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Commercial debt recovery – Do you need to litigate?

No business owner ever wants to be in the position of litigating against a debtor.

However, sometimes it may be necessary to protect your business interests.

If you don’t take the appropriate legal action at the right time, you could incur financial loss and miss opportunities for engaging with other, more reliable clients.

Whether it’s a client who hasn’t paid an invoice or recovering sums paid from a supplier who hasn’t delivered goods, financial disputes can significantly impact a company’s cash flow.

While negotiation and mediation are often the first steps, sometimes more formal legal procedures are necessary.

Before court proceedings

It is usually recommended that you try to recover your debts without initiating court proceedings.

Sometimes, a few reminders and regular communication may be all that is needed to get your debtors to pay up.

However, if this proves ineffective, you should instruct your solicitor to send a “Letter Before Action” to the debtor.

This letter will outline the debt owed to you and state your intention to litigate if it is not settled.

You should also set a deadline for payment and include any interest or fees that will be applied if the deadline is not met.

If the debtor doesn’t comply, the next step is to issue a statutory demand: a formal legal notice requiring the debtor to pay the debt within 21 days.

Failure to comply can result in further legal action, including winding-up proceedings for companies or bankruptcy proceedings for individuals.

Care should be taken when issuing a statutory demand. They should not be simply used as the first call or a “blunt instrument of” debt collection.

County Court Judgment (CCJ)

If the statutory demand is ignored, you can apply for a County Court Judgment (CCJ).

This is a court order stating that the debtor must pay the money owed. A CCJ can severely impact the debtor’s credit rating, making it a powerful tool for debt recovery.

You will need to submit a claim form to the County Court, detailing the debt and any evidence.

The debtor will then have 14 days to respond. They can either pay the debt, dispute it, or file an acknowledgement of service to obtain an additional 14 days to respond.

Directions will be set out by the Court and for the parties to comply with. These will help ensure that the claim is ready to be heard by a judge.

If the debtor disputes the claim, a court hearing may be necessary. You will need to present your case to the judge, who will then decide on the outcome.

Enforcement

If you obtain a CCJ and the debtor still does not pay, you have several enforcement options.

A warrant of execution allows bailiffs to seize assets from the debtor, while attachment of earnings results in money deducted directly from the debtor’s wages.

You can also secure a charging order, which secures the debt against the debtor’s property.

Additionally, a third-party debt order freezes the debtor’s bank account until the debt is paid.

Insolvency proceedings

As a last resort, you can initiate insolvency proceedings.

These proceedings include a winding-up petition for companies, which could result in the company being liquidated to pay off debts.

For an individual, a bankruptcy petition can be filed, leading to the sale of the debtor’s assets to pay off the debt.

Best practices for debt recovery

Litigation is an effective way to recover your debts, but it can be costly.

Even if you are successful, you will rarely be able to recover all of your costs from the debtor.

That’s why it is important to always do your due diligence on new clients or suppliers to assess their financial stability, as well as ensure that all terms and conditions are clearly stated and agreed upon by both parties.

This reduces the risk of you needing to go to court in the first place.

If you do need to recover a debt, don’t delay taking action. The sooner you act on a debt, the higher the chances are of recovering it.

You should also keep clear records of all transactions, communications, and agreements, as these can serve as evidence if you need to go to court.

Finally, you should always consult a legal expert to help you understand your options and advise on the best course of action for your specific case.

Our Litigation and Dispute Resolution team have a wealth of experience in supporting businesses with commercial debt recovery. If you are owed money and your debtor is refusing to pay up, we can provide you with immediate assistance.

Need help with recovering your debts? Contact our expert team today.

Stuart Daniel

Director – Head of Family Department

I qualified as a Solicitor in 2006 and now specialise in divorce, financial settlements, childcare arrangements and Pre Nuptial Agreements. I have many years’ experience as a private family lawyer having worked with two other local firms before returning to Mander Hadley, where I first undertook work experience during my university studies.