We caught up with David Walker from Cashflow Rescue to find out how suppliers can avoid it and still get a positive outcome. Here’s what he had to say.
DW: Going to court is always risky. There is no such thing as a rock solid case that you are guaranteed to win. So, if you can settle out of court and reach an agreement you’re happy with, this is always the best option.
However, reaching a settlement usually requires that you compromise what you are asking for and accept a lower amount. But you have to make a decision, is a smaller amount now better than the chance of a higher amount later?
Don’t just think of the settlement amount, think of the opportunity cost. Going to court is going to take time and effort. Could that be better spent in other areas of your business?
DW: This is a free service offered to anyone who is involved in a small claim (i.e., one under £10,000).
After your client has filed a defence to your claim, the court will write to both parties asking them to complete a directions questionnaire. This helps the court set the timetable for getting the case to trial.
One of the questions on this form is whether you’re prepared to try mediation. It’s not compulsory, but I always say yes, even if you don’t think your client will agree.
You’ve got nothing to lose by trying mediation and you may get a good result. Also, if you don’t try mediation and you go to court the judge will probably look less favourably on you. Therefore, agreeing to mediation helps you keep the moral high ground over your client.
DW: If both parties agree to mediation a date will be set by the mediator. The mediator will then call each party in turn and listen to their arguments.
The mediator will go back and forth between the parties trying to help them reach a settlement. You won’t actually speak directly to your client.
The mediator is not a judge so will not determine the outcome or make a decision. They will help you see the strengths and weaknesses of your case and will put forward offers or counter offers on your behalf.
If a settlement is reached they will then help you prepare a settlement agreement which is a binding contract confirming the terms you have agreed.
DW: For the small claims process it is relatively quick.
The defendant has up to 28 days to file a defence to your claim (they can ask for longer if needed but 28 days is standard).
Once this has been filed the directions questionnaire is sent out by the court. Depending on the workloads of the court this could take a couple of weeks and they will give you a deadline, normally another couple of weeks, for completing it.
When both parties have filed their directions questionnaires and agreed to mediation, a telephone appointment will be arranged for a time convenient to both parties. On the day of the mediation, the mediator will call each party in turn to hear their arguments and explain what the other party is saying.
The mediator will then go back and forth between the parties dealing with all of the arguments and counter-arguments until a settlement has been reached or until it becomes clear that a settlement is out of reach. This process generally goes on for an hour or so.
With larger claims, the parties organise it themselves so you can arrange a mediation appointment whenever you like.
The mediation itself can also last much longer. A full day is not unusual.
DW: The biggest thing to remember is to be prepared. Know your case inside out. Accept that there may be some holes in your case, but think about how you can deal with them.
For example, you might accept that the service was late by a day or two, but what was the effect of this? Was it inconvenient for your client, or did they lose sales? If they lost sales you will probably have to compromise more than if it was simply an inconvenience.
Anticipate what arguments your client may put forward and have an answer ready for them.
Think about what evidence you have to back up your arguments.
Also remember that settlement negotiations are a two way process. Make sure you listen to what your client is saying. You can learn a great deal about the strengths and weaknesses or their case, even if you don’t actually reach a settlement.
DW: For the small claims mediation service, your claim has to be allocated to the small claims track in the court system. That means it will be less than £10,000. For all other claims, the courts encourage the parties to consider all forms of settlement, including mediation but it’s not a free service.
Hiring a mediator can be expensive, so I tend to only go down this route for really high value claims, otherwise it’s just not cost effective.
DW: If you don’t reach a settlement during the mediation, your claim will continue to trial where the outcome will be decided by a judge. As I said before, the mediator won’t decide the outcome, they can only help the parties reach a settlement they’re both happy with.
DW: If it is clear that the mediation is not working out and a settlement is not going to be reached the mediation can end at anytime. Either party can bring it to a close. At that point, the claims continues towards trial as before but if the claimant has decided that enough is enough it is possible to bring all proceedings to a halt.
A word of warning though, if the claimant does halt legal proceedings before going to court they may be liable for both their costs and those of the defendant.
DW: It can be.
The small claims mediation service is free, but if you have to hire a mediator it can be expensive.
With higher value claims both parties will probably be represented by solicitors, who will also attend the mediation so costs can soon escalate. However, those expenses can be good value if the mediation leads to a settlement you are happy with.
DW: You can try arbitration. This is different to mediation because the arbitrator will actually make a decision on the outcome. The parties agree beforehand to accept any decision the arbitrator makes. Arbitration is good where, for example, specialist knowledge of an industry is required.
Another benefit of arbitration is that it can be kept completely confidential. Court proceedings are public so the outcome is public knowledge. If you want your dispute and the result to be kept behind closed doors, arbitration is a serious consideration. However, like meditation, it can be expensive.
Aside from that, I would say speak to your client. Take the time to meet them if possible. Get a coffee, talk through the issues and see what result you can achieve.
Clearly, while you are trying to reach a settlement, you must keep commercial reality in mind. There is a big difference between what you do when chasing for payment of an outstanding invoice for a few hundred pounds and trying to resolve a much larger and complicated dispute.
For unpaid invoices, whilst it is important to try to settle the dispute, don’t be afraid to push your claim towards court as quickly as you can. I find that the more prepared you are to go to court, the less likely you will find you have to.
DW: After you have exhausted your credit control procedure, your next step should be a letter of claim. This is the same as a letter before action.
A letter of claim should set out all of the details of what you are claiming and why. If your client still disputes the payment they should then send a full response explaining why they don’t believe they should pay.
A letter of claim is often thought of as a final step before starting legal action, but I often find that it leads to at least another round of correspondence as arguments and counter-arguments are raised.
After sending the letter of claim and dealing with any following correspondence you then have a choice, you can either start legal proceedings through the court or if the debt is undisputed and your client is simply refusing to pay you can send a statutory demand (I’ll come back to this in a bit).
Once court proceedings have been started you can consider mediation through the small claims mediation service or independently if the claim is valued above the small claims limit. There is no reason why you couldn’t consider mediation or arbitration before court proceedings are started, but for a debt claim it would be rare.
Another alternative is to drop the claim. You will have reached the end of the pre-action stage and this is the time when many people decide they no longer want to commit any more time and energy to the dispute.
DW: A statutory demand is a final step before a winding up petition is drafted and served on the client. It is a single form and there are no fees to pay. However, you can only send it in certain circumstances.
First the debt must be undisputed. If it is a disputed debt, even if the reasons for disputing it would never win in court, you cannot serve a statutory demand. Next, if the client is a company, the outstanding debt must be over £750 and if they are an individual the debt must be over £5000.
If you can send the statutory demand it is very effective because the client will know that the next step is for the company to be wound up or the individual made bankrupt. If they don’t want this to happen, because they are running a profitable business, they will usually pay up pretty fast.
If they don’t pay up you can then prepare a winding up petition, but there will be fees that you have to pay.
If the client hasn’t paid up after the letter of claim and the statutory demand, you have to question if they ever will. If they are insolvent and simply do not have the funds to pay you will most likely end up with nothing if you are an unsecured creditor (as most suppliers are).
This is then a commercial decision. Are you acting in the best interests of your company by pursuing this any further? If you are a director of a company and are answering to other shareholders, not just yourself, you have to consider this very carefully indeed.
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 Cashflow 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.