By Jason Smalley, Lawyer at The Legal Director (www.thelegaldirector.co.uk)
According to a recent survey by financial comparison website, NerdWallet, 55% of SMEs in the UK have outstanding invoices from the 2022/23 tax year.
For businesses in the hospitality sector, already facing high energy costs, rocketing prices and the continuing impact of Brexit on supply chains, chasing unpaid invoices is more important than ever, but it is far from easy.
As a specialist disputes solicitor, I have seen how quickly disputes can arise and how difficult it is for small businesses to recover funds. So, here is my take on why it’s so hard, and some tips on what you can do to recover your debt.
Limitations of the small claims court
One of the clearest blockers for smaller businesses in accessing justice is the £10,000 limit in the small claims court. And to make matters more challenging, it has been rumoured for some years that this limit is likely to increase. The idea is to disincentivise lawyers being involved in small claims because only a very limited amount of costs is recoverable, even by the ‘winning’ party.
Small businesses operating in today’s economy often can’t afford to write-off a few thousand pounds worth of debt or pay out on a claim. But this limit often means it’s uneconomical to get legal advice, forcing small businesses to either forget about the money or to tackle the legal system alone, dedicating time and effort to the process, which is antiquated and backlogged.
Aside from the management time for dealing with debts, the small claims system has become incredibly slow and cumbersome. It is quite common for disputed claims in court to take well over two years before getting to a trial judge. Obviously, if you’re the party which is behind with making payments then this delay can be used to your advantage to buy more time. You can effectively ‘work the system’ in your favour. If, on the other hand, you are trying to recover your debt, this time delay can literally put you out of business.
Other options:
Serve a statutory demand
If your business is owed money and tackling the legal system is not an attractive proposition, there are other options available. You could consider starting an insolvency process against the non-paying party with service of a Statutory Demand. Unfortunately, however, the rules governing such a method are again complicated to navigate for someone who is not qualified as a solicitor, so I would recommend bringing in expert legal advice to ensure you get it right.
Seize goods
If the contract allows, more practical steps may work. You could, for example, seize back goods that have been supplied and not paid for. This is evidently more difficult if the debt has arisen following the provision of a service or for something that has already been consumed.
B2B or B2C?
It is also important to acknowledge that different laws and rights apply to a business-to- business debt or business-to-consumer and vice versa. The latter have greater powers and more flexibility so make sure you familiarise yourself with what applies to your business.
Understand the reasons
The best advice with any type of debt is to firstly understand the reason(s) it is not being paid. Does one party simply not have funds available or is there a genuine dispute? Do you wish to continue trading with the other party once this matter has been resolved? Damaging a valuable relationship might be more harmful than writing off a debt so think twice before launching straight into a fight.
Consider Alternative Dispute Resolution
Once you’ve established what is going on, then attempting to resolve through considered negotiation has always got to be the preferred initial route to take. You may have to concede on a few points, but at least you will have more control over the process and will be more likely to reach a form of settlement quickly. This is better known as Alternative Dispute Resolution (“ADR”) and has become more commonplace over the years. ADR is also actively encouraged by judges in court and the rules applying to debt recovery generally. It can lead to a more formal process like Mediation.
Seek external help
I know spending more money on legal help may feel counterintuitive. But I, and many other specialist disputes solicitors, are prepared to have an initial no-obligations discussion about debt resolution and you may find expert intervention is an investment worth making in the long term.
