Cash collection in challenging economic times

A look at the English legal aspects of cash flow collection for SMEs.

We are certainly living in challenging economic times.
Related Articles:

  • Debt collection: guidance for SMEs
  • Minimising risk in uncertain times
  • Late payment a key issue for UK SMEs in 2009
  • How to avoid late payment
  • Dealing with late payment: A guide for SMEs

As bank finance has all but dried up the issue of cash flow is very dear to the heart of all businesses and requires constant attention to maintain working capital.

In the last 18 months this issue has moved from required to critical for the very survival of many businesses, particularly, but not exclusively, smaller enterprises across all business sectors. It is clearly essential and legally correct that businesses are paid on a timely basis for the products or services they have provided to customers or clients.

If payment is not made, then the non-paying customer is implicitly calling into question the continuation of the commercial relationship. If this happens and the parties can agree terms for payment, whether immediately following a period of default, staged or even instalment payment, then the relationship can be preserved.

Non payment inevitably leads to a termination of the commercial relationship and the issue then becomes what are the options to resolve no payment of a commercial debt. On the assumption that there is no dispute over the product or service supplied, then it may be necessary to introduce the appropriate debt recovery process to obtain payment and ensure the continued existence and survival of the business. When the issue of debt payment is uncontested, it is preferable to use the insolvency route to obtain payment.

UK insolvency procedure outlines the following steps that can be taken in order to recover a debt:

Stage 1.

Letter before action/claim; This gives brief details of the indebtedness and a request for payment within a specified time limit, say seven or fourteen days. If payment is not forthcoming then we move to stage 2.

Stage 2.

If there is no dispute on the product or service, and the debt is over £750.00 you can issue proceedings for bankruptcy (individuals or a partnership) or a winding up order (companies) by serving a Statutory Demand and then a Bankruptcy or Winding Up Petition.

Stage 3.

Obtain payment of the debt from the Trustee in Bankruptcy (individuals and partnership) or the Liquidator, from the assets realised.

Court litigation is really only appropriate where there is a dispute between the parties on, trading terms, the amount of product or service supplied, defective goods or products, bad service or negligence in supply. Court proceedings are lengthy and can take up to 18 months and can be expensive. The unpredictable nature of litigation will have an impact on legal and other costs.

Given the expense involved in taking a dispute to court, it is always worthwhile carrying out searches and enquiries about assets owned by the debtor in advance of legal action. There is no point in obtaining Bankruptcy or Winding Up Orders which will never be paid or taking court action against a debtor who does not have the assets to satisfy a Judgment to pay.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© , September 2009

Please contact:

John Kenneally - Partner

DD +44 (0)20 7553 6001

View profile »