Recovering unpaid fees
This section explains how you can recover unpaid introduction or transfer fees from clients.
In depth article on debt recovery
Guest writer Sally Bradshaw of Francis Wilks unravels the mystery of insolvency in the REC Legal bulletin July/August 2013 (issue 57).
I supplied my client with a temporary worker for 3 weeks and my invoice has not been paid. What are my options?
Most businesses will experience the problem of getting paid on time by their clients. In the first instance you should send reminders. You should then send a final reminder letter to your client making it clear that you intend to take legal action and when you will do this if payment is not made within a certain period of time, say 7 days. If this does not lead to payment then the only remaining option is to take legal proceedings for recovery of the debt. Remember there is no point in making empty threats of legal action if you are not prepared to go through with it.
It is therefore extremely important to assess carefully whether going to court is likely to recover the debt especially since the court cannot help if your client has no money or anything else of value. For example if there are already County Court judgments against your client it may be less likely that your debt will be paid. In England and Wales you can find out if an individual or company has unpaid county court judgments against them by contacting your local court to search the Register of County Court judgments subject to a small fee. Equally the Enforcement of Judgment Office in Northern Ireland will be able to provide the same information. In Scotland in order to find out if an individual or company has unpaid court judgments against them you can ask your local Trade Inspections Agency to do a search subject to a small fee.
If your client is already bankrupt or in ‘compulsory liquidation’, which means that the business has stopped trading and probably has neither money nor other assets, you are unlikely to recover the debt. In England and Wales you can contact the Insolvency Service at 21 Bloomsbury Street, London WC1B 3SS and tell them the name of the person or company and their last known address in order to find out this information. In Northern Ireland the Insolvency Service at Fermanagh House, Ormeau Road, Belfast will be able to provide the same information. In these circumstances you would write to the person appointed as the liquidator and provide them with details of your debt on a ‘proof of debt’ form. Sometimes the liquidator will write to you to inform you of the liquidation and ask you to complete this document. You will then be added to the list of creditors and any monies will be distributed equally to all creditors.
In court proceedings for a small claim you cannot recover any legal fees or other costs except for the court fees and expenses, even if you win. It is therefore essential to consider whether you wish to represent yourself or instruct a firm of solicitors. Obviously if the legal fees are likely to exceed the debt, financially it would not be worth obtaining legal representation but if the issues are complex you may be at a disadvantage if the claimant is legally represented. It is also worth considering the value of your own time spent in taking proceedings and attending court resulting in lost business.
You should keep copies of all correspondence requesting payment including notes of any telephone conversations. This is essential written evidence to prove to the court that you have made attempts to resolve the matter before resorting to legal proceedings.
Once you have taken the decision to resort to legal proceedings you need to consider which route to take. If the client is not disputing the debt i.e. agrees the fees are payable but is delaying payment, there are two options available: debt recovery through the courts or insolvency proceedings. However if the client is arguing that they are not liable for the debt, for example because the work was not performed or not performed satisfactorily, then you cannot pursue insolvency proceedings and must start court proceedings for recovery of the debt.
I have sent my client reminder letters requesting payment. They keep saying we will receive payment but the invoices are now 90 days overdue and remain unpaid. How do I start insolvency proceedings?
England, Wales and Northern Ireland
If the amount you are owed is more than £750 you can apply to make an individual client bankrupt or apply for a winding up order if your client is a company or partnership. This is called insolvency proceedings whereby a company, partnership or individual is forced to cease trading and sell its assets in order to pay its debts to anyone to whom it owes money, their creditors.
First you should complete and serve on the defendant a ‘statutory demand’ form demanding payment. The ‘statutory demand’ form is available from the Stationery Office. If the defendant fails to make payment within three weeks after sending the statutory demand you can then apply for bankruptcy or a winding up order in the Chancery Division of the High Court on the grounds that the defendant is unable to pay its debts. It is important to note that the procedure involved is very complex. We therefore recommend instructing a firm of solicitors for assistance.
If the court grants a winding up order against a company or partnership an Official Receiver will be appointed to take control of all aspects of the business. Equally if the court grants a bankruptcy order against an individual sole trader, a trustee will be appointed to collect all his assets, convert these into money and use the money to pay the creditors.
It is important to remember that debts are paid in a strict order to creditors and even with a winding up or bankruptcy order from the court you will rank after creditors such as HM Revenue and Customs, as unsecured creditors for payment of debts out of any proceeds and may receive little or nothing. Payment of all debts must be made in the following order:
Costs of the bankruptcy/winding up order
The first item to be paid are the costs incurred as a result of the bankruptcy or winding up order including the cost of collecting the business assets and the cost of the petition.
Preferential debts
The following creditors rank first and equally amongst each other and if there are insufficient funds, each creditor will receive only a percentage of the amount due to them, that percentage being the same for each creditor.
- PAYE income tax and national insurance contributions due on the last 12 months;
- VAT due in the 6 months prior to the order;
- Accrued holiday pay owed to employees; and
- Wages of employees (not temporary workers on contracts for services).
Secured creditors
These are creditors whose debt is secured by a mortgage or other charge on property or assets owned by the debtor.
Unsecured creditors
If there is any money left after payment of costs and preferential debts it will be shared between unsecured creditors. For example, a recruitment consultancy owed money by a client will rank as unsecured creditors alongside any other suppliers. There are almost always insufficient assets to sell and at best you may receive a small percentage of the money owed to you.
Scotland
Your client is a company
If a company owes you more than £750 you can apply either to the sheriff court or Court of Session for a winding up order. Before commencing proceedings you should complete and send to the defendant a ‘statutory demand’ form demanding payment. The ‘statutory demand’ form is available from your local legal stationer. If the company fails to make payment within three weeks after sending the form you can then apply for a winding up order on the grounds that the company is unable to pay its debts. If the court grants a winding up order against a company an interim liquidator will be appointed to collect all the assets of the business, convert it into money and use the money to pay the company’s debts.
Your client is an individual sole trader or partnership
If you are owed at least £1,500 you can present an application (petition) for bankruptcy of the individual/partnership either to the local sheriff court or to the Court of Session in Edinburgh. If the amount is less than £1,500 and another individual/partnership is also owed less than £1,500 you can jointly petition for bankruptcy. However, it is important to note that you should not petition for bankruptcy if there is already a petition for bankruptcy before the court against the debtor or the court has already ordered bankruptcy from which the debtor has not been discharged. It would therefore be useful to write to the Office of the Accountant in Bankruptcy to find out the information before sending a petition.
You will need to show that the debtor is “apparently insolvent”. The most commons grounds of apparent insolvency are as follows:
- The debtor has failed to pay the debt due under a decree of court, and a charge for payment served by a sheriff officer has expired without payment having been made;
- You have served a statutory demand for payment, 21 days have expired and the debtor has neither paid the debt nor returned the denial slip.
If the court awards your application for bankruptcy, you can ask the court to appoint a professional insolvency practitioner as trustee or the court may appoint the Accountant in Bankruptcy to be trustee. The trustee will then be responsible for taking control of all aspects of the debtor’s business by collecting all the assets, converting it into money and using the money to pay the business’s debts.
As with England and Wales unsecured trade creditors are paid last because payment of all debts must be made in the order set out above, after costs of the insolvency, preferential and secured creditors.
I have sent my client a reminder letter requesting payment. He now says that the work carried out by the temp was unsatisfactory and that they will not pay the sums contained in the invoices. How do I take court proceedings for recovery of the debt?
England, Wales and Northern Ireland
Starting The Claim
The claim can be commenced in any County Court although it may be transferred if your client defends the claim and he or she is an individual whose address is in another court's area. If the client is represented by a solicitor your claim will be transferred to the court covering the area of the solicitor’s business address. The address and phone number of the local County Court is available in the phone book and most court offices are open between 10am and 4pm.
In England and Wales you need to complete Form N1, which can be obtained from the court office to commence legal proceedings. In Northern Ireland you need to submit an Application for Arbitration. The court fees can be added to the amount of your claim so too can interest on the debt from the time it became due. The fee you will have to pay the court will depend on the amount you are claiming. Details of the fee are available from the court office.
Once you have completed the appropriate form you should photocopy it so that you have:
- one copy for yourself;
- one copy for the court; and
- one copy for your client (referred to as the defendant).
In England and Wales on presenting the completed Form N1 the court will stamp it and post a copy of the claim form and a 'response pack' to the defendant by first class post. The response pack contains the forms that the defendant can use to reply to your claim. These comprise an admission form, a defence form and an acknowledgement of service.
If the defendant's copy of your claim form and the response pack are returned by the Post Office as undelivered, the court will send you a Form N216 telling you the reason why the documents were returned to the Post Office. The court will also inform you of the steps required to serve the claim form yourself. The claim form must be served on the defendant within four months of the date it was issued and if you require additional time you must apply for an extension of time before the four-month period ends. Service means delivery to the defendant by post or in person to their last known address. With a limited company this must be the registered office, which may differ from their trading address. To discover the address of the registered office a search may be conducted at Companies House, Crown Way, Cardiff CF14 3UZ.
In Northern Ireland the Application for Arbitration is served on the defendant by first class recorded delivery with a standard Notice of Dispute and a standard Acceptance of Liability Form.
No Defence
If the defendant fails to pay the amount claimed; fails to respond with a Defence within 14 days after service; or does not reply to the claim form you can request judgment to be entered by completing a Request for Judgment Form, which can be obtained from the court. You will then be issued with a Judgment and can then take enforcement action if the debt is not paid (see below).
Defence
If the defendant does not admit or accept the claim he must complete and return the Acknowledgement of Service and Defence form within 14 days of receipt. The Defence can include a Counterclaim, for example, that you owe the defendant money. The court will send you a copy of the defendant's Defence and a Form N150 (allocation questionnaire). The information you provide in the questionnaire will help the Judge decide which is the most appropriate track for your case. Claims for under £5,000 are usually dealt with as a small claim in the Small Claims Track.
In Northern Ireland the Acceptance of Liability or Notice of Dispute must be completed and returned by the defendant within 14 days of receipt. However, the time limit is not as strictly enforced and the defendant can turn up at court on the hearing date specified on the application without having lodged a dispute.
Preliminary Hearing
In the following circumstances the Court will arrange a preliminary hearing if:
- The Judge feels that your claim requires special or unusual steps which the Judge wants to explain to you and the defendant personally; or
- The Judge feels that either you, or the defendant has no real prospect of winning your claim, or Defence and wants to dispose of the claim as soon as possible to save everyone time and money; or
- If your Particulars of Claim, or the defendants Defence, do not show any reasonable grounds for bringing the claim or defending it.
Hearing and decision
In most cases the Court will simply notify you and the Defendant of the date for the hearing of the claim and at the same time give you any directions in preparation for the hearing. You will be required to send copies of documents and any witness statements to the other side and should comply with the timescales given for doing this. A small claims hearing is an informal meeting between you, the defendant and a District Judge. This takes place on a date fixed by the court. You do not have to attend the hearing and may submit written evidence. However, whichever method you choose it is extremely important to have available all documents relating to the case as the onus is on you to prove your case.
At the hearing the Judge will listen to you, to the defendant, to any witnesses and review the evidence which each of you puts forward. At the end of the hearing the judge will tell you the decision reached and give brief reasons for it.
After the hearing the court staff will send you and the defendant an Order or Judgment setting out the decision of the court. If you are successful in your claim this document will enable you to take steps to enforce the judgment if the defendant fails to pay.
Costs and expenses
If you win your claim you can request costs from the defendant for:
- Any court fees you have paid;
- An amount of not more than £50 per day each for you and any witness you may have for loss of earnings due to attending the court hearing; and
- Any additional travelling and overnight expenses.
Interest
It is common for terms of business to stipulate a rate of interest on late payment of invoices. This is usually payable from the end of the period during which payment is due i.e. if the invoice is payable within 14 days then interest is calculated from the 15 th day after the date on the invoice, until payment.
If the terms of business do not give a right to claim interest it is still possible to claim interest, without bringing court proceedings, under the Late Payments of Commercial Debts (Interest) Act 1998. This came into force on 1 st November 1998 but was phased in by the Government. Since 1 st November 2002 all businesses are entitled to claim statutory interest from each other. The Act gives the right to claim interest at the Bank of England base rate from time to time plus 8% if payment is not made within 30 days.
If proceedings are started in the courts then interest can be claimed under the court rules at a fixed rate, which is set from time to time.
Enforcing Judgment
If the defendant still fails to pay after Judgment has been entered you may take the following additional steps to have the Judgment enforced against the defendant. In each case you will need to complete a form and pay the court a fee to start the process. The fee is added to the amount of your claim.
- Warrant or (Writ) of Execution/Seizure Order - This is effective if the defendant has assets, which can be taken and sold for a significant sum of money. The process enables the Court Bailiff to attend the defendant’s address to seize suitable goods to sell at auction. However, the Bailiff is prohibited from taking domestic items, items that the defendant needs for their job such as tools or a car, or items that are rented.
- Third Party Debt Order - This is particularly useful if the defendant’s bank account is in credit. The bank or building society will be ordered by the court to set aside the amount of your claim from the funds in the defendant's account.
- Attachment of Earnings Order - If the defendant is an individual who is employed, this compels the defendant’s employer to make regular deductions from his or her wages and pay it over to you.
- Charging Order - This will prevent the defendant from selling assets (e.g. house, stock or shares) without paying you the money you are owed. The defendant is usually an individual rather than a limited company.
- Instalment Order - This is only available in Northern Ireland and compels the defendant to make payment in instalments.
Scotland
In Scotland there are 49 sheriff courts and a list of their addresses and telephone numbers is available from the court offices. Claims should normally be made in the sheriff court where the client carries on business. In certain circumstances members can make a claim in the sheriff court in their area, for example, if the client's whereabouts are unknown or the client's business is outside Scotland.
The sheriff courts deal with three different types of cases:
- Small Claims - deals with debts of less than £750;
- Summary Causes - deals with debts between £750 and £1,500;
- Ordinary Actions - deals with debts exceeding £1,500.
Small claims in the sherrif court
Starting the claim
In order to commence legal proceedings you need to complete Form 1: "Small Claims Summons” - "Claim For Payment of Money" and Form 3: "Defenders Copy Summons". These forms are available from your local sheriff clerk's office either by going to the office, by telephone or by post. The fee you will have to pay the court will depend on the amount you are claiming and details are available from the court office. The court fee can be added to the amount of your claim provided that your claim is over £200. Equally interest can also be added to the amount of your claim.
Once you have completed the Forms you will need to hand or post them to the sheriff court with the correct fee. The sheriff clerk will fix a date for the claim to be heard - this will normally be about 6 to 8 weeks ahead. Businesses cannot personally send the summons and must give it to a sheriff officer or solicitor - upon payment of a fee - to send it on their behalf.
No defence
If your client (referred to as the “defender”) fails to respond by the return date the sheriff clerk will send you Form 10. You must then complete one of the boxes in Form 10 either for a court order for payment of the sum claimed with interest and expenses; or if you wish a continuation stating the reasons for the continuation and for the period of time. For example, if your client has paid the sum due by cheque and you are waiting for the cheque to clear, you could request a continuation of the case for a further 2 weeks.
It is important that you return Form 10 to the court by 12 Noon on the day prior to the preliminary hearing date otherwise the court will dismiss your claim. If the defender still fails to pay you can then take enforcement action.
Defence
If the defender denies the claim the sheriff’s clerk will advise you by sending you Form 11 which will inform you of the exact nature of the defender's response.
Preliminary Hearing
This will usually take place when:
- The defender intends to appear to state a defence or dispute the amount of the claim or to challenge the jurisdiction of the court; or
- The defender has admitted the claim and intends to appear to make an application about payment; or
- The defender has admitted the claim and made a written application about payment and you do not accept the offer to pay.
The sheriff will hear what both sides have to say in turn. If the claim is disputed or defended, the sheriff will note what the defender says and try to find out what issues and facts you can both agree on. Occasionally the sheriff may have enough information to decide the case at the preliminary hearing, but if there are some facts and issues that are not agreed a date will be fixed for a full hearing with witnesses and evidence.
Hearing and Decision
The hearing will be an informal meeting where the sheriff will listen to you, to the defender, any witnesses and review the evidence which each of you puts forward. At the end of the hearing the sheriff may tell you the decision reached or may require further time to consider the case in which case a written decision will be provided within twenty-eight days. Once the sheriff's decision has been reached the sheriff clerk will send a copy of the written judgment to you and the defender.
If you are successful write to the defender asking for payment or for the court's order to be complied with. If the defendant fails to pay you may employ a sheriff officer to enforce the court order.
Costs and expenses
In small claims there are limits on the amount of expenses that can be awarded in a defended case. If the value of the claim is up to £200 there will normally be no award of expenses. This means that if the case goes to a full hearing, win or lose you may have to pay the fees and costs. If the value of the claim is more than £200 but not more than £750 the maximum amount of expenses that will normally be awarded by the court is £75.
In the following circumstances the limit on expenses does not apply and therefore full court expenses may be awarded to:
- Undefended claims;
- Claims where the defender states a defence but doesn't go ahead with it;
- Claims where either side has acted unreasonably;
- Appeals to the sheriff principal about a decision of the sheriff.
Appeal
If your claim is unsuccessful you may appeal to the sheriff principle against the decision of the sheriff. An appeal cannot be made about the sheriff's decision on the facts of the case only on a point of law. It is therefore advisable to seek legal advice before making a decision on whether to appeal.
Summary cause procedure in the sheriff court
Starting the case
You need to complete two forms. One is for yourself called a 'summons' and the other is a copy to be sent to your client whom you are making the claim against (the defender). These forms are available from your local sheriff clerk's office either by going to the office, by telephone or by post. The fee you will have to pay the court will depend on the amount you are claiming and details are available from the court office. The fee and interest can be added to the amount of your claim.
Once you have completed the Forms you will need to hand or post them to the sheriff court with the correct fee. The sheriff clerk will fix the Return Day which is the date you must return the summons to court and the Calling Date which is a date when the case will be heard - this will normally be about 6 to 8 weeks ahead. The summons will then be returned to you for you to arrange for the copy summons to be sent to the defender. Businesses cannot personally send the summons and must give it to a sheriff officer or a solicitor - upon payment of a fee - to send it on their behalf.
Once the solicitor or sheriff officer has done this, the summons will be returned to you with a certificate stating that the copy summons has been sent to the defender. You must return the summons to the sheriff clerk not later than the Return Day. You should then contact the sheriff clerk immediately after the Return Day to find out if the defender has responded.
No Defence
If the defender fails to reply you can ask the court to make an order for payment against the defender. This is done by filling in a form, which the sheriff clerk will give you, or by going along to the sheriff clerk's office and making a written entry in the Book of Summary Causes. This must be done before 12 noon on the day prior to the Calling Date. On the Calling Date the court will make an order in your favour without you having to attend court.
Defence
The defender must send a written reply back to the court if they intend to defend the case no later than the Return Day.
The Calling Date
The first time that the case is discussed is called the Calling Date. The sheriff hears what both sides have to say in turn. If the claim is disputed or defended, the sheriff notes what the defender says, and may then fix a date for a further hearing called the Proof at which witnesses and evidence may be presented.
The proof
At this hearing you will have to provide evidence in support of your case. You may wish to show the court documents or take along witnesses. You can represent yourself, but you cannot be represented by someone else except a solicitor. Once the sheriff has reviewed the evidence which each of you puts forward he will make a decision. If you are successful the sheriff clerk will send you the summons with the court's order in the case. You should then write to the defender asking for payment or for the court's order to be complied with. If this does not work you need to employ a sheriff officer to enforce the court's order.
Costs and expenses
If you win your case you may be able to recover from the defender the following:
- Any court fees you have paid;
- Legal fees;
- Travelling expenses and loss of wages when attending court;
- Travelling expenses and loss of wages for any witnesses;
- The cost of sending a copy summons to the defender:
Appeal
If your claim is unsuccessful you may appeal to the sheriff principle against the decision of the sheriff. An appeal cannot be made about the sheriff's decision on the facts of the case, only on a point of law. As a result it is advisable to seek legal advice before making a decision on whether to appeal.
Enforcing judgement
If the defender still fails to pay after a court order has been entered you may take the following additional steps to have the court order enforced against the defender. In each case enforcement is commenced by the sheriff officer serving a charge for payment. This is a document demanding payment within a prescribed period, normally 14 days.
Earning Arrestment
If the defender is employed, an Earnings Arrestment can be served on his/her employer which will require the employer to make deductions on every pay day and remit the money directly to you until the debt is paid in full.
Poinding/Warrant of Sale
This is effective if the defender has assets, which can be taken and sold for a significant sum of money. The first step is for the sheriff officer to execute a poinding - value goods belonging to the defender. The officer is prohibited from valuing goods, which may cause undue hardship, for example, the loss of office furniture
You must then wait 14 days after the poinding has been executed before you can instruct an officer to make an application to the court for permission to sell the poinded goods. At this stage a copy of the Application for Warrant of Sale is served on the defender. Again a period of 14 days will pass during which time the debtor can object to the process. Thereafter if you are successful the court will grant a Warrant of Sale.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.