The reminder letter
Where an invoice or a series of invoices remains unpaid after the due date the first step is to write a friendly reminder letter to the debtor. In this letter you would not threaten court action but instead remind the debtor of the payment terms of the agreement. You could invite the debtor to make contact with you to discuss any issues they may have.
Letter before action
The letter before action is a demand for payment of all unpaid invoices within 14 days of receipt of the letter of demand, failing which proceedings may be commenced. The demand is not only for payment of the amount due on the invoices but also for interest (see below) on the amount owed for the period that payment has been outstanding.
This letter must be given to the debtor before you start court proceedings. Court action should not be started before the 14 days have expired, otherwise you may not be able to recover your costs. If the debtor pays the debt in full immediately at the start of the court proceedings, the court may regard the court action, without sending a letter before action, as unreasonable.
The interest and recovery costs
A creditor is not only entitled to claim the principal debt but also interest on the outstanding amount. The amount of interest that can be recovered on late payments is usually set out in the terms of a commercial contract. However, if the contract is silent on this or if it does not give the creditor a substantial alternative remedy for late payment by the debtor, then interest can possibly be claimed by the creditor under the Late Payment of Commercial Debts (Interest) Act 1998 (the 'Act'). This Act allows all commercial traders to claim simple interest from each other on late payments at the rate of 8% above the base interest rate of the Bank of England. To fall within the act the late payments must, amongst other requirements, be in respect of goods supplied and/or services rendered. If the commercial contract does not state a payment date interest under this Act will generally be calculated from a date 30 days after delivery, invoice and acceptance.
Under the Act the creditor can also claim a fixed sum once the interest starts to run. The amount of the fixed sum is determined by the size of the claim.
Reasonable recovery costs
The Act also enables the creditor to claim their 'reasonable' costs of recovery even where the recovery costs are not related to court proceedings, such as the costs to use a collection agency. The amount of the fixed sum will however be deducted from the amount of these costs. This is in addition to any litigation costs that the creditor will be entitled to on winning a court action
If a debtor fails to pay the debt within the time limit stated in the letter before action the creditor could still consider making arrangements with the debtor before taking the matter to court.
The creditor could also start insolvency proceedings against the debtor. These proceeding would be brought on the basis that the debtor is unable to pay their debts. To prove this the creditor must first serve a statutory demand upon the debtor for the outstanding debt.
If the statutory demand remains unpaid after the period within which payment was required, usually 21 days, the creditor can proceed with the insolvency application with this proof in hand.
If this statutory demand was for debts of £5,000 or more, it is possible for a creditor to petition for the bankruptcy of a debtor if the latter is an individual. A creditor can apply to have a debtor company liquidated if the statutory demand was for a sum exceeding £750 and it remained unpaid for more than 3 weeks.