Late Paying Customers Causing Headaches? Here's What To Do

David Owen is an Associate Solicitor in JCP Solicitors’ Recoveries and Professional Liabilities team, undertaking a range of work for commercial and non-commercial clients.

Most businesses across the region will be familiar with the problem of late paying customers; the debilitating knock-on effect this can have on cash flow, the wearying cat and mouse game of re-issued invoices, telephone and email chasing, and other avoidance tactics that are often involved.

Some sources estimate that unpaid invoices and the costs associated with pursuing payments, as well as longer payment terms, could be costing Wales’ 221,000 SMEs more than £10 billion of cash flow every year. However, there is effective legal action that can be taken to tackle the problem.

If you have an issue with a late paying client and you have tried to resolve it in a reasonable manner – by issuing invoices promptly, following up with reminders and talking to the debtor to try to obtain payment - then the time may have come for stronger action.

It is sensible to engage a solicitor to handle correspondence and the legal processes. A solicitor’s first step is to issue a letter to the debtor detailing the amount of the outstanding payment, when payment was due and what action is required by the debtor if Court proceedings are to be avoided (i.e. a Letter Before Action).

In many cases, that letter is enough to prompt payment; particularly as the Late Payment of Commercial Debts (Interest) Act allows a supplier to charge interest on the debt, at a rate that is linked to the base rate (currently 8.5%pa), until payment is made. The Act also allows you to recover a late payment charge of between £40 and £100 in addition to the debt (depending on the value of the overdue invoice). That is the minimum charge applicable as an amendment to the Act allows you to recover your ‘reasonable’ recovery costs should they exceed the level of the fixed charges.

The Act is particularly useful if you do not have a contractual entitlement to charge costs and interest in the event of late payment, since the terms of the Act are treated as being included in all qualifying contracts.

If a Letter Before Action is not enough to nudge your debtor into action, Court action can be pursued. In the majority of cases, the most appropriate course will be to pursue a money claim in the County Court. If the debt is still not paid by the deadline set by the Court, and no defence to the claim is raised by the debtor, then a Judgment can be entered against them without a hearing. Once a Judgment is entered, that gives you access to various methods for enforcing payment.

Here are some key points you should be aware of when pursuing legal action against a late payer or a bad debtor.

• If your debtor is an individual rather than a company or partnership, you must follow the Pre-Action Protocol for Debt Claims. It sets out the level of detail and information that must be provided to the debtor, together with the response times that must be given before proceedings are commenced.
• It is best practice to provide the debtor with all relevant paperwork associated with the transaction in question so they understand your claim. This includes the agreed terms and conditions, invoices, proof of delivery and any communication about the order or debt.
• Don’t delay. The sooner you talk to the debtor and make efforts to start recovering the debt, the better the chance of making a recovery.
• If your customer disputes the debt, you may have to pursue the claim through to a final hearing before a Judge in the County Court. Some debtors will simply not pay until faced with the prospect of losing at trial. 
• If a County Court judgment is entered in your favour, the debtor is required to pay the debt within a month. If they don’t, the judgment is registered for six years and will affect their ability to obtain credit.
• A money claim in the County Court is not the only option. If the customer doesn't dispute the debt, and it exceeds the relevant threshold, insolvency proceedings may be appropriate. If the debtor is made bankrupt or wound up by the Court, any assets can be sold for the benefit of creditors. However, you should try to find out what you can about their financial position beforehand. If there are insufficient assets to cover all the debts and costs of the insolvency, you will have to share what is available with any other creditors. This may not leave you with very much, so it’s important to consider your position carefully before pursuing insolvency proceedings.  
• Clearly, as you might not get anything back through either enforcement or insolvency if the debtor has few realisable assets, it is important to find out as much as you can about who you are trading with both at the outset of the relationship and before commencing Court action. There is nothing worse than succeeding in Court proceedings only for it to be a hollow victory because you can’t recover payment.

David’s experience includes recovery of secured and unsecured business liabilities for banking and building society clients, personal debt recovery, insolvency based litigation and general property litigation. For tailored professional advice, contact David at: david.owen@jcpsolicitors.co.uk or call: 01792 525 431.