In the fourth of our series of interviews with David Walker, owner of Grid Law and author of Cash Flow Rescue, we talked to him about the ins and outs of settling late payment disputes in court.

Often considered the ‘nuclear option’ David talked us through how to navigate the process. Read on to learn what he has to say.

 

PPD: What would you say to people who are worried that the costs of going to court outweigh the benefits?

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.

 

PPD: In chapter nine of your book, Cash Flow Rescue, you say that going to court is risky, if that’s so why is it worth doing?

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.

 

PPD: Is taking a claim to court an expensive process from an admin perspective?

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.

 

PPD: If going to court, can one reasonably expect to recover the full amount plus expenses?

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.

 

PPD: How likely is it that a complainant could end up losing and paying the defendant’s costs?

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.

 

PPD: How do you set about calculating the amount you should claim in court?

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.

 

PPD: You say in your book that preparation before going to trial is vital, what would you say are the most important areas to cover off?

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.

 

PPD: How best would you advise people to prepare for their day in court?

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.

 

PPD: How long does it take for the judge to pronounce a judgement?

DW: You should get an immediate decision at the end of the hearing

 

PPD: If the complainant wins will the CCJ go against the defendant’s company name or the director’s name?

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.

It would be normal to think that invoices are generally disputed by customers on the grounds of some legitimate technical reason but the act of disputing an invoice has wider ramifications for the supplier.

 

Going to court should always be the option of last resort but part of the process leading up to an appearance in court involves the issuing of a statutory demand.

As David Walker from Cashflow Rescue points out in our second interview with him, 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.” 

Namely:

“…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.”

 

Statutory demands are effective because the recipient will most likely know, or shortly find out, that the next step is for the debtor company or individual to be declared bankrupt.

As such disputing an invoice could be used as a blocking tactic by a savvy and unscrupulous customer. Sadly, according to David, this is not uncommon however he has developed strategies to deal with this kind of situation.

 

All that said it would be preferable to avoid having disputed invoices in the first instance.

Knowing if a customer that you are about to do business with has, in the past, disputed an invoice can help you prepare for such an eventuality.

In every rating made on The Prompt Payment Directory, contributors are asked if the invoice has been disputed or not. To avoid the possibility of having invoices disputed, suppliers can take the following steps:

  • Make sure you know exactly what information is must be displayed on the invoice.
  • Make sure you know who the invoice should be sent to and in what format.
  • Make sure you know exactly when the invoice should be sent.
  • Make sure there are no spelling errors.
  • Make sure you have the customer’s address and contact details correctly displayed on the invoice.
  • Make sure you have not forgotten to include the purchase order if one was supplied.
  • If possible make sure the goods or services you have supplied have been signed off by the customer.
  • In advance of doing the work or delivering the goods make sure you know exactly what is expected in order for the job to be considered complete by the customer. If possible have this agreed upon either in the body of the contract or in an appended clause.
  • Make sure you know who is supposed to sign off on the completed goods or services.

These are not just exercises in covering your back, they’re good housekeeping. Larger organisations have complex systems in place for managing cashflow and minor slips-ups can cause invoices to get caught up in them.

Above all, get to know your customer and do your due diligence in advance of going into business.

 

Going to court is rightly considered to be the option of last resort when settling a late payment dispute.

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.

 

PPD: What would you say are the pros and cons of settling out of court (vs going to court)?

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?

 

PPD: How does the small claims mediation service fit into the process?

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.

 

PPD: How does the small claim mediation service work?

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.

 

PPD: It seems like this could be a long and drawn out process. How long does it typically take to get a mediator appointed and to complete the mediation process?

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.

 

PPD: What are the do’s and don’t in conducting a settlement negotiation?

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.

 

PPD: Is there a lower or upper limit to the outstanding debt amount that restricts the use of the mediation service or makes it a pointless exercise?

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.

 

PPD: What happens if the mediation breaks down?

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.

 

PPD: Is it possible to bail out at this stage or will claimants have to go to trial having started down the mediation route and subsequently failed?

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.

 

PPD: Is mediation expensive?

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.

 

PPD: Are there any other out of court settlement processes that you would recommend aside from mediation?

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.

 

PPD: What about tactics like diving straight in with a letter of claim, a letter before action or even a draft winding up petition?

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.

 

PPD: So, you mentioned sending a statutory demand, why would you do that rather than drafting a winding up petition?

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.

Ringing a customer to find out why an invoice hasn’t been paid can be difficult.

Fortunately The Prompt Payment Directory has been discussing just this with David Walker from Cashflow Rescue. Here’s what David had to say.

 

PPD: At what stage during the credit control process do you advise picking up the phone?

DW: I’m a big fan of communication to resolve disputes so I would say pick up the phone at the earliest opportunity. However, you have to be realistic, especially in a busy credit control department so you may not have the time to speak personally to each client as soon as their invoice is overdue. Therefore, I would probably send a first reminder letter and then if this didn’t lead to payment, speak to them to find out why payment hasn’t been made.

Alternatively, if you have a good relationship with your clients and you have regular, ongoing work, you can mention it in one of your calls. It doesn’t have to be a specific call to deal with the late payment.

 

PPD: What are the most important preparations to be made in advance of this kind of call?

DW: You need to have all the information to hand to be able to answer any questions from your client. Clearly, this is going to be different for different businesses, but you should always know when the invoice was sent out, when it became due, and how much is outstanding. Again, depending on the size and nature of your business you might be aware of, for example, how and when the service was provided, if there were any problems along the way, how they were resolved etc. Basically, you need to be able to anticipate what your client may say to delay the payment and have a response ready. Having to say “I’ll find out and get back to you” will only delay payment further.

 

PPD: In your experience what tone of voice do you find is most effective in delivering results?

DW: I usually start off friendly and try to build some rapport. A bit of small talk is fine, but we’re all busy so you have to keep this business-like. Always be assertive, but not aggressive – there’s a big difference!

 

PPD: What is the best way to manage the conversation if the person you are calling adopts a combative stance?

DW: First of all, don’t fight back! Understand why your client is feeling like this. They’re probably stressed and on the defensive, fighting 101 other fires in their business. You need to keep your emotions out of this and remember what outcome you want – i.e., your invoice to be paid. Listen to them and then respond with logic and reasoning, rather than emotion.

 

PPD: How should you respond if the person you are calling requests that the conversation be postponed for an hour or a day on account of “an urgent task or meeting” that they must first attend to?

DW: If you have to postpone a meeting, try to get a commitment and a time and date in the diary for the re-scheduled meeting. Then confirm this in an email.

 

PPD: What should you absolutely not say on a call such as this?

DW: I never ask “if this is a good time”. It’s a good time for you and if it isn’t a good time for your client, they will no doubt tell you. If they know you’re calling to ask for money and you ask “is this a good time” it’s too easy for them to say “no” and that they’re busy.

The other thing to remember is never to be embarrassed to ask for payment! So, don’t apologise for having to raise this issue, your client should be apologising to you!

 

PPD: How might the approach differ approach if it’s a second or third call?

DW: With each call you are going to be taking a tougher and tougher stance with your client. You should be eliminating any excuses for non-payment with each call and so by the third call you will probably be threatening legal action. However, don’t make empty threats. If you threaten legal action you must follow through or you will not be taken seriously in the future.

 

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.

Legal action is a big step to take when recovering overdue invoices.

While it is often effective, lawyers are expensive and there is no guarantee of recovering the debt or the fee.

Fortunately there are other options.

 

Research published by the Federation of Small Businesses (FSB) in November 2016 shows that the average amount for an overdue invoice is £6,142.

David Walker from Cashflow Rescue points out in his book that for amounts below £10k the legal system prevents your solicitor’s fees from being recovered EVEN if the case is won.

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:

  1. Initiate D.I.Y legal proceedings
  2. Carry out effective due diligence in advance of going agreeing a contract.

 

Initiating legal proceedings on your own

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.

 

Option 1

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.

 

Option 2

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.

 

Option 3

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.

 

Option 4

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.

 

Effective due diligence

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:

  1. All contributors making their first rating will receive 12 months FREE subscription to The Prompt Payment Directory
  2. Subscribers to The Prompt Payment Directory can search for potential or existing customers to see if they have been rated and if so what their score is. Where companies have been rated and payment was overdue, some context may also be available in the form of an explanation given by the debtor as to why the invoice has not been paid or was paid beyond terms. This will help potential suppliers to more effectively understand the risk level and compensate for it.
  3. Subscribers to The Prompt Payment Directory will also receive access to free resources in the user’s account area, these will help in debt recovery as well as debt mitigation.
  4. Contributors to The Prompt Payment Directory will be taking a positive step towards creating a business environment that espouses transparency and promotes prompt payment.

 

ACKNOWLEDGEMENT: With thanks to David Walker of Cashflow Rescue for his feedback on the writing of this post.