Chasing unpaid invoices can be frustrating and time-consuming for any business. Whether it’s a simple oversight or something more serious, knowing your legal options early can help you take the right steps to recover what you’re owed.
In this guide, we’ll explain the practical actions you can take and when it might be time to get expert help. If do you need immediate support to recover a commercial debt, our experienced commercial debt recovery solicitors are here to support you.
Contents:
- What’s the first thing you should do when another business doesn’t pay an invoice?
- Can I charge interest on overdue invoices?
- What are your legal options if you establish that there’s a dispute?
- What happens if the dispute can’t be resolved informally?
- What if it’s not possible to resolve the dispute through mediation?
- What should you do if no dispute is identified?
- What if sending a Letter Before Action does not result in a payment?
- What about using the insolvency process?
- How long do I have to take legal action for an unpaid invoice?
- Summary
What’s the first thing you should do when another business doesn’t pay an invoice?
You should try and chase up the outstanding invoice, and it’s recommended that you put any chasers in writing in order to keep an easily trackable record of all correspondence. A simple email with a copy of the invoice attached might be all that it takes to prompt payment, and it’s also recommended that you keep the tone friendly at the outset; reminding the other party of when the payment due date was and highlighting your company’s late payment terms.
It’s a good idea to follow up on an unanswered written chaser with a telephone call, because this might serve the dual purpose of revealing whether your correspondence is going to the right person in the organisation, or whether there’s a dispute of some kind around payment of the invoice.
Can I charge interest on overdue invoices?
You’re legally entitled to charge interest on overdue invoices, and the amount of this interest will depend on whether or not there’s a clause in your contract or terms and conditions of trade with the party who hasn’t paid you. If there is, it should be set out clearly what the rate is and when it becomes added to the late payment – and it’s essential that they’re aware of the existence of this clause before they entered into their contract with you.
If the contract or terms and conditions does not mention anything specific about interest being payable on late payments, you’re able to rely on statutory provisions that are available through the Late Payment of Commercial Debts (Interest) Act 1998. The rate of interest you’re currently permitted to charge on the overdue invoice is 8% above the Bank of England’s base rate. ‘Overdue’ is classed as the day after the date payment was due by – unless your payment terms state something different on this.
To calculate the interest you’re owed, you can use the following formula:
Amount owed to you x the interest rate x the number of days overdue ÷ 365
In addition to charging interest on late commercial payments, you’re also entitled to claim fixed amounts of compensation for your costs of having to chase the funds. These are:
| Amount of debt | What you can charge |
| Up to £999.99 | £40 |
| £1,000 to £9,999.99 | £70 |
| £10,000 or more | £100 |
If you are a supplier, you’re allowed to claim for reasonable costs every time you try to recover the debt.
What are your legal options if you establish that there’s a dispute?
If it comes to light that there’s a problem, try to remain as calm as possible and focus on establishing the grounds for the dispute. This is important because, depending on the seriousness of the grounds, you might need to seek support from a business disputes lawyer as soon as possible to talk through your options and obtain advice on your legal position.
It is worth checking with the non-paying party whether they’re open to having an informal discussion about the problem with a view to coming to a resolution without the need to involve lawyers – misunderstandings and crossed wires can happen in business, so if both parties are willing to attempt this, a solution may be found and the relationship can get back on track, or it can be agreed that you will part ways once the problem has been addressed.
What happens if the dispute can’t be resolved informally?
Mediation is an excellent and often successful way of settling conflicts; the aim of the mediator (an independent individual who may or may not be a qualified lawyer) is to encourage the parties to move towards a potential settlement by helping you and the other party talk to each other with a view to coming to an agreement. It’s worth mentioning that very often, the mediation process is more cost-effective, faster and less stressful than going through the court process, and you can read more about it in our commercial mediation guide.
What if it’s not possible to resolve the dispute through mediation?
There are other forms of alternative dispute resolution (ADR) that might be suitable for your dispute if mediation isn’t successful or if it’s not appropriate for some reason. Some of these methods can be summarised briefly as follows:
- Adjudication: This is a compulsory form of dispute resolution. The costs are usually less than the costs of litigation and the adjudicator reaches a decision on the dispute within 28 days of referral (unless it’s agreed that this time period is extended). The decision of an adjudicator is binding unless revised by an arbitration award or a court judgment.
- Arbitration: It’s fairly common in commercial contracts for there to be a clause specifying arbitration as the default dispute resolution mechanism when there’s an issue between the parties. It’s a confidential process (important in the context of your company’s reputation not being affected by the dispute becoming public) and, whilst not in the strictest technical sense a form of ADR, the parties cannot take legal action in court after a final, binding decision has been made by an independent arbitrator (or panel of arbitrators) unless there are exceptional circumstances.
- Expert determination: Similarly to arbitration, there’s generally a clause around using this type of ADR in the contract between the parties if it’s likely to lend itself as suitable to resolving a dispute in the kind of industry you and the other party are in. It focuses on key technical issues and is often a faster and cheaper solution.
Ultimately, it could be the case taking the other side to court is the only way of resolving the dispute and seeking legal advice on this as early as possible is recommended to minimise the disruption and costs implications for your business.
What should you do if no dispute is identified?
It could well be the situation that there’s no reason forthcoming as to why your outstanding invoice hasn’t been paid and in circumstances where your chasers don’t give rise to a dispute being identified, the next step would be to speak to a business disputes solicitor who will be able to send the non-paying party a Letter Before Action.
A Letter Before Action warns the other party that if they don’t settle the invoice, you’re prepared to take legal action. Ideally, it should contain the following content:
- The full name and address of the company that owes you the money
- How they trade (i.e. as a limited company, limited liability partnership (LLP) or a partnership)
- The total amount outstanding
- How the debt has arisen
- Details of any other interest or charges that are due
- A copy of the agreement under which the debt arose (or in the cases of a verbal agreement, information about this)
- Confirmation that the debt is overdue
- Confirmation that court action will be forthcoming if payment is not received within a specified time (usually 14 days)
- Details of how the debt can be paid
- The correct address for a response
It’s a good idea to attach a copy of the outstanding invoice (or statement of account if there are many outstanding invoices) to the Letter Before Action. You should send this letter and any attachments by both email and recorded delivery.
Be aware that there are additional requirements for sending a Letter Before Action under the Practice Directions to the Civil Procedure Rules (CPR) where a letter is being sent to an individual consumer, as opposed to a business-to-business transaction.
What if sending a Letter Before Action does not result in a payment?
If taking the above steps doesn’t lead to your invoice being paid and if it remains the case that no dispute is raised, then you’re free to issue court proceedings by way of serving the other party with a claim to recover the debt via this method. If no acknowledgement of service or defence is entered, then it’s possible to obtain judgment in default and then move forward with enforcement options.
What about using the insolvency process?
If no dispute has been raised it may be appropriate to consider the insolvency/bankruptcy process and either serve a statutory demand or proceed to a winding up petition after giving warning of your intention to do so.
Statutory demand
Serving a statutory demand is often a faster and more cost-effective method of prompting the debtor to pay the debt instead of starting court proceedings, at least in the first instance. It starts the clock ticking for the non-paying party to satisfy its debts because once they’ve been officially served with the demand by a process server (which attracts a fee), they have 21 days within which to satisfy the debt they owe you. It carries with it the serious threat of bankruptcy, or winding-up if served upon a company.
Winding up petition
If the debtor is a limited company and owes you in excess of £750, you can apply to the court by way of a petition to wind the company up – this has grave consequences (including potential personal liability for the company’s directors) and should be treated as such by the debtor. Usually, a statutory demand will have been served and the 21-day period expired before the service of a winding up petition. Although, in certain circumstances, it’s possible to present the winding up petition without the presentation of a statutory demand. If the statutory demand has not been complied with, then it evidences an inability to pay debts as and when they fall due.
If the debtor is an individual, the threshold for presenting the statutory demand is £5,000 and the personal service of the statutory demand is obligatory before presentation of a bankruptcy petition after 21 days.
The court will list a hearing date for the petition and if the company/individual fails to respond, or if they don’t provide an adequate reason for non-payment, then it’s likely that the judge will issue an order to wind the company up/make the individual bankrupt. If the company/individual has sufficient assets, they’ll be used to satisfy your debt and those of any other creditors of the company.
It is fair to say that the use of the insolvency procedure may very quickly help determine whether the non-payment is a result of inability to pay as opposed to a dispute. If it’s established that the default is a result of inability to pay, it’s possible to follow the insolvency procedure, but you should keep in mind that, at the end of the day, there may be no recovery made if the company or individual is genuinely insolvent and a winding up order or bankruptcy order is made.
How long do I have to take legal action for an unpaid invoice?
There’s a six-year time limit (the limitation period) for taking legal action for an unpaid invoice, unless a longer period of time is written into your contract or terms. This timeframe starts to run from the date the debt was due to be paid, although it’s important to bear in mind that if the party who owes you the debt writes to you to acknowledge the debt or makes a partial payment of it, the limitation period resets and begins again.
Summary
It’s clear that there are several different avenues available to you in the event that another business has failed to settle an invoice. If a straightforward resolution cannot be reached informally, then obtaining the right legal support from a business dispute solicitor is recommended to help you navigate these avenues to ensure that the most appropriate route is taken to try and recover your money in the least disruptive and most economical way possible.
