Recovering a trade debt: quick guide

A quick guide to recovering a modest trade debt where both parties are businesses within the jurisdiction and there is likely to be no substantial dispute of fact or evidence.

Contents

Scope of this quick guide

Most, if not all businesses, regardless of the sector in which they operate, are likely to need to pursue an unpaid invoice at some time. This quick guide briefly considers the main options available. It assumes that:

  • Both parties are businesses operating within the jurisdiction of the courts of England and Wales.

  • The unpaid sum, which recently fell due, is relatively modest and there are no cross-claims in respect of it.

  • There is no serious dispute regarding whether or not the sum should be paid.

  • Routine payment reminders have been sent to no avail.

  • The party pursued is good for the sum owed.

  • The aims are to get the sum repaid as quickly and cost-effectively as possible and to maintain the commercial relationship between the parties, if possible.

This quick guide considers the following options:

  • Threatening or commencing court proceedings.

  • Threatening or commencing insolvency proceedings.

  • Informal methods of resolving the matter: negotiation and/or mediation.

  • Doing nothing: writing off the debt.

It also provides links to materials (practice notes, checklists and standard documents) that provide more information and resources on the points highlighted here. Although this quick guide considers the above options under separate headings, in practice, the party seeking recovery would commonly adopt a staged approach comprising two or more of the above methods of recovery, as set out below.

A staged approach to debt recovery

Typically you might consider adopting a staged approach along the lines set out in the flowchart below. Note that, for the sake of simplicity, we have assumed that:

  • A party would not make repeated attempts at correspondence were correspondence ignored.

  • A party would not make repeated attempts to negotiate should negotiations fail.

  • After formal recovery proceedings had been commenced, the party seeking recovery would not simply write off the debt.

We are aware that, in practice, matters do not always unfold in such a straightforward manner.

As a final point, the flowchart assumes that the party seeking payment has in mind court proceedings, rather than insolvency proceedings, if the debt is not paid. That is because, in the context of this note, insolvency procedures are considered as methods of debt recovery in circumstances in which the party seeking repayment believes that the debtor is good for the money and would not be looking to have the company wound up (see Insolvency proceedings below).

Staged approach to debt recovery: flowchart: court proceedings

For further information, see Practice note, Early determination: an overview ( www.practicallaw.com/3-203-1178) and Trial: an overview ( www.practicallaw.com/1-204-0174) .

 

The main options

The next sections consider the main options open to a party looking to recover a fairly modest trade debt namely:

  • Court proceedings.

  • Insolvency proceedings.

  • Settlement.

  • Doing nothing.

 

Court proceedings

There are a number of points of caution to consider before commencing proceedings:

  • Conduct a cost/benefit analysis before starting proceedings. Factor in the cost of enforcement. Note that, for modest and perhaps straightforward cases, perhaps the main point of note relating to the Jackson/civil litigation reforms ( www.practicallaw.com/6-525-3094) is the change to the overriding objective ( www.practicallaw.com/4-205-5197) which means that the court's obligation to deal with a case justly implicitly includes dealing with it at proportionate cost.

  • Be cautious about starting proceedings if you do not intend to see them through. You will almost certainly be liable for the opponent's costs if you discontinue (see Practice note, Discontinuance: an overview ( www.practicallaw.com/6-203-3722) ) and you also need to take into account the impact that taking such steps may have on your relationship with the debtor.

  • Remember that costs' recovery will be affected by the track to which your claim is allocated and the way in which the matter is resolved (see Costs).

  • Be cautious about threatening to commence formal recovery proceedings if you do not intend to do so. The other party may call your bluff.

Pre-action matters

The following preliminary points are worth considering:

  • Is there in place any relevant agreement between the parties containing provisions requiring that the parties attempt negotiation or alternative dispute resolution? If not, it is worth considering whether, in any event, it may be appropriate to attempt to resolve the dispute by one or more of those methods.

  • The Practice Direction on Pre-Action Conduct and Protocols (Pre-action PD) sets out the conduct that the court will "normally expect" of prospective parties. It applies to proceedings under CPR 7 or CPR 8. In particular, note that the court will expect parties to exchange sufficient information to facilitate settlement before commencing proceedings.

  • In most cases, it is appropriate to send a letter before claim to ensure compliance with the Pre-action PD.

  • Members of the public may obtain copies of all statements of case that have been filed at court in civil proceedings since 2 October 2006.

See Toolkit, Recovering a trade debt: Pre-action matters ( www.practicallaw.com/9-504-4626) for details of resources that contain more detailed points to consider before commencing proceedings.

Note that the Civil Procedure Rule Committee is working on a Pre-Action Protocol for Debt Claims. The main principle of the protocol is to provide debtors (or alleged debtors) with sufficient information to enable them to obtain advice on their position before the issue of claims. For further details on its development, see Practice note, Practical Law Dispute Resolution: what to expect: tracker: Pre-action protocols ( www.practicallaw.com/8-519-1383) .

Costs

If you are contemplating using court proceedings to recover a debt, bear in mind that the recoverability of the costs incurred in doing so will be affected by when the matter is concluded (whether before or after proceedings have been commenced) and how it is concluded (whether by agreement or at trial). The main points to note are that:

  • If the matter settles pre-action, the party seeking repayment has no entitlement to costs, although the parties may agree a figure.

  • If the matter settles pre-action and the parties agree who should pay the costs but not how much should be paid, there is a procedural mechanism by which the court may decide the issue (see Practice note, Costs-only proceedings ( www.practicallaw.com/8-213-3952) ).

  • If the matter settles after proceedings have been commenced, the parties will usually agree costs, but if they cannot do so and refer the matter to the court, the court may exercise its discretion to determine the matter.

  • If the matter is decided at trial, the court will decide what is recoverable. That will usually be strongly influenced by the procedural track to which the claim was allocated, which will, in turn, largely but not exclusively, depend on the financial value of the claim. See Practice note, Case management: which track? ( www.practicallaw.com/8-205-5020) , which considers the extent to which costs are recoverable in each of small claims and fast track claims.

For more detail, see Practice note, Costs: an overview ( www.practicallaw.com/7-203-1181) .

Interest

Commercial parties usually make express contractual provision for the payment of interest on overdue invoices. If there is a contractual provision to this effect then, as a starting point, you will usually be looking to include a claim for interest in the letter of claim. If the contract is silent on the point then, where both parties are businesses, and other criteria have been met, the Late Payment of Commercial Debts (Interest) Act 1998 may assist by implying terms regarding the payment of simple interest and its rate. For more detailed information on this point, see Practice notes, Interest under the Late Payment of Commercial Debts (Interest) Act 1998 ( www.practicallaw.com/5-532-8306) and Interest clauses ( www.practicallaw.com/7-107-3799) .

If proceedings to recover the debt are commenced, then the particulars of claim should include a claim for interest and an indication of the rate and the basis on which it is claimed (that is, the contract, the Late Payment of Commercial Debts (Interest) Act 1998 or section 35A of the Senior Courts Act 1981).

For more detailed information, see Standard document, Particulars of claim: contractual debt claim: Claim for interest ( www.practicallaw.com/7-501-6771) .

Statements of case

In civil proceedings, the parties formally set out their respective positions in statements of case which identify the relevant issues and the areas of dispute. Certain established principles and rules govern the drafting of statements of case. Generally, these principles are aimed at reducing costs and the time required at trial.

See Toolkit, Recovering a trade debt: Statements of case ( www.practicallaw.com/9-504-4626) for details of resources that contain useful points to consider when drafting statements of case.

Starting a claim

CPR 7 and its Practice Directions (PD) contain provisions about starting claims. It may be possible to start and manage proceedings online under PD 7E where, among other criteria, the only remedy claimed is a fixed sum of money of less than £100,000 (excluding any interest or costs) and the sum claimed is in sterling (PD 7E.4).

For more information about Part 7 claims, see Practice note, Issuing a claim under Part 7 ( www.practicallaw.com/1-381-0624) .

(Depending on the facts of the case, it may be possible to commence proceedings under CPR 8 instead. For more information, see Practice note, Issuing and responding to Part 8 claims ( www.practicallaw.com/3-506-2005) .)

Court fees

The fees payable in the County Court and the High Court at certain key stages in the proceedings are set out in Quick guides:

Service

If you decide to commence court proceedings you will need to ensure that, after the claim form has been issued, it is served effectively. This is important because, unless exceptional circumstances exist and the court agrees to dispense with service, the court will have no jurisdiction in respect of a claim form which has not been properly served.

See Toolkit, Recovering a trade debt: Service ( www.practicallaw.com/9-504-4626) for details of resources that contain useful points to consider when serving proceedings.

Responding to a claim

When considering starting proceedings, a key consideration is how the debtor might respond (see Practice note, Responding to a claim: key action points ( www.practicallaw.com/0-382-2321) ). This deals with the key procedural and practical points a solicitor will need to address if a client is served with proceedings.

Early determination of the dispute

If court proceedings are commenced and the matter appears open and shut, it would be prudent to think about the procedures available for obtaining judgment quickly. Instigating such procedures where appropriate will:

  • Send a clear message to the debtor that you are seriously pursuing the debt.

  • Hopefully (though not necessarily) keep costs down.

  • Enable you to obtain judgment for the relevant sum as soon as possible and move on to the enforcement stage, if necessary.

See Toolkit, Recovering a trade debt: Interim procedures ( www.practicallaw.com/9-504-4626) for details of resources containing useful information about the different early determination procedures that may be available.

Interim procedures

Where you are considering having the matter determined at an early stage, you will need to think about the procedures for making an interim application. In that event, as a starting point, consider the points raised in:

Enforcement

If you have obtained judgment and the debtor does not pay, then you will need to consider formal enforcement proceedings.

See Toolkit, Recovering a trade debt: Enforcement ( www.practicallaw.com/9-504-4626) for details of resources that contain useful points to consider when considering enforcement.

 

Insolvency proceedings

The starting point is that insolvency proceedings are not intended to be used for debt recovery. However, the threat of insolvency proceedings may be sufficient to persuade some debtors to settle their debts. It can also provoke debtors to set out their reasons for failing to pay, including any dispute as to the amount payable.

The type of insolvency proceedings that may be suitable will depend on whether the debtor is:

  • A company.

  • An individual.

  • A partnership.

These alternatives are considered below. It is assumed, in this section, that the debt is unsecured.

Before threatening or commencing insolvency proceedings, consider the following points:

Winding up proceedings

Compulsory liquidation, or winding up, is a process governed by the Insolvency Act 1986 (IA 1986), by which an independent insolvency practitioner (liquidator) gathers in and realises a company’s assets, and distributes the proceeds to the company’s creditors.

The process is started by issuing a petition at court. The court will decide, at a hearing, whether to make a winding up order. A creditor of a company has the right to issue a winding up petition (section 124(1), IA 1986).

There are various grounds on which a company may be wound up, including that the company is unable to pay its debts (section 122(1)(f), IA 1986).

If a winding up order is made, the directors' powers cease and the employees are automatically dismissed. Each of the company's creditors is invited to submit a proof of debt to the liquidator. To the extent that the liquidator accepts its proof, each creditor is entitled to a dividend at the end of the liquidation process.

(For more detail, see Quick guide, compulsory liquidation ( www.practicallaw.com/8-502-2031) .)

Serving a statutory demand on a company

A company will be deemed to be unable to pay its debts (satisfying one of the grounds on which it may be wound up) if a statutory demand for a debt of more than £750 is served on a company and the company fails to pay the debt within three weeks (section 123(1)(a), IA 1986).

A statutory demand is a written notice in a prescribed form demanding payment of a debt owing by a company to one of its creditors.

Click here ( www.practicallaw.com/0-502-1573) for an example of a blank form of statutory demand and here ( www.practicallaw.com/2-383-6280) for an example of a completed form.

You do not need to serve a statutory demand before issuing a winding up petition. However, it may be advantageous because:

  • Preparing and serving a statutory demand is quick and inexpensive, and does not involve the court.

  • Having served a statutory demand, you are not obliged subsequently to commence winding up proceedings.

  • Having been served with a statutory demand, a company faces the risk of having to defend winding up proceedings if it fails to act within three weeks. That prospect can lead to a prompt settlement.

For more detail on this topic, see:

Advantages and disadvantages of the threat or commencement of winding up proceedings

The threat or commencement of winding-up proceedings can put considerable pressure on a company to pay an outstanding debt promptly and the basic procedure is relatively inexpensive.

However, such proceedings should generally be regarded as a last resort. There are a number of potential disadvantages in issuing a winding up petition, for example:

  • You should not commence winding up proceedings on the basis of a debt that is genuinely disputed or if the company has a genuine cross-claim or right of set-off. To do so would constitute an abuse of process.

  • Issuing a winding up petition has serious consequences for the company. Its ability to continue trading and commercial reputation are likely to be damaged.

  • Winding up is a class remedy. This means that once you have issued a petition, even if you are repaid in full, another creditor may pursue the proceedings causing the company to go into liquidation in any event, which may not have been your aim.

  • If you receive payment from the company after a petition has been presented and then a winding up order is made, you could be required to repay the company under section 127 of the IA 1986.

  • If the company goes into liquidation, there is likely to be a substantial delay before a dividend is paid to unsecured creditors.

  • The dividend paid to unsecured creditors in a compulsory liquidation is often only a few pence in the pound.

For more detail on points to consider when considering insolvency proceedings, see Practice note, Liquidation and debt enforcement: a practical guide ( www.practicallaw.com/3-383-1159) .

For guidance on the procedure, see:

For a draft letter threatening winding up proceedings, see Letter before action: winding up petition ( www.practicallaw.com/7-385-3639) .

Bankruptcy proceedings

Bankruptcy is a process, commenced by court order, by which an insolvency practitioner (trustee in bankruptcy) realises and distributes an insolvent individual's assets among his creditors. It is governed by the IA 1986. The ability of a bankrupt individual to trade and take credit is restricted. An individual's bankruptcy usually lasts for one year, although the realisation and distribution of assets by his trustee in bankruptcy may take longer. A creditor who is owed £5,000 or more may issue a bankruptcy petition against an insolvent individual (sections 264(1)(a) and 267, IA 1986) (see Practice note, Personal insolvency procedures: overview: Creditor's petition: process ( www.practicallaw.com/9-385-9094) ). The bankruptcy level increased from £750 to £5,000 on 1 October 2015, following the coming into force of The Insolvency Act 1986 (Amendment) Order 2015 (SI 2015/922) (see Legal update, New thresholds for bankruptcy and debt relief orders ( www.practicallaw.com/5-596-3702) .)

One of the conditions on which a petition may be issued is that the debtor appears either to be unable to pay, or to have no reasonable prospect of being able to pay, the debt (section 267(2), IA 1986). This will be deemed to be the case if statutory demand has been served and not been paid within three weeks (section 268, IA 1986). (See Practice note, Personal insolvency procedures: overview: Bankruptcy ( www.practicallaw.com/9-385-9094) .)

Serving a statutory demand on an individual

In most cases, a creditor will serve a statutory demand on the debtor before issuing a bankruptcy petition. If a statutory demand is served and the debt is not paid within three weeks, the individual will be deemed to be unable to pay the debt (satisfying one of the grounds on which a bankruptcy order may be made) (section 268, IA 1986). Before deciding to serve a statutory demand, consider the following:

Procedure on a creditor's bankruptcy petition

Commencing bankruptcy proceedings should be regarded as a last resort. Note the following:

  • If the debt is genuinely disputed, it is an abuse of process to issue a bankruptcy petition.

  • If the individual is made bankrupt, there is likely to be a significant delay before a dividend is paid to unsecured creditors.

  • The dividend may be only a few pence in the pound.

  • Having issued a bankruptcy petition, you cannot withdraw it without the permission of the court (rule 6.32, IR 1986). Another creditor may seek to pursue the petition, so the debtor could be made bankrupt even if he repays your debt (rule 6.30, IR 1986).

A creditor begins bankruptcy proceedings against a debtor by presenting a bankruptcy petition to the debtor's local court. For a form of bankruptcy petition for use by a creditor, see Standard document, Creditor’s bankruptcy petition Form 6.7 ( www.practicallaw.com/3-502-3405) . The procedure is detailed in rules 6.7 to 6.25, IR 1986 and Practice Direction on Insolvency Proceedings ( www.practicallaw.com/8-577-9547) . For further guidance on the procedure, see Practice note, Presenting a creditor's bankruptcy petition ( www.practicallaw.com/1-504-5347) .

Insolvency proceedings against a partnership

A creditor may petition for the winding up of a partnership or limited liability partnership (LLP) in much the same way as it would a company (Section 14 of the Limited Liability Partnerships Act 2000, article 7, Insolvent Partnerships Order 1994 (SI 1994/2421)). The winding up procedure will be the same as set out above in respect of a company (see section Winding up proceedings). For more information, see Practice note, Insolvency procedures for limited liability partnerships ( www.practicallaw.com/1-503-8295) .

 

Settlement

It almost always makes sense to consider informal methods of recovering a debt, including negotiation and mediation, as they can provide the quickest and simplest solutions. And, as a separate but very closely related consideration, there are a number of disadvantages of litigation, in particular:

  • Litigation can be disproportionately expensive to the sums in issue. This factor is especially relevant to the main assumption underlying this quick guide, namely that the debt is relatively modest. It is an even more important consideration since the revision of the overriding objective ( www.practicallaw.com/4-205-5197) and the extension of the courts' costs and case management powers from 1 April 2013.

  • The outcome of litigation is uncertain.

  • The court is able to offer only a limited range of remedies.

  • In litigating, the parties often destroy any prospect of an ongoing, mutually beneficial commercial relationship.

Bear in mind, however, that if negotiations commence, the focus will often shift onto the without prejudice correspondence and away from the open correspondence. Remember to protect your open position, especially if negotiations become protracted. Consider writing on an open basis referring to the fact of the without-prejudice discussions.

Bear in mind that a negotiated compromise need not be confined to the narrow parameters of the dispute that has arisen. Sometimes opportunities arise to tie in a settlement with agreements as to future business or varied trading terms.

For some useful information and resources on the subject of settlement, see Recovering a trade debt: toolkit: Settlement ( www.practicallaw.com/9-504-4626) .

Negotiation

Negotiation is a dialogue intended to resolve a dispute and produce agreement on a future course of action. One way in which a trade debt might be recovered is by opening such a dialogue with the debtor. This can be done either verbally (by means of a telephone call) or in writing (by e-mail or fax).

Alternatively, it may be more structured and involve a third party intermediary, perhaps taking the form of mediation (see below). Negotiation or mediation may take place before or at the same time as commencing formal proceedings for debt recovery.

Mediation

Mediation is a flexible, voluntary and confidential form of dispute resolution in which a neutral third party assists parties to work towards a negotiated settlement of their dispute, with the parties retaining control of the decision whether or not to settle and on what terms.

The Mediation topic page contains a number of detailed notes about the different stages of the mediation process.

However, as a starting point, especially if you have not had previous experience of mediation, Toolkit, Recovering a trade debt: Mediation ( www.practicallaw.com/9-504-4626) provides details of resources that might be helpful.

The without prejudice rule

Parties usually negotiate on a without prejudice (WP) basis. The WP rule generally prevents statements made in a genuine attempt to settle an existing dispute, whether made in writing or orally, from being put before the court as evidence of admissions against the interest of the party which made them. It is intended to facilitate settlement. If you are opening or entering into settlement discussions, it is prudent to do so on an expressly WP basis.

For more information about the without prejudice rule, see:

 

Doing nothing

There is, of course, the option of simply walking away and writing off the sum owed. Always weigh up the merits of doing this, taking into account the following factors:

  • The size of the debt.

  • The likely ease or difficulty with which the debt will be recovered.

  • The likely costs of recovering the debt.

  • The possible internal costs of recovering the sum owed, in terms of management time.

  • The likely internal "wear and tear" associated with recovery. Always consider the personalities involved, and the extent to which the mere existence of the dispute, while not eating into management or productivity time directly, might well sap morale, cause distraction and otherwise indirectly affect productivity.

  • The importance of the current relationship between the parties.

  • The likelihood of maintaining an ongoing commercial relationship between the parties.

 
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