Bad Debt Recovery
Posted on: 04/04/2024
Category: For your business
Seeking payment of unpaid invoices and debt recovery can be a constant headache for businesses. Following worldwide events of recent years, it is noticeable how some customers seek to delay payment or extend payment terms which can cause significant cash flow issues. The job can be made harder by not having a clear contractual right to claim payment of the debt. Orders taken without any terms and conditions in place are at risk of becoming a business liability.
Set out below are some of the key terms that will help protect a business from late or non-payment for goods and services supplied.
Payment Terms are an important clause in a contractual agreement because they can specify the amount owed, the due date for payments, and any interest rates or late payment fees that may apply. They will set the contractual right to be paid.
Late payment interest clauses allow interest to be charged for late payment and may act as an incentive to pay on time although The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses the right to charge interest on invoices that are overdue.
Acceleration of payment and an obligation to pay by a specific time can be grounds to seek termination and early payment for goods or services already provided where a customer is not complying with its side of the bargain.
Retention of Title clauses within supply agreements for goods will allow the supplier to repossess the goods supplied to its customers for nonpayment and can be useful in situations involving the insolvency of the customer where the suppliers’ goods can be identified and recovered for non-payment.
Debt Collection Costs associated with collecting debts can sometimes outweigh the initial debt and are not recoverable in the small claims court (claims under the value of £10,000). Even for claims that go into the fixed costs track (between £10,000 and £100,000) there is no assurance all the debt recovery costs will be recoverable. Hence a legal costs recovery clause should be included within the contract often by way of an indemnity for legal fees incurred.
Debt Recovery Procedures set out the steps that the creditor can take to recover the debt, including issuing notices, engaging debt collection agencies, and pursuing legal action and may outline the process the parties must comply with before the matter is escalated to court action. It may save time and money if there is an internal procedure that needs to be followed first within the two businesses. Escalating matters to senior managers under a contractual process may resolve the issue before legal representation is required.
Set off rights can often be found in commercial contracts but the right to set off a claim may be precluded if a clause expressly forbids this.
Confidentiality of the dealings between the parties maybe commercially important to maintain where there is a bad debt situation, and this may be useful to protect the reputation of a business. This may be considered in the context of a contractual arbitration clause for sensitive higher value claims to prevent disputes going into the public courts and contractually forcing the parties to resolve their dispute through confidential private arbitration.
Finally, debts in themselves are an asset of the business and those governed by underlying contractual terms may be more valuable in the event of an onward sale to a debt recovery agency or on the sale of a business.


Jack Coleman
If you have any questions or queries, please contact Jack Coleman on +441905723561 or by email at jack.coleman@smesolicitors.co.uk.