Covid-19: Trade debt recovery in a time of crisis

As we remain in a period of restricted movement and trading, businesses are seeking a steady cash flow to keep their doors open. This is a challenge facing most firms today.

Covid-19: Trade debt recovery in a time of crisis

As we remain in a period of restricted movement and trading, businesses are seeking a steady cash flow to keep their doors open. This is a challenge facing most firms today.

Businesses are still operating and having to adapt to new working practices, but the collection of an unpaid invoice is a core activity that continues without pause.

A common question asked in 2020 was “how can I collect debt owed to me”?  The volume of debt recovery requests has only increased, highlighting this widespread impact on business cash flow.

The prospect of debt collection is daunting to many. In this article, we will provide a step-by-step guide, helping your business maximise the recovery of outstanding business-to-business invoices.

Start with a phone call

If you have sent reminders regarding unpaid debts and no funds are forthcoming, the first step is to pick up the phone and get the ball rolling on the debt recovery process. 

There are two reasons for this approach; i) receiving a phone call indicates to the debtor that the matter of an unpaid invoice is serious, and ii) you and the debtor can have a conversation free from the potential miscommunication pitfalls that come with emails and instant messaging. 

Talking over the phone means you can hear the reasons a debtor may have for non-payment of an invoice and make arrangements that are a win-win for both sides of the dispute.

If phone calls do not elicit a positive result, the next step is to send a Letter Before Action.

Letter before action

Note: The below applies to business-to-business debt (excluding sole traders).  If you are chasing a debt owed by an individual or sole trader, the government Department of Justice procedure for Pre-Action Protocol for Debt Claims applies.

If your debtor is in genuine financial distress, they will most likely let you know and may be open to negotiate a payment plan. Avoiding the issue may mean they are simply refusing to pay. Your emails and phone calls go unanswered. If so, you should act fast. 

Seeking legal advice early can mitigate the risk of stressful and time-consuming litigation later. Furthermore, the Court will expect you to have complied with the Practice Direction on Pre-Action Conduct and Protocols, something a good Solicitor can advise you on.

The aim of the Practice Direction on Pre-Action Conduct and Protocols is to:

  • help both parties understand the other’s situation
  • decide how to proceed with resolving the dispute
  • resolve the matter through alternative dispute resolution methods
  • ensure the management of the dispute is efficient and effective
  • minimise the cost of resolving the dispute

If a party fails to comply with a Pre-Action Protocol (PAP) or the Practice Direction (PD), the Court may impose sanctions (often related to costs), stay the proceedings or make an order relieving the parties of the obligation to comply further with the PAP or PD. 

The first formal step in business-to-business debt collection is to send a Letter Before Action (LBA). This letter requests the payment of a debt and states that if it is not paid you will bring a Court claim.

An LBA needs to state the following:

  • the amount being claimed
  • the basis for the debt (for example goods being supplied under a contract)
  • summary of the facts relating to the attempted collection of the debt to date
  • information on any interest or admin. charges being claimed in addition to the debt
  • copies of any relevant documents such as previous invoices, contracts
  • email / paper correspondence and telephone dates/times requesting payment
  • how and when the debt must be paid

Commonly, outstanding debts are paid upon receipt of an LBA. But with the current economic environment, other action may be required.

Using mediation to collect an unpaid debt

Going to court is an expensive debt recovery process and can be stressful. Therefore, before considering court proceedings, it is preferable to resolve any disputes around payment via alternative dispute resolution methods, for example, mediation. 

Not only is mediation cheaper and faster than formal litigation, but mediation proceedings are also completely confidential, thus ensuring your business’s reputation is protected.

Traditionally, unlike a Judge or an Arbitrator, a Mediator does not decide a case on its merits, rather the mediator will work to facilitate an agreement between the parties.  

There is a growing trend to ask Mediators to evaluate a particular claim and/or comment on the strengths and weaknesses of a case. Regardless of how you use mediation, the process is a voluntary one (unless you are contractually bound to follow this route) .  

A Mediation Agreement will normally state that anything said during the mediation is ‘without prejudice’, meaning what is said or written cannot be used in later proceedings if the mediation does not settle the dispute (note that there are some limited exceptions).

Although mediation decisions are not legally binding, it is a myth that they are not enforceable. Most Mediation Agreements will stipulate that any agreement reached via mediation will be documented, signed and enforceable as a contract.  

Parties can also apply for a Court Order to enforce an agreement reached in mediation if there are associated proceedings.

Court proceedings

If the LBA is ignored, mediation is not an option or unsuccessful, or despite all promises, the debt remains unpaid, the next step is to issue court proceedings, normally at the County Court Money Claims Centre (CCMCC) or County Court Bulk Centre (CCBC). Bear in mind that you may or may not be awarded costs and it can take many months to settle a case.

If you receive a judgment in your favour the Court will make a County Court Judgment (CCJ). The business that owes you money will have 14 days to respond to the CCJ by completing the claim form and response pack. A two-week extension can be requested.

Failure to pay following a CCJ will mean that the debtor company will have details of the CCJ bad debt reference on its credit file for six years. This will severely restrict their ability to raise finance in the form of loans or enter into supplier agreements.

In summary

Debt recovery is one of the most challenging aspects of being in business, especially when you know many organisations are struggling to survive during times of intense economic pressure. But addressing late payment or non-payment of invoices is sometimes key to a business surviving. 

Court action may ultimately be the way to go for a debt recovery matter, but there are ways to seek resolution of debt claims before getting to the stage of potentially costly court proceedings.

The checklist below is a well-structured process you can follow to address outstanding debt.

  • Start with a phone call, many disputes can be handled in this way
  • Letter Before Action is a powerful tool to settle debt recovery
  • Consider mediation to settle claims, it can be less costly and faster
  • Proceeding to court may sometimes be necessary, there is a clear process to follow
  • Expert legal guidance can help to ensure the best chance of success


Clive Rich
Clive Rich

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