Initial steps

Initial steps

Contents

Pre-action letters

The reminder letter

Where an invoice or a series of invoices remains unpaid after the due date the first step is to write a friendly reminder letter to the debtor. In this letter you would not threaten court action but instead remind the debtor that an amount is overdue and request payment. You could invite the debtor to make contact with you to discuss any issues they may have.

Letter before action

The letter before action is a demand for payment of all unpaid invoices within a specified period (usually at least 14 days) of receipt of the letter of demand, failing which proceedings may be commenced. The demand is not only for payment of the amount due on the invoices but also for interest (see below) on the amount owed for the period that payment has been outstanding.

This letter must be given to the debtor before you start court proceedings. Court action should not be started before the specified period has expired, otherwise you may not be able to recover your costs. If the debtor pays the debt in full immediately at the start of the court proceedings, the court may regard the court action, without sending a letter before action, as unreasonable.

See the Justice website for more on the steps required before action can start.

The interest and recovery costs

Interest under the Late Payment of Commercial Debts (Interest) Act 1998

A creditor is not only entitled to claim the principal debt but also interest on the outstanding amount. The amount of interest that can be recovered on late payments is usually set out in the terms of a commercial contract. However, if the contract is silent on this or if it does not give the creditor a substantial alternative remedy for late payment by the debtor, then interest can possibly be claimed by the creditor under the Late Payment of Commercial Debts (Interest) Act 1998 (the 'Act'). This Act allows all commercial traders to claim simple interest from each other on late payments at the rate of 8% above the base interest rate of the Bank of England. To fall within the act the late payments must, amongst other requirements, be in respect of goods supplied and/or services rendered.

If the commercial contract does not state a payment date, interest under this Act will generally be calculated from a date 30 days after delivery, invoice and acceptance. Parties to a contract could by agreeing a long acceptance procedure or a late payment date, delay the date from when interest would be calculated. Alternatively, the date from when interest would be calculated could be brought forward by agreeing an early payment date.

The Act however caps the length of time to 30 days from the date of delivery by which a long acceptance procedure can push back on the date from when interest will start running, if that acceptance procedure turns out to be grossly unfair towards the supplier. In this event the interest will start running 30 days after delivery irrespective of the acceptance terms agreed in the contract for the goods or services. The act also caps the extension of the payment date by business customers for purposes of the start of interest to 30 days, if a longer period would be grossly unfair towards the supplier.

Fixed sum under the Late Payment of Commercial Debts (Interest) Act 1998

Under the Act the creditor can also claim a fixed sum once the interest starts to run. The amount of the fixed sum is determined by the size of the claim.

Reasonable recovery costs under the Late Payment of Commercial Debts (Interest) Act 1998

The Act also enables the creditor to claim their 'reasonable' costs of recovery even where the recovery costs are not related to court proceedings, such as the costs to use a collection agency. The amount of the fixed sum will however be deducted from the amount of these costs. This is in addition to any litigation costs that the creditor will be entitled to on winning a court action

Interest under the County Courts Act and Senior Courts Act

Pre-judgment interest

In the High Court section 35A of the Senior Courts Act and in the County Court section 69 of the County Courts Act empowers the court to include in the amount for which judgment is given, simple interest at an appropriate rate relating to the pre-judgment period. The pre-judgment interest would be calculated on the particular outstanding amount from the date that the cause of action arose until payment either in full or in part pre-judgment or until date of judgment as may be applicable.

Post-judgment interest

The County Courts (Interest on Judgment Debts) Order 1991 provides for interest at the rate of 8% on county court judgments for the payment of a sum of not less than £5,000. The interest will run from the date that the judgement is given, unless the amount of the judgement debt is to be determined by the court at a later date in which event the interest will run from that later date.

There are instances where the county court interest will however not be applicable. These are if the judgment is given with regard to:

  • money due under an agreement regulated by the Consumer Credit Act 1974; or
  • granting a suspended order for possession to the landlord of a dwelling house or the mortgagee of land consisting of or that includes a dwelling house.

Statutory demand

If a debtor fails to pay the debt within the time limit stated in the letter before action the creditor could still consider making arrangements with the debtor before taking the matter to court.

The creditor could also start insolvency proceedings against the debtor. These proceeding would be brought on the basis that the debtor is unable to pay their debts. To prove this the creditor must first serve a statutory demand upon the debtor for the outstanding debt.

If the statutory demand remains unpaid after the period within which payment was required, 21 days, the creditor can proceed with the insolvency application with this proof in hand.

If this statutory demand was for debts of £5,000 or more, it is possible for a creditor to petition for the bankruptcy of a debtor if the latter is an individual. A creditor can apply to have a debtor company liquidated if the statutory demand was for a sum exceeding £750.