When to instruct a solicitor to collect a business debt

What are your options?

Legal advice if a debt is worth pursuing or if it is time to cut your losses

According to the Federation of Small Businesses, approximately 50,000 commercial enterprises are forced to close their doors each year due to the late payment of debts. This is a grim statistic that highlights the real problem businesses face when money owed to them is not paid on time, or where they feel compelled to write off invoices they have given up chasing.

Robust internal credit control is obviously key to keeping debtor levels down, but so too is recognising when you have done all you can to recover a debt and the time has therefore come to pass the matter to a solicitor. But how do you decide when the time is right to get a lawyer involved?

There is no one-size fits all answer to this question, but as a general rule we would suggest that you talk to a solicitor about your options once your internal credit control procedures have been exhausted and, in any case, where a debt has been outstanding for more than 90 days.

How a solicitor can help

As debt recovery specialists, we have the expertise needed to be able to tell you quickly whether a debt is worth pursuing or if you should just cut your losses now and move on. This means that, by taking advice from us, you can ensure that you focus your debt recovery efforts where they count and avoid jeopardising your own position by throwing good money after bad.

Understanding the cause of the debt

In those cases where a debtor clearly has the means to pay but is choosing to drag their heels, we can support you in taking swift and forceful recovery action, which will begin with a formal letter of demand, followed by a final warning and then the instigation of either debt recovery proceedings or the service of a statutory demand, whichever is deemed to be more appropriate.

Where the reason for non-payment turns out to be that the debt is disputed, we can advise you on the legality and strength of the debtor’s position and either push on with recovery action where we consider their arguments to be weak or without merit, or else try to seek a fair and negotiated settlement, possibly via mediation where we consider that this may help.

In those cases where an account remains outstanding because the debtor is experiencing financial difficulties, we can assess the extent of the problems they are facing and tell you whether we think any issues are likely to be temporary or permanent, and therefore possibly terminal. This insight can then be used to help you make informed decisions about the extent to which you should continue to engage with the debtor at this stage.

Factors that should shape your debt recovery strategy

Having spent many years supporting businesses in their debt recovery efforts, it has become clear to us that everyone takes a different approach when developing their personal strategy.

For example, some companies have a zero-tolerance approach and go after all debts, no matter how small, to send a clear message to their customers that the non-payment of accounts will not be accepted.

In contrast, other firms will only instruct us to pursue debts above a certain amount (and where no query on the account has been raised), and others prefer to make decisions on a case-by-case basis in consultation with us.

Dispelling a few debt recovery myths

It is up to you to decide which strategy you want to adopt, but there are a couple of common misconceptions around the potential to recoup some or all the legal fees from the debtor.

Myth number one: No contractual rights, no costs recoverable. Even if you do not have a contractual right to recover legal costs associated with chasing an overdue account, you are likely to be able to recoup at least part of your costs by exercising your statutory rights, under the Late Payment of Commercial Debts (Interest) Act, to claim:

  • interest on the overdue amount, at 8 per cent above the Bank of England’s base rate; and
  • compensation for late payment of between £40 - £100, depending on the size of the debt.

Myth number two: Debt under £10,000, only minimal costs recoverable if you go to court. While it is true to say that debts under £10,000 will normally be classed as a small claim, and therefore subject to rules which limit the amount of costs you can recover, it is becoming increasingly common for judges to depart from these rules and allow greater costs recovery where your terms and conditions provide for recovery costs to be passed to debtors.

Further information

To find out more about your options for debt recovery, please contact Norman Hunter-Goulder in our Commercial Litigation Team on 01480 702207 or via email at info@hcsolicitors.co.uk.

Norman Hunter-Goulder LLB, Senior Associate

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This article has been prepared for general interest and information purposes only; it does not constitute legal advice and should not be relied on as such. While all possible care has been taken in the preparation of this article, no responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the firm or the authors.