Chasing Debts Wisely

You’ve chased politely, waited, chased again, waited, sent a letter before action from your solicitor which usually prompts a payment, but still nothing has been received. So what’s next?

For many businesses the thought of court action can be daunting, often because they don’t realise that in many instances the case is settled before it actually gets to trial. However, with a 39% increase in the value of debts being chased by Lovetts through the Court system in Q1 2012, more and more businesses are realising that sometimes pursuing commercial debtors through the legal system gets better results and can strengthen the impact of all your debt recovery tools.

The key to success is to make the system work for you and to limit your exposure to unforeseen costs.

First – deter debtors!
The key to avoiding court is to make it more expensive for your customers to pay late in the first place. Exercise your right to charge late payment interest and compensation by using late payment legislation. This gives 8% interest over base rate. But make sure you circulate the new terms to your customers – old and new. Businesses who continue with a rate linked to bank base rates are missing out on a valuable revenue stream!

You can also claim for the £40 to £100 compensation per overdue invoice which can be charged under the Late Payment of Commercial Debts (Interest) Act 1998, as amended by the Late Payment of Commercial Debts Regulations 2002.

Making this clear in your terms will deter debtors in the first place but if you do end up in court you have the ability to recoup the relevant costs.

Do they have the funds to pay up?
A commercial decision needs to be made on whether the debtor is worth pursuing through the courts. There is no point in conducting proceedings against a defendant who will not be able to pay you, so monitor the debtor’s financial position through:

• Credit reports – but remember the information is often fairly historic
• Keeping debtor ‘on report’ with credit monitoring services
• Regular internet searches regarding their activity
• Word of mouth in the industry
• Periodic visits by your reps either to the debtor or to make enquiries in the area

If you decide to proceed, keep monitoring the defendant’s position particularly on receipt of a Defence once the court gives directions, as expenses will be incurred on disclosing documents and preparing witness statements. Check again a couple of months before trial.

A Claim Form
If you decide, with advice from your legal team, that making a legal claim should be made, a Claim form is the next step. It may seem like a big leap from the threat of legal action but most cases are in fact resolved by getting either judgment in default of Defence or Summary Judgment. These occur when no defence is filed (Default Judgment), or when one side has a very week case (Summary Judgment).

Insolvency Proceedings
In cases where it is clear there is no real dispute you could consider insolvency proceedings immediately. Preparing a draft winding up petition and sending this with a standard 7 day letter (letter before action) can be very effective in the right case.

Evidence, witnesses and Statement of Truth
If a case is likely to be defended you need to make sure you have the witnesses and evidence available. Be ready to justify the claim because certain court documents must include a Statement of Truth confirming that you honestly believe the facts stated in the document are true.

Know what it costs
Most solicitors’ tariffs set out charges for routine cases and for Small Claims Track Cases (less than £5,000).

If a defence is filed in a case over £5,000, check how the solicitors handling the case will be charging, whether on a time basis what the hourly rate is and how changes to estimated costs at each stage will be conveyed to you.

Duty to keep documents
Once proceedings are a possibility, you have a duty to preserve all records, including electronic information, relating to the case. In particular, it is important to make sure that your normal IT housekeeping routines do not delete relevant e-mails or other electronic records.

Anticipate whether the debtor has grounds for a counterclaim – be prepared as you will have to defend the counterclaim which will add to the costs. The defence must be filed within 14 days and the defendant will be able to enter judgment against you if a defence to the counterclaim is not filed in time.

Stopping a case
You can stop (“discontinue”) a case but you may have to pay the defendant’s costs if you do. In any case you want to stop, it is important that you tell your legal representatives and take advice first. It is often possible to negotiate a settlement in which the claim, and any counterclaim, is dropped with each side paying their own costs.

Defended cases
If the claim is under £5,000 the case will be allocated to the Small Claims track. Your legal adviser can help you take the case to a hearing if necessary and their costs will be set out in their tariff.

However, if the solicitors can show on paper that there really is no defence, they can apply for summary judgment. This speeds things up and avoids the need for trial.

For cases which are worth more than £5,000 and on which your solicitors cannot apply for a summary judgment, mediation is normally proposed. If the debtor won’t mediate or mediation is not successful, the court will give directions for trial. These will be for:-
• The parties to disclose relevant documents
• The exchange of witness statements
• For an expert to provide a report, where needed
• Trial, which in cases under £25,000 and estimated to last no more than one day should take place with 30 weeks of directions being given.

Summary Judgment and mediation
As stated earlier, very few debt recovery cases actually get to trial. It is either possible to show on paper that there is no defence and apply for summary judgment or cases are settled out of court.

If you can’t get summary judgment it is usually sensible to settle in view of the cost (both legal and managerial) and the inherent uncertainty of going to trial.

Cases are settled either by direct negotiations or through mediation.

Chasing Debts Wisely
There are cost implications to all aspects of legal action and it is therefore vital for you to work closely with your legal advisers to agree the best course of action at each stage of the proceedings while keeping a close eye on the finances of your debtor. Remember that in many uncontested claims well over half of the solicitors charges can be recoverable, therefore making debt recovery legal action an increasingly viable option for businesses focused on keeping the cash flowing.