Watching the figures: Part 2

By Arj Arul of Mills and Bann Solicitors

In a follow up to his article on maintaining tight credit control (4th September 2008). Arj Arul looks at what businesses should do when an invoice remains unpaid and reminder letters have been ignored.

If you have issued an invoice and reminders for payment have been ignored, it is always necessary to conduct a risk assessment on recovery action. Inevitably the first questions to be asked are whether the customer is good for the money and whether there is good reason for non-payment. It is sensible to consider whether an otherwise good business relationship might be soured by hasty legal action.

If further legal action is appropriate, then you will inevitably need to consider proportionality, including internal costs in gathering relevant paperwork and dealing with any court claim, and external costs such as solicitors or debt recovery agents. It may be more proportionate to write off the debt and, for example, reclaim any VAT. It is important to try and establish the whereabouts of the customer, whether their business has the means to satisfy any judgment and, if a limited company, is in or on the verge of administration or liquidation. If the customer is a business desperate to avoid going under then service of a ‘statutory demand’ (which is a precursor to bankruptcy or winding-up) may be a better incentive to payment than simple reminder letters. Failure to satisfy the debt or raise a defence within three weeks would usually raise a presumption of insolvency allowing you to petition for bankruptcy or winding-up. This would have adverse implications for those looking to continue in business.

It will be necessary to justify at partner or board level any decision to invest further monies in pursuing a debt that has gone bad and the ultimate prospect of recovery will be vital to this process. You should consider what the position might be if court proceedings were commenced. The matter might well be defended, not necessarily on genuine grounds, causing delay and further cost. If proceedings go undefended you are able to request a judgment ‘by default’ from the court, however thought must still be given to how this might be satisfied. For example, the customer may have assets such as equipment or stock which could be seized by bailiffs, or funds held in a bank account which could be secured under a third party debt order.

If, having asked all of these questions, it is still appropriate to commence a county court claim, ensure that your paperwork is in order. You should keep copies of contracts, orders, terms and conditions, invoices and relevant correspondence. Ensure you have the correct defendant and that you follow the court requirements for pre-action behaviour and directions during the proceedings. When court proceedings become necessary or in complicated disputes, specialist advice should be sought.

Arj Arul can be contacted at Mills and Bann on 01635521545 or by email: arj@mblaw.co.uk.