Dealing with overdue invoices – some options
09/11/22 – When I’m asked by a client to help with an invoice that they’ve been chasing without success, they assume the next step is for me to fire off a letter before action, ideally threatening fire and brimstone, and then issue legal proceedings. There are times when this is appropriate, but there are also a number of options available to suppliers before, or even instead of, asking a lawyer to help. This article takes a brief look at some of the options.
Confirm when the payment actually became overdue
Your invoice may state ‘PAYABLE WITHIN 14 DAYS’, but unless you have previously agreed 14-day payment terms with the customer then this will not be enforceable – you cannot unilaterally add your payment terms to a contract that has already been formed. Instead check the invoicing and payment terms that were agreed with the customer. This should be straightforward if there’s a written agreement, or if the customer agreed to your Ts&Cs. If not, then it may be that the customer’s PO incorporated their purchasing Ts&Cs, and the customer’s payment terms apply.
Once you’ve confirmed the correct due date, check that you’ve done what the contract requires you to do, e.g. issued the invoice with the correct information included, sent the invoice to the correct contact at your customer, attached any required delivery receipts, timesheets, acceptance certificates etc.
Find out why the customer hasn’t paid
Sending repeated reminders and demands for payment is all well and good. But make sure to ask your customer why they haven’t paid your invoice. You may discover that there’s a problem with your product or service that you didn’t even know about, and that you can now look to fix. Or your customer may have a cashflow problem, in which case it may be in your interests to try to agree extended payment terms. If conversations are verbal, make sure to confirm them in writing.
Charge the customer for using you as a credit facility
Many commercial agreements have a late payment clause entitling the supplier to charge an agreed rate of interest on amounts which are overdue. Although these are mainly used when making a formal debt recovery claim, you can invoice the customer for contractual late payment interest at any time payment is overdue.
If your agreement does not have a late payment clause (or if the contractual late payment clause does not provide a ‘substantial remedy’), then you are automatically entitled to claim statutory interest plus fixed compensation under the Late Payment of Commercial Debts (Interest) Act 1998 (as amended). The rate of statutory interest is calculated as the Bank of England base rate plus 8% (so currently 11%), and can be charged from the date that the amount became overdue until the date of actual payment. The fixed compensation depends on the amount of the debt – it is currently £40 for debts of less than £1,000; £70 for debts of £1,000 or more, but less than £10,000; and £100 for debts of £10,000 or more. For these purposes each overdue invoice will normally constitute a separate debt. Again, you can invoice your customer for statutory interest and fixed compensation as soon as a payment becomes overdue.
A contractual late payment clause may include an obligation for you to give the customer advance notice before you invoice them for interest. There is no such requirement when invoicing for statutory interest and compensation, but it would normally be a good idea to do so.
Serve a statutory demand
If the amount owed is more than £750 and you don’t believe that the debt is disputed, then consider serving a statutory demand on the customer. Following service of the demand, the customer must either pay the debt within 21 days, or ask the court to set aside the statutory demand because the debt is disputed. If the customer fails to do either, you can ask the court to wind up the customer. Although a very effective credit control tool, the relationship with your customer is perhaps unlikely to recover.
Issue legal proceedings yourself
Money Claim Online (MCOL) is a portal operated by HM Courts & Tribunals Service for the recovery of debts of up to £100,000. It is intended to be used by non-lawyers as well as lawyers, and there are plenty of guidance notes to help users put together their claim. Fees range from 5% to just over 10% of the amount of the claim. As with all legal proceedings in the UK, before using MCOL you must first have tried to settle the dispute with your customer, including sending a letter before action with detailed information about your claim and giving the customer an opportunity to respond.