What can you do if your customer refuses to pay you?
We get a lot of enquiries from both individuals and businesses who are owed money by clients and customers. What can you do if your customer refuses to pay you?
Why aren’t they paying?
The first rule is to make contact with the customer and find out why they are not paying. Is there a genuine reason for non-payment i.e. is the customer in financial difficulties themselves? If they are and they simply need time for payment then try and agree a payment timetable. A debtor who is in genuine difficulties should not have any problems at all in agreeing such a schedule. Once a payment schedule has been agreed, you should make sure it is adhered to.
If the debtor is not in financial difficulties, consider if there is a genuine dispute as a reason for non-payment. Normally you will be told only too quickly by the customer that they have a problem with the service or product you have provided.
Dealing with that complaint needs tact and discretion, as well as analysis as to whether the complaint is justified or not. Let’s assume for these purposes that the complaint is not justified and is merely an excuse for non-payment. What evidence have you got to rebut their complaint?
How much are you owed?
If the sum is less than £10,000 it will constitute a small claim within the County Court. You will not be able to claim your legal fees in addition to the monies you are owed, even if you are successful in recovering your money. The only sums you can recover, in addition to the debt you are owed, are the court fees payable upon issuing the claim and some small fixed costs which represent your legal costs.
The small claims court is designed to keep lawyers away and to encourage people to act on their own behalf. However, as the limit is £10,000, that is a significant sum of money. You may well need legal advice on your rights or how to recover the debt, but note that if it is recovered, the fees you pay your solicitor will in all probability be coming out of the payment you are owed.
If the debt is more than £10,000 if you win, you are able to recover your legal fees plus the monies you are owed from the debtor. However, if you lose, you will have to pay the other side’s legal costs.
If there is a genuine dispute as to the payment, this has an effect upon the legal remedies available to you. As a claimant, if you do not agree with the reason the debtor is stating for non-payment, you should use the court system by issuing a Claim Form with Particulars of Claim and issuing through the County Court, or the High Court for claims above £50,000.
Can I make them bankrupt?
If there is no dispute at all as to the service provided and you are owed more than £750, it is possible for you to use an insolvency process. This is started by issuing a Statutory Demand which, if not satisfied by the debtor, would enable you to apply for a bankruptcy petition, or a winding-up petition against a company.
The definition of insolvency is that the debtor is unable to pay their bills as they fall due or in full. However, it must not be used as a debt recovery process and should only be used where you think there is a real prospect that the debtor is actually unable to pay.
As a small creditor, you need to consider carefully whether you wish to take the risk of issuing an insolvency process, leading to the bankruptcy of your debtor. That may mean you end up carrying the petition for larger creditors such as HMRC or the banks, and take your place in the queue of creditors. This process is often used as a draconian form of threat against recalcitrant customers and can produce speedy results. However you must be wary as it can also backfire. A Judge in a bankruptcy court will not allow a bankruptcy petition to be presented if he/she thinks this is being used as a debt recovery process or there is a real dispute. Also the costs of issuing and pursuing a bankruptcy petition are greater than those in filing a straightforward court claim for debt.
A Bird in the hand?
If you are owed money by a customer then you should move quickly and not let the grass grow under your feet. Either issue court proceedings or a statutory demand once it becomes clear that the debtor is unable or unwilling to cooperate with you.
Consideration should always be given to whether the debtor is able to pay. If they have no assets or resources then consider whether it is worth investing further time and money into pursuing them if, at the end of the process, they cannot pay you what you are owed anyway. In that situation, if the debtor pays something towards what is owed, even if it is a long way short of what is fully due, you may be better off remembering the old adage of “a bird in the hand is worth two in the bush”.