One of the biggest problems faced by a UK business is recovering unpaid debt. It is vitally important to strike a good balance between maintaining positive client relationships and ensuring that they offer prompt payment of invoices. However, there will always be an exception to this rule and at some point, a company will face problems with collecting payment.
We feel there are 5 important steps that need to be followed in order to recover outstanding debts and maintain good financial stability. Let’s explore these in more detail.
Stage 1 – Communications
When an invoice is overdue, it is important to swiftly send a reminder to the client. This will be a polite reminder, but it needs to hold an important message that settlement needs to be made promptly.
If this first letter is ignored, then a follow-up needs to be drafted and sent. This should be structured so that it holds a much more forceful message setting a clear timeframe when the debt needs to be settled by. It can also mention an introduction of penalties fees or additional interest charges. Content should take a very legal format stating that failure to comply could result in legal action being taken (which again will incur extra and substantial charges).
Following the first two communications, if no response is received then a formal letter before action needs to be issued. This will notify the debtor of the intent to pursue legal proceedings to cover the outstanding debt. By taking this approach the business stands a much better chance of recovering legal costs if the matter leads to a court hearing.
Stage 2 – No Responses
If the debtor continues to ignore the communications, then a decision needs to be taken as to whether to take court action or undertake insolvency proceedings.
A pragmatic approach needs to be taken towards these options. If a debtor genuinely cannot afford to pay, legal action won’t magically create funds. Any reasonable offers to pay in instalments, backed by evidence, should be considered seriously to avoid wasting further time and money. Also, there will be a negative impact on business relationships taking lots of time and management resources with legal proceedings.
Stage 3 – Court Action
An official court claim can be made if no responses are received. This involves several logical steps:
- Submit a claim form to the court which outlines full details of the claim and the outstanding debt. There will be an issue fee that will need to be paid.
- Once issued the court will serve the claim on the debtor who will have 14 days to acknowledge and 28 days to file a reply.
- The debtor has a right to dispute the claim by filing a defence. At this stage the case will be allocated to the respective court track, and a trial will be initiated.
It is important to note that for debt under £10,000 a small claims track will be initiated where recoverable costs are limited, even with a positive outcome. Timelines can also be stretched out taking anywhere from 6 to 18 months.
Stage 4 – Enforcement
If a court judgement has been passed but the debt remains unpaid then the next stage is to take enforcement action. Again, this will incur further costs and there is still no 100% guarantee that the debt will be paid. Enforcement can take different paths which include setting up a payment plan, seizing valuable possessions or placing a charge on any owned property.
Stage 5 – Insolvency
For businesses that are unable to pay debts which exceed £750 a winding up order can be applied for. This may force the company into liquidation. It is often hoped that the threat of insolvency forces the debt to be settled.
If the debt is in relation to an individual and exceeds £5,000 then a file for a bankruptcy petition can be made. Again, this can be time consuming and costly, so it is recommended to proceed with caution.
Should you have any questions or would like any advice on recovering debt then our team would be very happy to help. Please call us on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
You can also book a free 20-minute call with Yarka – https://calendly.com/yarka-ssa/20min
