Unfortunately, in business, you may on occasion face situations where payment of an outstanding invoice just doesn’t materialise and you find yourself wondering what legal options you have available to you. We understand how stressful this can be, so our business dispute solicitors put together a guide to help you decide what legal action you can take to recover your unpaid invoices.
- What’s the first thing you should do when another business doesn’t pay an invoice?
- 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 doesn’t prompt payment?
- What about using the insolvency process?
What’s the first thing you should do when another business doesn’t pay an invoice?
First and foremost, it’s advisable to 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 relatively friendly at the outset; reminding the other party of when the payment due date was and highlighting your company’s late payment terms (if you have any in place – if not, it’s a good idea to put a policy together on this and/or insert such terms into your formal Terms & Conditions of trading so that the process is as streamlined and smooth as possible).
It’s prudent 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.
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 of course worth checking with the non-paying party whether they are amenable to having an informal discussion about the problem in order to come to an amicable resolution without the need for the involvement of 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?
If it transpires that the dispute can’t be resolved informally, it’s still possible for it to be dealt with outside the arena of the courts. Mediation is an excellent and often successful way of settling conflict; 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 detailed guide to commercial mediation.
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 utilised within the construction industry. 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 is 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 is 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 utilising 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.
If you would like to read about any of the above methods of ADR in further detail, you can refer to our article on the different types of alternative dispute resolution methods and choosing the right one for your business.
Ultimately, it could be the case that court action 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 is no reason forthcoming as to why your outstanding invoice has not 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 do not settle the invoice, you are 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 is a good idea to attach a copy of the outstanding invoice or statement of account if there are numerous outstanding invoices to the Letter Before Action. It is worth sending by email by and recorded delivery. There are additional requirements for sending a letter before action under practice directions to the civil procedure rules 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 doesn’t prompt payment?
If taking the above steps does not lead to your invoice being paid and if it remains the case that no dispute is raised in relation to it, then you are 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 ultimately it is possible to obtain judgment in default and then proceed with enforcement options. (You can read more about the main methods of enforcing a money judgment in our article on the topic here.)
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.
Serving a statutory demand is often a faster and more cost-effective method of prompting the debtor to pay the debt instead of commencing 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 have 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 is 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 do not 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 will be used to satisfy your debt and those of any other creditors of the company.
In summary on this topic, it’s 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 is possible to follow the insolvency procedure, but very much necessary to keep sight of the fact that ultimately there may be no recovery made if the company or individual is genuinely insolvent and a winding up order or bankruptcy order is made.
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 disputes specialist 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.