Quick Guide to Recovering Trade Debts

Why does the issue arise?

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:

Court proceedings: sending a letter before claim threatening court proceedings.
Insolvency proceedings: serving a statutory demand or threatening winding up proceedings.
Informal methods of resolving the matter: negotiation and/or mediation.
Doing nothing: writing off the debt.

A combined, staged approach

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.

Staged approach to dealing with a trade debt (court proceedings)

Trade debt flowchart

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.
Be cautious about starting proceedings if you do not intend to see them through. You will almost certainly be liable the opponent's costs if you discontinue.
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.
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 (PDPAC) sets out the conduct that the court will "normally expect" of prospective parties. It applies to proceedings under CPR 7 or CPR 8 commenced after 6 April 2009. In particular, note that the court will expect parties to act reasonably in exchanging information to facilitate settlement before commencing proceedings.
In most cases, it is appropriate to send a letter before claim to ensure compliance with the PDPAC.
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.

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 depend on 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.
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.

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, the party seeking payment 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, as amended may assist by implying terms regarding the payment of simple interest and its rate.

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 (the contract, the Late Payment of Commercial Debts (Interest) Act 1998 or section 35A of the Senior Courts Act 1981).

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.

Starting a claim

CPR 7 and its Practice Directions contain provisions about starting claims.

In certain circumstances it may be possible to start and manage proceedings online. These are set out in PD 7E.4. Among other criteria, the only remedy claimed must be a fixed sum of money of less than £100,000 (excluding any interest or costs) and the sum claimed must be in sterling.

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.

Responding to a claim

When considering starting proceedings, a key consideration is how the debtor might respond. 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.

Enforcement

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

Insolvency proceedings

One way in which a debt may be recovered from a company is by threatening compulsory liquidation (also known as winding up) by the court, another is by serving a statutory demand. Some points of caution in this regard are:

Be wary of threatening to commence formal recovery proceedings if you do not intend to do so. The other party may call your bluff.
Remember that it is an abuse of process to issue a winding-up petition where a debt is genuinely disputed.

Statutory demand

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. 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, the company will be deemed to be unable to pay its debts (section 123(1)(a), Insolvency Act 1986). This will constitute a ground on which the court may order the company to be wound up.

In many cases it is advantageous for a creditor to serve a statutory demand on the company before presenting a winding-up petition, although it is not strictly necessary. However, some of the advantages of serving a statutory demand are:

Preparing and serving a statutory demand is quick and inexpensive.
The process does not involve the court.
If a creditor serves a statutory demand, he is not obliged subsequently to commence winding up proceedings.

If the company does nothing within three weeks of service of a statutory demand, the creditor may rely on the company's failure to comply with the demand as prima facie evidence that the company is unable to pay its debts and thus as a basis on which to seek to wind up the company.

Winding-up petition

Winding up is a statutory process by which an independent insolvency practitioner (or liquidator) gathers in and realises a company's assets before distributing the proceeds to the company's creditors and members in the prescribed order of priority. Once the liquidation is complete, the company will be dissolved.

The grounds on which a company may be wound up by the court are set out in section 122 of the Insolvency Act 1986. One such ground is that the company is unable to pay its debts as they fall due. This ground may be made out where:

A debt owing and undisputed by the company had not been paid (section 123(1)(e)andCornhill Insurance plc v Improvement Services Ltd [1986] WLR 144).
A creditor has served on the company a statutory demand for a sum exceeding £750 and the company has failed to pay the sum due within three weeks (section 123(1)(a)).

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. Therefore, winding-up proceedings can be regarded as a method of debt enforcement. However, these proceedings should generally be regarded as a last resort. The court requires a creditor to behave reasonably before commencing winding-up proceedings and, in particular, to write to the company with details of the debt and demanding payment. Further, it is an abuse of process for a creditor to commence winding up proceedings on the basis of a debt which is genuinely disputed.

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.)
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.

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. 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 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.

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.