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Dealing with sole traders? Debt recovery just became a whole lot harder

Dealing with sole traders? Debt recovery just became a whole lot harder
Ally Tow

Ally Tow

Chasing unpaid debts is, sadly, a challenge many businesses have to devote time to. But did you know the challenge has become a whole lot harder in recent weeks – with real implications for cash flow?

Governments of all hues have, for many years now, been taking well-publicised action to protect small businesses from late payment of debts. However, a new measure introduced by the courts in October 2017 – the Pre Action Protocol for Debt Claims –has reversed the progress made in many cases.

The protocol has laudable objectives – in seeking to protect individuals from overbearing debt enforcement by businesses. However, because the definition of individuals also takes in sole traders, and because of the way the protocol works, small and medium-sized businesses could find unscrupulous sole traders playing the system.

Whereas enforcement would previously kick in within weeks, the onerous new rules could leave business owners having to wait months before they can take action to force payment of invoices for service or goods purchased, but not paid for, by sole traders.

For instance, under the previous rules, creditors only needed to provide details of the amount and seven days to pay, as well as offer details of organisations which offer debt advice (a requirement that continues under the protocol). The new rules extend the time it takes to issue court proceedings by some five weeks.

The new rules also set out a list of information to be provided by the creditor by way of a letter of claim before any issuing of proceedings. The letter must give the debtor 30 days to pay the debt, and the creditor must also consider any offer from the debtor to pay by instalments.

The creditor must also include copies of all relevant documentation and if the debt has not arisen subject to the terms of a written agreement, provide sufficient information about how the debt has arisen for the debtor to be able to clearly identify and understand the debt.

Thankfully there are steps you can take to at least limit your exposure if you are dealing with sole traders.

  1. Know your debtor. Always be clear where you are dealing with a sole trader. The last thing you want to do is jump through all these extra hoops only to discover that you are actually dealing with a limited liability partnership or limited company.
  2. Take a hard look at changing your payment terms. Under the best case scenario with the new Pre Action Protocol, the delay could mean recovery will take at least 3 or 4 months – and quite possibly longer – before you can start talking about issuing court proceedings. Taking this into account, do you really want to give sole traders 60 or 90 days payment terms?There is no reason why you can’t offer much more limited payment terms – say payment within 14 days. You certainly don’t want to risk offering extended payment terms that self-limit how long you have to let things run before you even consider getting into enforcement.
  3. Review your internal credit control procedures. If your payment terms are 14 days, then start dealing with the problem on the fifteenth day. Even under the former regime – where enforcement was relatively swift – clunky or inconsistent internal credit control processes can mean companies have had a debt problem for three or four months before considering enforcement. Under the new rules, with this kind of internal delay factored in, you could be getting close to nine or ten months before recovering what by then is a very old debt. Few small businesses could cope if this kind of delay became the norm.
  4. Change terms and conditions to include provision for recovery of costs.As the new rules are more likely to mean proceedings will not be issued and costs will be incurred on a pre-action basis, making such a change will give you a contractual right to recover such costs from your debtor, avoiding unnecessarily eating into your profits.
  5. Don’t ignore disputed debts. For many small businesses, there is a kind of ethos that says, particularly for debts below £10,000, “we’ll just ignore the dispute and issue proceedings – the courts can deal with it”. That’s not sustainable. By using the courts to pursue a debt that is in dispute, companies run the risk of the courts saying that is an unreasonable approach – and as a result could find themselves burdened with the costs of the case. Debtors can also stay the proceedings and compel companies to comply with the protocol before the proceedings can continue. So this really does become an ill-advised approach. If you’ve given yourself the ability to recover costs incurred on a pre-action basis, it makes sense, in any case, to tackle disputes head-on on this basis, avoiding the gamble of “I’ll see you in court”.
  6. Consider bankruptcy measures.This is a high risk approach, not appropriate in all cases. Strictly speaking it is not a debt recovery tool because you are actually saying to the court that your debtor can’t pay the debt. But it is a nuclear weapon that can be deployed in the right circumstances. The debt has to be over £5,000 and can’t be a disputed debt. If those hurdles are cleared, the Pre Action Protocol doesn’t apply to bankruptcy. So if you think you are on strong ground, and consider settlement of the debt to be critical for your own business, this approach may just get you your money quicker. This is a very expensive option, though. And the risk is that you discover that your debtor’s financial position is more precarious than you have gambled upon, and issuing a bankruptcy petition does actually push them over the edge. In that case, you’re not going to recover your debts after all.

In short, the Pre Action Protocol for Debt Claims does have the capacity to cause a real headache for companies that are unprepared for it, and who do a lot of business with sole traders. However, it need not cause problems if businesses tighten up their contractual terms and credit control procedures, and have clear debt recovery procedures in place. With these mitigating steps, although you might still notice a slightly more sluggish cash flow in some cases, it shouldn’t become a problem.

Ally Tow heads up the debt recovery team at Boyes Turner

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