Often considered the ‘nuclear option’ David talked us through how to navigate the process. Read on to learn what he has to say.
DW: The first thing I would say is that you should take all emotions out of any decision. You need to make a commercial decision that going to court is in the best interests of your company, not an emotional one that is more about “getting back at” your client who hasn’t paid. That means you must keep a close eye on costs.
For any claim under £10,000 it is likely to be dealt with as a small claim which means that there are unlikely to be any awards of costs on either side. This means that if you use a solicitor to fight this for you, you will be unlikely to get their costs back, even if you win.
However, the small claims procedure is relatively straight forward so you should be able to represent yourself and not incur any solicitors costs. My book, Cash Flow Rescue, takes you through this process step by step.
DW: There are never any guarantees when going to court. I’ve seen really good cases fall apart when a witness gets nervous and then confused over the evidence they are giving. Although a judge may offer some leniency to someone representing themselves, you still have to prove your case and if you can’t do that, the judge won’t make the order that your client has to pay.
Having said that, if there is no good reason why your client hasn’t paid, then they won’t want to stand in front of a judge and explain themselves. So then the risks are well worth taking because the client has far more to lose by going to court than you do. But remember, it is vital you remain dispassionate when assessing their reasons for not paying.
DW: It can be if you haven’t done this before and you’re trying to figure everything out. However it doesn’t have to be. The main thing is to be organised, clear and concise. Stick to the facts and don’t get drawn into long convoluted arguments. This is one of the reasons I wrote the book and produced Cash Flow Rescue – I wanted to make the process as quick and easy as possible.
DW: For an unpaid invoice it’s usually either due or it’s not. If it’s due then you should recover the whole amount. The judge will usually only reduce the amount awarded if, for example there was an argument about the quality of work produced, or for example you massively exceeded a quote for the amount of time you would spend on something.
In terms of expenses, you should recover the court fee and you may also get some interest, but those are the only likely expenses you will recover.
DW: If it’s a small claim (under £10,000) and you lose then you shouldn’t have to pay the defendant’s costs. Costs are always at the discretion of the court so if your behaviour was really unreasonable, then there is a risk you could receive a costs order against you. The same of course goes for the defendant.
DW: Most of the time you will be claiming your unpaid invoice(s), plus interest and your court fee. Your contract should say what interest rate you can claim. For example it may be 3 or 4% above base. However, if it is a B2B (business to business) contract and you haven’t said in your contract what the interest rate should be, you could claim interest at 8% above base under the late payment legislation. The late payment legislation also allows you to claim a fixed amount as compensation of the late payment.
Up to £999.99 you can claim an extra £40;
£1,000 to £9,999.99 you can claim an extra £70; and
£10,000 and above you can claim an extra £100.
DW: In the lead up to trial, the court will have given directions on what both parties should have done. For example, the court may have said that you must file all of your evidence at court in advance of the hearing. Make sure all of these directions have been completed. If there is something you can’t do because of the defendant not complying, make sure you have done all you can to comply.
The court will expect you to have at least tried to settle this before going to court, so as much as there may be a huge amount of bad feeling between you, give it a go. Even if you think the defendant won’t engage in discussion, at least show you have tried.
Then make sure you know your case inside out and back to front. Make sure that if, for example, the judge asks for a copy of your invoice or your contract you can give it to them straight away. If the judge asks how you have calculated your interest, make sure you can explain it.
DW: On the day of the hearing, you’re going to be nervous. This is completely natural. Going into court is a step into the unknown for most people, but believe me, it’s not as bad as you will expect!
The chances are the hearing won’t be in open court, it will probably be dealt with in the judge’s private chambers and it will be just you, the judge and your client there.
Beforehand, make sure you know where you are going and make sure you have plenty of time. Getting stuck in traffic is never good for the nerves and it won’t be accepted as an excuse.
At the start of the hearing the judge will probably ask you what this case is all about. Rather than having to remember it all, there is nothing wrong with having some notes to refer to. Think about what you will say to prove your case and explain to the judge what evidence you have got to support your arguments.
Try to avoid giving opinions unless you can back them up with evidence and stick the the facts rather than claiming something is unfair.
Think about it from the judge’s perspective. How can you make it easy for them to understand this case and decide in your favour.
DW: You should get an immediate decision at the end of the hearing
DW: It will go against the name of the defendant. So, if you are claiming against a company, it will be the company. If you are claiming against a sole trader, it will be the sole trader personally.
David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights. David set up Cash Flow Rescue as a low cost legal alternative for small businesses with debt recovery problems.
Research published by the Federation of Small Businesses (FSB) in November 2016 shows that the average amount for an overdue invoice is £6,142.
As the amount of the debt decreases the cost of legal fees as a proportion of the outstanding debt goes up. If the legal fees can’t be recovered then the consideration process shifts away from legal action and possibly towards writing off the debt.
There is an obvious problem, with the average size of an overdue invoice being £6,142 many businesses will feel that legal action is not worth the cost. This is perhaps why so many businesses eventually go to the wall.
In the same research the FSB point out that were it not for late payment an additional 50,000 businesses might have been saved from having to close their doors permanently.
Leaving aside invoice financing as a means to freeing up capital there are several other low cost actions that suppliers can take to recover debts and mitigate the problem. They broadly fall under two headings:
You will need to consider this in context of the size of the outstanding debt and whether or not it’s disputed or undisputed. However, it isn’t as daunting as it sounds mainly because there are a few actions that can be taken which generally lead to a favourable outcome before the situation ever goes to court.
Probably the first option to consider is the issue of a letter before action . Users that register with Prompt Payment Directory can obtain a free LBA template, supplied by Lovetts Solicitors, in the My Resources section of the account area.
A letter before action is a letter warning your customer that court proceedings will be started if the debt is not paid. Going to court should always be considered a last resort and the court will expect that all efforts be exhausted before issuing a legal claim.
A letter before action is that final opportunity for a debt to be settled by the debtor, however it’s also a bit more. In most cases debtors will understand the gravity of the situation and find a way to pay up upon receipt of one.
Another option is the issuing of a statutory demand. More information on how to do this can be found via Cashflow Rescue. However, in essence a statutory demand is the beginning of the formal legal process for recovering a debt.
Probably the most important role it plays is to signify to the debtor that you are serious about recovering the money owed to you. Links to the various forms can be found here.
A more heavy handed option is to issue a draft winding up petition.
A winding up order is a court order that forces a company into liquidation. These are issued by the courts when all other efforts have failed and a creditor has presented a winding up petition to a court with the intention of obtaining a winding up order as a means to retrieve funds from the overdue invoice.
A draft winding up petition signifies intent but does not require involvement from the courts and as such costs less. Lovetts report that in cases they represent, 4 out of 5 debts are paid when draft winding up petitions have been issued to the debtor.
The final option is to follow the procedure set out by Cashflow Rescue.
This low cost, easy to use, self administered service was created specifically to help creditors with individual outstanding debts of less than £10,000 recover those debts, through the courts if necessary, without the costs of legal fees.
The process can also be used in cases where the overdue invoices amount to more than £10k and anecdotal evidence shows it to be a very effective process.
The clearly laid out framework puts the creditor in control of the debt recovery process and the associated costs. For adaptable small businesses owners that are used to wearing many hats this should not prove too daunting.
Ultimately it’s preferable to simply not be in the position where invoices are overdue. The best advice here is to get to know your customer as much as possible in advance of doing business.
Additionally, just as with the principle behind Cashflow Rescue, suppliers can begin to make a difference and join the growing number of contributors by anonymously sharing their experiences of payment, both good and bad, on the Prompt Payment Directory. In doing so there are four benefits:
ACKNOWLEDGEMENT: With thanks to David Walker of Cashflow Rescue for his feedback on the writing of this post.