Small to medium sized enterprises (SMEs) are the driving force behind our local economy. They account for 99.9% of all businesses in Northern Ireland and employ more people than all large businesses and the entire public sector, combined. In a recent survey of NI businesses, when asked to identify the main barriers or obstacles impacting on success, SMEs put ‘cash flow/ getting paid’ at the top of the list. What steps then can your business take to ensure effective cash flow and what are the options when customers or clients don’t pay your invoice.
Terms and conditions – get it right from the beginning
Drafting effective terms and conditions is one of the key steps any business can take to protect their cash flow. You may wish to consider retaining title over any goods supplied until your client has paid in full. A term allowing you to recover reasonable legal costs if payment is delayed is also essential. Sound legal advice at this stage can prevent complications further down the line.
It is essential to make sure that your clients are aware of your terms and that your processes maximise the chance of your terms prevailing over those of any other entity with whom you do business. Consider sending out a copy to every new client and print your standard terms on each invoice you issue.
Timely action is key
The key to cash collection is to be firm and transparent. A simple phone call reminding a client of an outstanding invoice may be all it takes. It is important to follow up any phone call with a letter outlining the amount due and giving a timeframe for payment. Do not threaten legal action unless you intend to follow through, as empty threats will only weaken your position in the future. If you have genuine concerns over the financial stability of the debtor, now is the time to consider whether firm action will prove cost effective.
Legal action – what are the options
The first step is to issue a Solicitor’s letter, outlining the services/products provided, detailing the debt falling due and owing, and giving a time period (usually 7 days) for payment. This warns the debtor that if they fail to respond, you will proceed with legal action to recover the money. This will often bring the debtor to the table and will result in lines of communication being opened. If, however, the debtor does not make contact within the stipulated time frame, it is time to consider raising proceedings.
Debts of £3,000 or less
The small claims court is the venue for disputes relating to debts equalling £3,000.00 or less. The court is purposely informal and, whilst you may instruct a solicitor or barrister to take such proceedings, the court encourages individuals to take their own actions, mainly as costs are not recoverable. The sitting judge will take time on the day to run you through how the action will be heard, how you should address them, and how to direct your case. Perhaps more importantly, the judge will ask that you step outside the court and discuss the outstanding debt with the debtor, in the hope that you can perhaps reach a resolution to the matter. If this proves unsuccessful, your case will proceed, and judgment will be given on the same day as the hearing.
If negotiation fails in relation to a disputed debt, the only way to proceed may be to seek a Court Order. This will either be through proceedings in the County Court for debts up to £30,000, or in the High Court for debts surpassing this amount. A Judgment will include a sum for your legal costs and interest due. However, getting to this point can be a lengthy process and not all costs may be recoverable. In Northern Ireland the only way to enforce a Judgment is through the Enforcement of Judgments Office (unless insolvency proceedings are appropriate). The EJO has a wide range of powers to secure payment from debtors. These include but are not limited to the following:
- Attachment of Earnings Order (payments come directly from the debtor’s salary);
- Order Charging Land (a ‘charge’ is placed on the debtor’s land for 12 years);
- Attachment of Debt Order/Garnishee Order (which gives the EJO the power to freeze the debtor’s bank account).
Where the debt is not disputed, and there is a genuine fear of insolvency/bankruptcy, having issued a 7 day letter the next step is to issue a Statutory Demand. This gives the debtor 21 days to pay and will put pressure on them either to pay in full or seek appropriate advice, especially if they are continuing to operate a business. If they fail to pay or engage, a Bankruptcy Petition (for an individual and in respect of debts surpassing £5,000) or Winding-Up Petition (for a company and in respect of debts surpassing £750) can be issued. Even if the petition is dismissed or withdrawn, from the date of issue it will appear on a bankruptcy search against the debtor’s name. In the case of companies, notice of the petition must be advertised and therefore business contacts may become aware of the position. Your client may be minded to pay up to avoid bankruptcy/insolvency.
Each debt is different and therefore any legal action taken must be tailored to suit the individual circumstances to facilitate resolution of the matter in the most cost-effective way.
WE CAN HELP
At Mills Selig, our talented Debt Recovery team work to secure the most practical and commercial outcome for clients. It’s an approach based on responsiveness, value for money and regular communication at all stages.