Ask the experts: Debt recovery for small businesses

Blogs 27 Jul 2022

We asked the experts your frequently asked questions about how debt recovery works, including reminder letters, charging interest, court proceedings, and bad debts.

A version of this content was first published in June 2020.

Unsure how much to charge on overdue invoices? Wondering how long debt recovery takes? We asked our legal experts from FSB Debt Recovery, in association with Markel Law, your frequently asked questions about chasing debts and how FSB Debt Recovery can help your small business to take control of late payments.

I have an unpaid invoice, how can FSB Debt Recovery help?

The FSB Legal and Business Hub has a dedicated debt recovery page that provides a range of resources for members to help you reduce aged debt and recover overdue invoices. This includes a free guide with tips on how to resolve issues with late-paying customers and details of the debt recovery process. You can also seek expert debt recovery advice from a team of dedicated lawyers via the 24/7 legal helpline.

For those debtors who fail to pay an overdue invoice following standard credit control procedures, FSB Legal and Business Hub provides you with a free, downloadable Pre-Action Protocol compliant Letter before Action (“LBA”) and Late Payment Demand letter (“LPD”). As an FSB member, you can download these templates as many times as you wish. Alternatively, if you’re unsure or think the letter would carry more weight coming from solicitors, you can instruct a legal expert from Markel Law to write it for you for a discounted fee.

How much will it cost for me to send a Letter before Action?

A template letter can be downloaded free of charge from FSB Legal and Business Hub.

The fee to instruct Markel Law to send an LBA or LPD is fixed at £30 plus VAT regardless of the value of the debt. Letters will be sent out within 24 hours of provision of the relevant documents and payment of the fixed fee.

What if the debtor does not respond to the LBA or LPD?

The LBA and LPD give the debtor a short period in which to make a payment or respond with suitable payment proposals. Unfortunately, not every debtor will respond to the letter and some will require an escalation in the process.

If an LPD has been sent and the debtor fails to pay, an LBA should then be sent giving the debtor a final deadline in which to make payment and providing certain other information as to the debt that the Court expects to be provided before formal action is taken. If the debtor fails to pay within the period set by an LBA, Court proceedings can be issued as a next step.

What happens when Court action is taken and what will that mean for me?

A Claim Form and Particulars of Claim will be sent to the County Court Money Claims Centre. The Court will serve the debtor with these documents, after which the debtor has a period of up to 28 days to respond to the claim by either admitting the debt or entering a defence.

If the debt is admitted in full, the debtor can propose a repayment plan, which if accepted will be set out in the County Court Judgment. The debtor must then make payment in accordance with the Judgment until the debt is paid in full, otherwise immediate enforcement action can be taken.

If the debtor fails to respond to the Court within the given deadline, or fails to put forward payment proposals, Judgment in default can be obtained with the debt then due in full. If the debtor cannot make payment of the full outstanding sum, enforcement options can be explored.

If the debtor seeks to defend the claim, the matter will proceed through the Court process to its conclusion. Very few claims are determined by the Court and most are resolved before trial, whether through negotiation or a formal dispute resolution process, such as mediation. Where a matter does reach trial, key witnesses of fact will be required to give oral evidence and may be questioned by the Judge, the debtor and/or the debtor’s legal advisors.

If a Court, having considered all the evidence, decides that a debt is properly owed, it will make a Judgment in favour of the claimant and a period will be stipulated for payment (usually 14 days).

Are there any alternatives to Court action if the debtor won’t pay?

In circumstances where it becomes apparent that the debtor is unable to repay its debts, as opposed to merely being unwilling to pay, a creditor can present a petition to the court for a winding up order (forcing the debtor into compulsory liquidation). If the debtor goes into liquidation, each creditor must submit a proof of debt form to be entitled to a dividend at the end of the liquidation process.

This action is a lengthy process with limited prospects of the creditor receiving payment of the full outstanding debt sum. Whilst it should therefore generally be considered a last resort, it will be an appropriate step in many cases.

What can I do if the debtor does not pay after Judgment is obtained?

Once a Judgment has been entered, most debtors will immediately pay the debt in full, in which case the matter is closed. Others, however, may refuse to comply with the Judgment, may ignore it, or may seek to have it set aside or overturned.

The Court will not enforce a Judgment unless it is specifically asked to do so. This means that the creditor must go back to court to force the judgment debtor to pay. This is a process known as enforcement.

What is enforcement and how do I proceed to enforcement?

Enforcement is a process that is available when the debtor fails to comply with the payment terms set out in the Judgment. It enables you to force the judgment debtor to pay.

There are a variety of enforcement options available. Each method has its own particular strengths and weaknesses, and some may not be applicable in every case. The best one will depend on a variety of factors including the level of the sums owed, how quickly the funds are needed and the debtor’s assets / financial position.

What methods of enforcement are available to me?

The main methods of enforcement available are:

  • Taking control of goods instruct High Court enforcement officers (bailiffs) to attend the debtor’s property to seize assets belonging to the debtor so that they may be sold at auction to pay off the debt.
  • Attachment of Earnings Order – provide that a proportion of the debtor’s earnings are deducted by his/her employer and paid direct to the creditor until the debt is fully repaid. 
  • Third-Party Debt Order any money owed to the debtor that is in the hands of a third party (such as a bank with whom the debtor has a bank account) are frozen and seized for the benefit of the creditor.
  • Charging Order a charge will be imposed on the debtor’s beneficial interest in a specific asset (often land or a house).

How long will it take to recover the debt if proceedings are issued?

No two cases are the same and therefore, the length of time it may take can depend on a number of factors.

  1. Pre-Action – our LBA and LPD require the debtor to make payment or respond within 7 or 14 days from the date of the letter if the debtor is a business, or 30 days from the date of the letter if the debtor is an individual or sole trader. If the debtor proactively responds to the LBA or LPD and seeks more information, or more time for a substantive response, then this is usually something that a Court will expect you to afford them. Where the debtor is not able to make payment in full, it may seek more time to pay, or ask for a repayment plan to be agreed, which can extend the pre-action process.
  2. Issue proceedings – if proceedings are issued but not responded to, it will usually take between 1 and 2 months to obtain a judgment in default. Where a defence is filed the process will take longer. In a simple small claims case, trial will usually be listed within 9-12 months of the claim being issued. In complex cases that period could be as long as 18-24 months. Prior to trial the parties will be expected to explore alternative means of resolving the dispute between themselves and/or with assistance from an independent third party such as a mediator.

Can I charge interest on the overdue invoices? Do I have to?

Usually, a contract will make provision for interest once an invoice is overdue. If it does not, statute provides for a default rate of interest to be added for late payment of an invoice. The rate varies depending on whether the debtor is an individual or a company.

The standard LBAs and LPDs available to members on the FSB Legal and Business Hub outline the interest that will be claimed in any subsequent Court proceedings, but in an effort to incentivise early engagement from the debtor, the LBAs only seek to recover the principal debt. This follows the process that Markel Law adopt as standard. If you would like interest or any other contractual charges to be sought in addition to the principal sum in the LBA, you will need to amend the template letters to reflect this or, where instructing Markel Law, to advise them that this is your preferred approach at the point of instruction.

It is not compulsory for interest to be added to the overdue invoices. The decision will ultimately rest with you as to whether you want interest to be added. Considerations will likely include if you have incurred costs as a result of the late payment (e.g. bank charges), whether there is an ongoing commercial relationship with the debtor and, if so, what you consider their reaction will be to being charged interest.

Can I claim late payment compensation?

In certain circumstances, an additional fixed late payment compensation sum can be claimed for each overdue invoice. This will be between £40 and £100 depending on the value of the invoice and is intended to reflect the costs of pursuing the debt where the contract does not otherwise provide an adequate remedy. Late payment compensation cannot be sought where such a contractual provision exists.

As with interest, the standard LBAs and LPDs reference any late payment compensation that will be claimed in any subsequent Court proceedings, but in an effort to incentivise early engagement from the debtor, the LBAs will only seek to recover the principal debt. If you wish to take a different approach then you will need to amend the templates, or else let Markel Law know this at the point of instruction.

Will I be able recover the costs of litigation?

Pre-action costs are not recoverable of themselves, but can be included in the overall sums claimed if Court proceedings are later issued.

Where the claim is successful, the Judge will be invited to make an order that the debtor pays the creditor’s costs of the litigation. Likewise, where a claim is dismissed, the defendant will seek to recover its costs of the action from the claimant.

The Court has a very wide discretion as to costs. When exercising this discretion, it will have regard to all of the facts of the case, which will include the reasonableness of any settlement offers made, the parties’ compliance with the pre-action protocol and their conduct throughout the matter.

It is rare for a party to recover more than the Court fee, fixed debt recovery costs and out of pocket expenses on the small claims track, which covers disputes with a value of up to £10,000.

What will happen if I lose in court?

In the matter is defended and you lose at trial, your claim for the outstanding sum will be dismissed and no further action may be taken to pursue the debt, which will have to be written off. You may also be ordered to pay the debtor’s costs.

Is there a time limit for pursuing an old invoice before I have to write it off as a bad debt?

Debt claims must be brought within 6 years of the sums falling due or, if it occurred later, the debtor’s last acknowledgment of the debt. Otherwise, they will be statute-barred and become unenforceable. At that point, they should be written off as a bad debt.

What information will Markel Law need to pursue a debt for me?

It is important that the information in the LBA or LPD is accurate and therefore, having a full understanding of the sum and agreement terms are important. In a perfect world, there would be a single written document including all of this, but we appreciate that is not always the case.

Markel Law will though require copies of the overdue invoice(s), any contractual documentation (or correspondence setting out what it was requested/agreed and any payment terms), along with any correspondence with the client regarding the debt.

Take back control of your cash flow

It’s time to get the money you’re owed thanks to FSB Debt Recovery. Step-by-step guidance on chasing late payments, 24/7 support, free DIY template letters and clear, discounted legal costs.

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