There are various debt collection techniques. You should consider using these to help you collect money your company is owed.
- Warn debtors with a Letter before Action
- Adding interest to outstanding company debt
- Issuing a CCJ against the debtor
- Threaten to issue a Winding up Petition
- Sell outstanding debt to a specialist collector
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Write a Letter Before Action
If your company is owed money the best result is an amicable agreement for this to be repaid. You should suggest your openness to this in a Letter Before Action.
This letter is a written warning to a debtor of the debt collection action that will be taken unless a sensible payment plan can be agreed.
The letter should make clear that if the debt remains unpaid court proceedings will be started and costs and interest added. It should also highlight that court proceedings will normally affect the debtor’s credit rating.
It can be useful to employ a solicitor to issue this letter. This will involve additional cost. However the debtor will often take communication from a solicitor more seriously. They may continue to ignore a threatening letter which is just written on your company letter headed paper.
Adding interest to outstanding Company Debt
In 1998 the Government introduced legislation to give businesses a statutory right to claim interest from other businesses for the late payment of commercial debt. This is known as the Late Payment of Commercial Debts (interest) Act.
If you do not have provisions for interest charges in your standard payment terms you still add interest under this legislation. The court will normally uphold a company’s right to charge statutory interest on unpaid debts at 8% per year.
A warning that you plan to add interest and how this will be calculated should be included in any Letter Before Action that you send to debtors.
Issuing a County Court Judgment against the debtor
If your letter before action has been ignored you then need to take the next step in the company debt collection process. This is normally to apply for a County Court Judgment (CCJ). A CCJ is an agreement from the Court that an outstanding debt should be paid.
A company will normally need the help of a solicitor to apply for a CCJ. This will involve additional cost. In addition even if a CCJ is issued this in itself does not mean that the debtor has to pay. They may choose to ignore the Order.
The debtor may try to agree a staged payment plan. If this will result in the debt being repaid in a reasonable time it should be accepted. The fact that a CCJ has been issued and payment plan agreed will help if further recover action then becomes necessary.
Threaten a Winding Up Petition
What can a company do if an agreed payment plan has failed and a CCJ is ignored? The next step in the company debt collection process is to threaten a Winding Up Petition. This threat has significant teeth.
If the Petition is granted it will be advertised in the London Gazette. The advertisement will be picked up by the debtor’s bank and the company’s bank account will be frozen. Facing this threat a debtor is increasingly likely to pay what they owe.
If the threat of a Winding Up Petition is ignored you will have to think carefully before going through with the application. It will normally cost c£3000. In addition there is no guarantee that the debt owed will be recovered. However it may well lead to the closure of the debtor company and an investigation into the conduct of its directors.
Sell outstanding debt to a Specialist Collector
You may feel you have exhausted your collection options or further action is simply too expensive. In this situation you can consider selling the outstanding debt to a specialist purchaser.
The purchaser then takes on responsibility for trying to realise the cash from the debtor. You will then receive a percentage of the debt which the purchaser manages to recover.
This solution can only be used for debts owed by another commercial organisation. It cannot be employed if the debt is owed by an individual.
This solution is not generally useful for generating cash up front. However it allows cash to be collected which would otherwise may have been written off entirely.