Grid Law founder David Walker outlines two new processes small business owners should familiarise themselves with in order to recover an unpaid invoice from a sole trader.
Late payment continues to be a real problem for many small businesses. The culprit is often bigger businesses and supply chain bullies withholding payment from smaller businesses, but that’s not always the case. In many cases, it can be other small businesses and sole traders who are late paying their debts.
Until recently, the court rules treated everyone who owed money the same. However, on 1 October 2017, a new “pre-action protocol” was introduced which business owners must follow while trying to recover money from a sole trader or any other individual person.
Before the introduction of this new pre-action protocol, the usual method for recovering an unpaid invoice was to follow your credit control system, sending reminders for payment. If you reached the end of this procedure and payment still hadn’t been made, you would send a seven-day warning of your intention to start legal action.
If you still didn’t receive payment despite all of these warnings, you would start legal action.
If you’re owed money by another limited company or a partnership, you can still follow this process. It’s only where you are owed money by an individual that you must update your procedures to comply with the new pre-action protocol.
Because of this, some businesses may now need two processes to follow, depending on who the debtor is.
The purpose of this new pre-action protocol is to encourage communication between the parties. In my experience, this is something that’s often lacking, especially when dealing with an individual. They either ignore the dispute, hoping it will go away, or their response to the letter of claim is so lacking in detail, it’s no help at all in reaching a settlement.
Hopefully, with this new process, both parties will communicate more openly, which should mean they’re more likely to reach a settlement and avoid the need to go to court.
So, if you’re owed money by a sole trader (or any other individual), what should you be doing now?
Start by following your credit control procedure as before. If you reach the end of this without receiving payment, you should send a letter of claim that complies with the new pre-action protocol, rather than your normal seven-day demand for payment.
This new letter of claim should provide the debtor with the following information:
- The amount the debtor owes, including whether interest or other charges are being claimed. This information could be provided in a spreadsheet or other statement of account so that it’s easy to understand;
- Why the debtor owes the money, for example, refer to the contract which gives rise to the debt. If the contract is an oral agreement, the creditor must say who made the agreement, what was agreed, and when and where it was agreed. If the contract is a written agreement, the creditor must give the date of the agreement, the parties to it and offer to provide a copy;
- If the debtor is already making payments, trying to clear the debt, and the creditor doesn’t agree with the amount being paid (for example, they want the debt cleared quicker) they must explain why they are now considering legal action to recover the balance; and
- Details of how the debt can be paid, and what the debtor can do to discuss payment options.
It has always been good practice to send this information, but now, in addition to this information, the creditor should enclose with the letter an information sheet, reply form and a financial statement for the debtor to complete. Examples of these are included as an annex to the pre-action protocol and can be seen online.
The letter of claim should be clearly dated and sent to the debtor by first class post. It should be sent on the day that it has been dated (or the next day at the very latest) and the debtor then has thirty days to respond.
On receipt, the debtor should complete the reply form, admitting or denying the debt is due. If it’s due, they can agree to pay it all in one go or say that they need more time to pay. If they need more time to pay, the debtor should complete the financial statement giving an idea of how much they can afford to pay. This information can then be used to help the parties agree a payment plan.
If the debtor thinks they need more documents or information, they can request these from the creditor. They can also provide information to support their position.
The debtor should also explain whether or not they intend to get advice about the debt.
Completing the reply form, rather than just sending a letter back should mean that a more comprehensive response is received and this should help the parties reach a settlement.
If they can’t, they should consider some sort of alternative dispute resolution (ADR) and if this doesn’t lead to payment or an agreement, legal action can be considered. However, the debtor should be given at least fourteen days’ notice of this.
As you can see, these new rules are quite a departure from the normal “seven days to pay demand” that you would usually make. In some ways, it’s frustrating that the increased time limits seem to slow the process down, but if taking a little more time to exchange more information helps reach a settlement, this will ultimately be a good thing.
It’s still early days for these new rules so we will have to wait and see if they do lead to more debts being paid.
If you need any help updating your procedures, or if you have any other questions about recovering your unpaid invoices, feel free to email me at firstname.lastname@example.org and I’ll happily answer them for you.
Take a look back over David’s payment dispute articles for Business Advice:
- How to get comfortable having awkward conversations
- How to stop business disputes becoming personal
- Five early warning signs that your client is in financial trouble
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