Getting customers to pay their bills is a tiresome hassle for most companies. But it’s absolutely crucial. Not only can late or non-payment of debts seriously dent your cashflow, it can ultimately force a business to the wall. What are the best ways of ensuring you get paid and when and how should you take legal action?
Debtors frequently argue about the amount due. You can avoid arguments by spelling out clearly in advance what customers are paying for and how much the bill is likely to be (making clear that any estimate is just that - an estimate which may be subject to change). Talk to them about any problems as soon as they arise.
You need to be careful about who you invoice in the first place. Often the customer claims that the bill has been sent to the wrong person or company, so keep precise records of who has ordered your goods or services. Make sure you know the correct name and legal identity of whoever you contract with, especially if they use a trading name.
If your debtor simply ‘vanishes’ or becomes insolvent, you’re unlikely to get paid. Maintaining good records and billing and chasing promptly are the best ways to avoid this unhappy scenario.
If you decide to pursue a claim in court, you’ll need to show the contractual basis on which you claim payment. This could be your standard terms and conditions (as long as you sent them to the customer) or a written contract. If there is no written record of the contract terms, you’ll need witness evidence to explain what was agreed orally; the identity and address of the debtor for serving the court documents; and the amount of the debt – an invoice is usually sufficient, unless the sum is disputed. You will have to provide evidence about the quantity of the goods or services provided and you may also have to justify the reasonableness of your charges.
A court fee is payable when issuing a claim. The amount varies from £30 to £1,530, depending on the size of the debt. If the claim is defended, other court fees will be payable later on – but these should be added to the debt (assuming you win!). The court also generally applies a standard interest rate of 8% from the date of the invoice, but you can impose a higher rate of interest by specifying one in the contract or by relying on late payment legislation.
If you are claiming less than £5,000, you cannot reclaim any of your legal costs (apart from the court fees). If you are claiming over £5,000, you can reclaim at least some of your legal costs. But if the debtor has gone AWOL or has no funds, issuing court proceedings may be a case of throwing good money after bad.
If you do obtain judgment and this still does not trigger payment, you can seek to apply various enforcement tools. But this will involve further court fees, which again may not be recoverable.
Overall, the best advice is to stay in touch with your customers, bill and chase promptly and take legal action only as a final resort after weighing up the pros and cons.
Catherine Haugh is an associate at Lewis Silkin LLP (firstname.lastname@example.org)