Taking Legal Action to Collect Debts
Should I take legal action to collect debt?
Legal action should generally be viewed as the last resort when it comes to collecting debt from clients. Threatening legal action may have the desired effect but it is also likely to destroy the business relationship. Even if you decide it’s no longer worth keeping a client, taking them to court can prove to be extremely expensive and time consuming. Winning your claim may not result in payment of your debt if the company is in a precarious financial situation. Sometimes it may be better to simply write off a debt rather than pursue it and get into legal wrangles and possibly come out with a loss. However, occasionally the money owed is significant enough to warrant going to court - particularly if you are sure that your client has the funds to pay up.
Can I collect debt without going to court?
You should always try and resolve the situation before you initiate legal proceedings. Send your client a statement of account, formal reminder letters and a final demand for payment. Consider methods of alternative dispute resolution, compromise agreements, extending the payment date and instalment terms. You can even instruct a debt collection agency or law firm to increase the level of formality.
How do I go to court to collect a debt?
If you decide to take your client to court to recover a debt, you should send them a Letter Before Action prior to initiating proceedings. Filing a claim can then be done online or using paper forms, with claims below £10,000 being eligible for the court’s small claims mediation service. If you win a claim but the company fails to pay, you will need to consider ways of enforcing the judgement, such as asking the court to send in bailiffs.
Can I initiate winding up proceedings?
When you suspect that a client is unable to pay its debts as a result of being insolvent, you may decide to initiate winding up proceedings which can result in the business being put into liquidation. However, they must owe you at least £750 and you need to be pretty sure that they are insolvent, as you can end up being fined by the court if your winding up petition is seen as a tactical measure where a company is not actually insolvent.
How can I recover debt from an insolvent client?
If a company which owes you money is put into liquidation, it can prove difficult to benefit from the sale of any assets, as there may be preferential creditors. You will need to register as a creditor using a Proof of Debt form and find out where you are in the queue of creditors. Any personal guarantees you obtained from directors could be very useful at this point.
Debtor protection legislation
In connection with debt collection generally, you need to be aware that the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 will apply in certain cases to prohibit taking any step seeking payment from a debtor.
A variety of documents which may help with taking legal action to recover debts can be downloaded from our Business Documents Folder. Click on the title of any relevant topic below for further information.