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Commercial Debt Collection (Cash is King)

View profile for Stephen Mackie
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Are debtors crippling your business cashflow? After all “turnover is vanity, profit is sanity, but cash is King”. John Hodge Solicitors have vast experience of helping local businesses with debt collection. We have been providing services locally since 1777 in fact.

Although each case is different and needs specific advice, the following is a non-exhaustive list of good pointers when dealing with collecting debts:

  1. It is rarely useful to sue a person or a company for money if they have no money - unless they are likely to come into money in the 6 years following any win (and even then others might have a claim to that money that the law regards as having priority to yours). If the debtor owns land you can get a Charging Order over it following a successful County Court Claim but that can only really be followed up with by an Order for Sale if it is commercial property and if the land is owned jointly with another who is not liable for the same debt, a Charging Order is a very weak security.
  2. Check you are suing the right person. If they operate through a company and the contract is with the company then you need to sue the company and unless anyone (such as a shareholder or director) has guaranteed the debt in writing, the same problem arises since you cannot normally enforce a Court Judgment against a Company by seizing assets or income held by a shareholder or director.
  3. If the Claim is for under £10,000 then normally no solicitors costs are recoverable except a nominal payment towards the Claimants costs of preparing the Court papers (no more than £100). That can mean the use of solicitors is not commercially viable unless you proceed yourself and use solicitors only for the difficult legal bits. John Hodge Solicitors can help with that under what we call “Unbundled Services”.
  4. If a dispute that is for more than £10,000 goes to Court then the loser normally has to pay the winners costs subject to a deduction that normally takes about 10-20% off the amount of costs incurred that can be recovered. The losing side can be regarded as the winner for part of the time for which costs are awarded if they made a formal offer (under Part 36 of the Court Rules) and the opponent did not accept and did not beat it. From the time of the offer (plus a short period to allow the recipient to consider acceptance) onwards the loser is normally regarded as the winner for the purposes of a split costs award.
  5. In very clear cut claims against individuals for over £5000 and against Companies for over £750 the Court procedure can be avoided by the use of a Statutory Demand. No solicitor’s charges can be added unless there is a clear contractual entitlement to do so however the recipient can apply to the Court for an Order setting aside the Demand and a company can obtain an injunction if there is a reason why the normal County Court procedure should have been used instead. The loser of such an application usually has to pay the winners costs in the normal way no matter how much was involved. A successful Statutory Demand can lead to a bankruptcy order against a debtor who is an individual or a winding up order against a debtor which is a company, and the threat of that is often enough to secure payment when the debtor has the money but is “robbing Peter to pay Paul.”  If the payment is not made then a Petition for Bankruptcy/ Winding Up can be issued.
  6. The Court Rules have a pre-action protocol procedure for trying to settle such cases without the need for Court action. To refuse to follow the procedure can result in a costs order against the Party concerned if a Court case follows. You may wish to warn the debtor that a County Court Judgment that is unpaid after 28 days will result in credit problems for six years even if the Judgment is paid in full within that time. Debtors are often worried about preserving their credit rating.  The Protocol has a surprisingly high success rate and is normally cost effective so it is almost always best to start with this procedure.
  7. If you sue on a contract it is useful if it is in writing and was communicated to the other party before the contract was finalised and if possible expressly agreed. If it can be professionally drafted it can avoid significant costs being incurred proving who the contract was with and exactly what responsibilities and rights each side have. A credit check for County Court Judgements should reveal the risky people/companies who want to do business with you and if you are doing business with a young Company especially, written guarantees from the directors or shareholders should be considered and the Companies last available accounts should be checked (and that is normally available at Companies House).
  8. Consider an arbitration clause in any contract. Even if there is no such term, it can be used as part of the attempts at avoiding a Court case because if the disputed issue is technical, the Judge will often rely on expert evidence and arbitration can be used to get such an expert who also specialises in arbitration to make a binding decision. Care should be taken in the choice of arbitrator and procedure to be used because the Courts almost never overturn arbitration awards.
  9. Other methods of resolving disputes include mediation, round the table meetings, or a non binding joint referral of the disputed issues to an expert which in some situations can be a Judge of the Court (though that Judge is disqualified from dealing further with the dispute).

 

If you would like some further advice or assistance then please contact Stephen Mackie (e-mail: stephen.mackie@johnhodge.co.uk)

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