---

• Unpaid invoices fall into two categories: disputed and undisputed debt.
• Undisputed debt is more about the cashflow issues of the debtor, while disputed debt is an issue with your product or service.
• A pro-active approach to recovering debts is a must. To allow debts with customers to accumulate will only make the recovery process more difficult. Engage early, act swiftly, and when appropriate, act robustly.

---

Getting paid promptly, or at all, for the supply of your business’ goods and services remains a perennial issue.

Cashflow is the life blood of any business and getting your invoices paid sooner rather than later is therefore key to the longevity of any business.

Payment terms should be negotiated with your customer from the outset of the trading relationship or transaction, with 30-day payment terms being common. The problem arises where a customer fails to settle an invoice within the agreed payment terms. 

How a business deals with an overdue invoice will depend on whether the invoice is genuinely disputed or not. In all cases, early engagement with your customer to establish the reasons for non-payment is crucial – do not be tempted to delay this process. Understanding the reason for non-payment will allow a business to decide how to deal with the issue efficiently and avoid a significant impact on your own business.

In broad terms, unpaid invoices fall into two categories: disputed and undisputed debts.

Undisputed invoices

The majority of unpaid debts fall within this category and stem from the debtor’s own cashflow issues. This category of debt has nothing to do with any failings in your own business e.g. defective goods and/or providing a poor service. However, early communication with your customer to identify the reasons for non-payment is the first step to the recovery process. 

Often picking up the phone and discussing matters will lead to a resolution, even if that involves arranging a short-term repayment plan. That said, always encourage your customer to put any request for a repayment plan in writing, explaining the reason for the non-payment. This is critical evidence should legal proceeding be required in the future because it will assist in proving that it is an undisputed debt. It also minimises the credibility of a customer raising spurious disputes at a later stage.

There will always be customers who bury their heads in the sand in the hope that the issue will go away. This sometimes means that despite your best efforts to contact the customer, they fail to respond when chased. A scatter gun approach of chasing by phone, email, letter or even text/WhatsApp messages can bear fruits. However, a business needs to act responsibly by not harassing a customer; this can destroy commercial relationships and lead to reputational damage – be firm but fair.

If a debtor still fails to engage, your last resort is to recover the debt through established legal processes. For undisputed debts, the insolvency route is available to a business. This must only be used for debts where you are not aware of any substantial dispute to the unpaid debt, since to do otherwise is viewed as an abuse of process by the courts.

Should your debtor be a sole trader, you have the option to serve them with a statutory demand, giving 21 days for payment. If payment is still not received, a bankruptcy petition can be issued at court.

If the debtor is a company, there is the option to issue a winding up petition. Whilst technically not required, it is best practice to serve them with a statutory demand as a precursor to issuing the petition.

The insolvency route is by no means a guarantee that you will ever see the money you are owed. The reason for this is there will often be several creditors owed money with HMRC often being the biggest creditor in a failing business.

Disputed debts  

It is a commercial reality that occasionally goods or services provided to a customer do not meet the standards required by contract or law.  In these circumstances, a customer may have legitimate grounds to refuse or delay payment of an invoice.

Again, the key to payment is an early resolution to the customer’s dispute. Engage with the customer promptly and seek an amicable resolution. That may involve agreeing a partial credit note, offering replacement goods or undertaking remedials works. However, if this is not possible, legal action may be required.

In the event that an invoice is disputed, you will need to resolve matters through court proceedings or some form of Alternative Dispute Resolution e.g. mediation.

The precursor to issuing court proceedings is to send the customer a formal letter of claim setting out the basis for claiming sums from them. 

Should the debtor be an individual, then the Pre-Action Protocol for Debt Claims under the Civil Procedure Rules should be followed. If the debtor is a company, then the Practice Direction on Pre-Action Conduct should be adhered to. Both Protocols require a letter of claim to be sent to the debtor explaining the circumstances of the debt and giving time to pay.

Only once the Protocol has been exhausted and a resolution cannot be reached should court proceedings be contemplated. 

A pro-active approach to recovering debts is a must. To allow debts with customers to accumulate will only make the recovery process more difficult. Engage early, act swiftly, and when appropriate, act robustly.

Saljuq Haider is a partner at Taylor Walton Solicitors.

Read more

How specialist debt solutions can meet unique business needs – Specialist debt solutions can offer business owners a more flexible and strategic answers to their funding needs

What is venture debt? – What is venture debt? How do you get it and who are the providers in the UK?  

Guarding against supplier insolvency – Richard West, MD of Red Flag Alert, provides practical advice on how companies can protect themselves against supplier insolvency