Companies House website that no winding up petitions have been filed against the company.
For a few pounds you can also print off the company’s accounts.
If it is an individual, subject to your discretion, you can ask for copies of their redacted bank statements for the last few months, or alternatively do a credit-check on the person, a service provided by a host of websites found on Google.
Needless to say, your contract must be in writing.
Make sure it's signed by the other party.
We often see clients coming in to see us with draft contracts which were never signed.
Although in English law an unsigned contract or a verbal agreement can be recognised, it is a lot more difficult to establish than a clearly drafted written agreement.
A properly drafted and signed contract is always best, but even an email agreement or a handwritten note is better than nothing.
Make the payment dates clear in the contract. Put in a clause that says you will charge interest on the amounts due if payment is received late.
What to do if debtors won’t pay
Assuming you have sent reminders to the debtor and they have not responded, you need to consider how far you are willing to go to pursue the debt in terms of your time and costs.
Most importantly, is the debtor worth pursuing i.e. even if you spend time and money pursuing them, are they capable of paying?
You might also need to consider your relationship with the debtor, and your options should you wish to maintain that relationship.
You may also not wish to get into a spat for risk of potential damage to your reputation in the market.
Solicitor’s letter
A letter from a solicitor is a good way to put pressure on your debtor. It shows that you are serious about pursuing your dues and it often takes just one letter to get the debtor to pay up.
Arrange a fixed fee with your solicitor to pursue the matter stage by stage. At this stage it is worth thinking about how far you would be willing to go in terms of legal recourse to recover the monies.
Although making threats to issue court claims against a debtor may do the trick in some circumstances, some may call your bluff.
If you do not deliver on your promises, you may be viewed as making empty threats, which would weaken your position.
If the debtor engages in correspondence with your solicitor, then it may be wise to consider writing a ‘without prejudice’ letter to the other side with an offer of an amount you will accept in place of the debt, or an offer to meet to try and resolve the issues.
Genuine ‘without prejudice’ correspondence cannot later be shown to the court.
The hope is that parties will settle if they are free to make admission and offers in the knowledge that, if they can’t settle, those offers will not be used against them in court.
Make sure you refer in open correspondence to the fact that without prejudice dialogue is happening; so if the matter goes to court the judge knows that an apparent lapse in communication is in fact down to the existence of a without prejudice dialogue.
Statutory demand
An alternative to issuing a claim in the court is to issue a statutory demand on the debtor.
This is a legal notice used in cases of undisputed debts, which require the debtor to pay up within 21 days.
If they do not, you can apply for a bankruptcy/winding up order against them.
It is relatively easy to complete a statutory demand and send it to the debtor.
However, it is imperative that you do not send a statutory demand when you are aware that the debtor has disputed the amount or liability.
If you do so the debtor can apply to the court to have the statutory demand set aside and you may be liable for the costs.
A statutory demand often does the trick and gets the debtor to cough up.
If it does not, you should consider whether you do actually intend to wind up or bankrupt the debtor, as you will need to foot the costs of the necessary applications to the court and you may only end at the back of a queue of creditors.
The fact that you have served a statutory demand does not oblige you to commence insolvency proceedings against the debtor.
Issue in court
It is a matter of time and costs. Talk to your solicitors and ask for their fee estimate for handling the case.
If it is a straightforward claim you may get judgment easily, which you can then enforce in various ways. Similarly, once you issue your court claim the debtor may make you an offer to settle.
Debt recovery agencies
The internet boasts a ton of debt recovery agencies working on a ‘no recovery, no fee’ basis. Whilst not the method of choice for all, perhaps a barrage of calls, texts and other forms of harassment might prove effective for some.
However, these agencies will be limited by law to much the same options as above and you may have to give over a hefty chunk of the recovered amount as fees.
The advantage is that it frees up your time and, if they are polite, takes the heat off you directly, which potentially allows you to maintain relationships with the debtor. Make sure the agency is registered with the Credit Services Association.”
