Initial steps

Initial steps

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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 of claim

The court has set expectations about your conduct and that of the debtor before you start court proceedings in England & Wales. The sort of conduct they expect is outlined in guidance issued by the court service, depending on who you are making a claim against.

Business claiming against individual

If you are a business claiming against an individual (including a sole trader), you will normally be expected to follow the Pre-action Protocol for Debt Claims (Pre-action Protocol)

You should make sure that you follow the steps set out in the Pre-Action Protocol before you proceed to court, unless your claim against the debtor is about to become time barred. In the latter instance you would issue your claim and then ask the court to grant time for you to comply with the Pre-Action Protocol.

In broad outline the Pre-Action Protocol requires you to write to the debtor a final 'Letter of claim'. The purpose of the letter of claim is to exchange information, so that if there is a dispute about the claim for payment, you can try and resolve it before having to go to court. If court action can't be avoided and alternative dispute resolution is either not an option or not successful, the issues in dispute can at least be clarified and narrowed through this pre-action process.

The information and documents that should be included in the letter of claim is prescribed by the Pre-Action Protocol and this should be closely followed. If the debtor does not respond within 30 days of the letter of claim, you may begin court proceedings.

All other cases

In all other cases, you will be expected to follow the Practice Direction - Pre-action Conduct and Protocols (Pre-action PD)

Make sure you know what is expected of you before starting the court action. In broad outline this means that you should exchange sufficient information with the debtor about the matter to understand each other's position and make informed decisions about settlement and how to proceed.

You would be expected to send the debtor a final letter of claim with concise details of the claim. These details should include a summary of the facts giving rise to the claim and the basis of the claim. If it is a money claim you should set out how you calculated the amount due. You should state in the letter what you expect the debtor to do to satisfy the claim.

The debtor should respond within a reasonable time, which is generally accepted to be about 14 to 30 days unless the matter is very complex. Where the debtor disputes your claim, you should make appropriate attempts to resolve the matter and consider the use of an appropriate form of Alternative Dispute Resolution.

Starting proceedings should usually be a last resort, and proceedings should not normally be started when a settlement is still actively being explored. The court may ask you to explain what steps you took to comply with the pre-action requirements. Where either you or the debtor has failed to comply, the court may ask for an explanation. However, note that the court will consider whether you have complied with the overall intention of the Pre-action PD or Pre-action Protocol, and won't be concerned with every small technical detail. Also, when deciding whether to impose sanctions the court will look at the overall effect of non-compliance on the other party.

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 that 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 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.