Late payments are a year-on-year problem for many businesses. Recently, the office of national statistics (ONS) has reported that over half (54%) of businesses said they were waiting on late payment on invoices due to COVID-19.
Late payments can cause issues with cash flow; damage relationships with customers; and can lead to further late payments along the supply chain.
Chasing debts can be an uncomfortable and frustrating experience. Here are some of our top tips for managing late payments when these arise and what options there are for enforcement through the courts if necessary.
Sometimes clients have different ways of managing their outgoing payments, and some are more organised than others.
From the outset you should have a clear and straightforward invoicing procedure in place, setting out the date of the invoice; the date it was delivered; a summary/schedule of what it relates to; your bank details to accept payment; and precise timescales for payment (for example “upon delivery” or “payment within seven days” - but avoid using vague terms like “ASAP”).
It would be best if you aimed to make it as easy as possible for the client to pay the invoice. It sounds simple, but this is often the best way to ensure prompt payment.
Your manufacturing agreement or standard terms should contain a late payment clause forming part of your payment terms. This ought to be referred to on every invoice raised.
Late payment clauses usually contain a remedy to the innocent party where payment is late for example a contractual interest (normally between 2 – 4% above the Bank of England’s Base Rate). Be careful not to set the interest rate too high otherwise it could be invalid as a penalty clause.
Some manufacturing agreements give the manufacturer the option of suspending supply of products if invoices are not paid on time. This can be a useful tool for ensuring payment terms are complied with. If in doubt, check your contract or standard terms carefully or have it professionally reviewed by a lawyer.
Often manufacturing agreements contain dispute resolution clauses that set out a framework for resolving payment disputes. These may require the parties to notify each other where there is a disputed invoice; requirements to pay amounts not in dispute; agreements to negotiate in good faith; and/or referral for a resolution to arbitration, mediation or expert determination.
Exercise caution when serving a statutory demand or presenting a winding-up petition to recover debts – even where these are invoiced. Insolvency proceedings are generally only appropriate where the debt is not in dispute.
Threatening insolvency proceedings can amount to an abuse of process where a debt is disputed. The rules around insolvency can be complex and more so now given the raft of emergency legislation being pushed through by the government due to COVID-19. Therefore, legal advice should be sought before taking or threatening any insolvency action.
When chasing a client regarding late payment, ensure that you follow any government guidance, especially when claiming late payment interest. The “Users Guide to the recast Late Payment Directive” published by the Department of Business Skills and Innovation provides a useful summary of the current statutory framework in the UK regarding business to business debts.
If you are concerned that your client is not able to pay your invoice because of insolvency, then there are some simple checks you can undertake such as checking companies house filings to see if there are any insolvency notices; credit checks such as red flag searches; and winding-up petition at the Companies Court central index of winding up petitions or London Gazette.
If all else fails, and your client is ignoring your polite email reminders and telephone calls chasing the late payment, then there may be no other option but to consider litigation. The first step is to instruct a lawyer to send a letter before action (LBA). This sets out the amount of debt and how it has arisen. In most circumstances, interest and costs will be added to the original debt.
The LBA will provide a short deadline to respond (usually 7-14 days). In cases where a consumer owes the debt, the time to respond has to be 30 days. If the LBA is ignored or the debt is disputed, then court proceedings may be issued, and if the debt is over £10,000, costs are normally recoverable.
If you would like further information about how we can help with late payments and commercial debt recovery or if you have any questions, please do not hesitate to contact a member of our Commercial Litigation Solicitors on 0161 941 4000 or you can email the Commercial Litigation Team.