Today, thanks to the high-cost of current court fees, small to medium-sized enterprises (SMEs) face the problem of not getting paid by a customer and then, subsequently, not being able to go to court to get paid.

In 2015, the government increased court fees for creditor claims worth more than £10,000. The new rates were set at five percent of the sum being claimed, up to a cap of £10,000 for claims of £250,000 and above. Fees for claims worth less than £10,000 (which, at the time, accounted for around 90 percent of all claims) remained the same. However, the increase in the upfront costs of taking a civil case to court can act as a deterrent to firms looking at the possibility of going via the court system.

But should creditors be put off from court? Is insolvency now becoming a more attractive route?

Assuming a debt meets the necessary criteria (£5,000 for bankruptcy and £750 for winding up) and if the debt is undisputed (i.e. you have an admission or promise to pay etc.), then insolvency can be a real and cost effective alternative to going to court.

Insolvency is, essentially, the ultimate collection tool if you feel your customer is simply withholding payment. There is no greater tool in the armoury of a debt collector. The insolvency procedure is harsh, quick and effective.

So, let us look at the requirements of insolvency then and what options debt collectors are presented with when looking to go down this avenue.

The costs of the insolvency route can vary, but, when looking to implement it, a creditor should have a budget in mind – usually around £1,900 for each route of procedure. It’s worth remembering that there are stages throughout the process where the customer has the opportunity to pay their debt, and therefore avoid the costs and the order for the insolvency. I would advise the creditor to keep the customer aware of the costs that they could avoid if they were simply to pay early.

Ultimately, if the customer is going to pay, but chooses to leave it until the last minute, then the creditor will want all of their costs settled in addition to that of the debt. Therefore, if the customer is made aware of what these costs are likely to be at the beginning of the process, then the creditor stands more chance of convincing them that they should settle early in order to avoid ever increasing levels of debt.

When it comes to winding up, the stages for collection are as follows:

  • A formal request for payment – this can include any entitlement to interest (A point of note on this, is that no statutory demand is required before presenting a winding up petition, as long as a formal request for payment has been made). So then, what is a formal request for payment? Could an invoice satisfy this criterion? Bearing in mind my advice about costs and keeping the customer aware, I would suggest a short letter (emailed, faxed and posted) to the Director(s) of the customer company, stating what will happen if they don’t pay the debt and setting out the likely costs. This letter can seek payment within a short period, say 3 days as an example. Commonly known as the ‘winder letter’, it is cost effective and hard hitting.
  • Statutory Demand – this is compulsory for bankruptcy. It must be personally served to the debtor.
  • Present a Petition – this is where the costs are starting to build up, with aspects such as the court fee, Official Receiver deposit, service fees and so on, all going to be due at this stage of proceedings.
  • An advert in the Gazette (for limited companies only) – when dealing with a limited company the winding up procedure includes the presentation of an advert in the London Gazette; the official public record. This advert is scanned by many companies, including financial institutions, credit agencies, consumers and many more. For a company wishing to avoid adverse publicity, an advert in the Gazette could have direct repercussions, potentially meaning the cancellation of financial facilities such as overdrafts, the withdrawal of loan agreements and the potential loss of contracts agreed or pending. The creditor then, should explain the consequences of such an advert to the director(s) of a company as it could prove worthwhile in making them more forthcoming to settle the debt. This is though, unfortunately, only applicable to a limited company and there is no equivalent within the bankruptcy procedures.
  • Hearing – attendance, advertising fees (for winding up petitions only).

After a winding up or bankruptcy order is obtained, the debtor is then answerable to the Official Receiver, and they will look into their financial affairs past, present and future.

The downside of insolvency is that after spending approximately £2,000, you might still not get your debt paid back and you merely end up with the satisfaction of winding the company up. But, you can end up in a similar situation after having issued County Court Proceedings, obtaining a County Court Judgment and pursuing enforcement thereafter, as this can also incur costs without getting the debt repaid.

Let us look at County Court as an option.

While insolvency is the ultimate tool in a debt collector’s armoury, County Court is the most commonly used. It is still the cheapest option for low value debts, but the question is where does insolvency become an option when it comes to court fees alone?

Debts up to £50,000 will cost £2,250 to issue proceedings via the County Court Business Centre and £2,500 at the Court Office. Taking a direct cost comparison then, suggests that any debts over the £45,000 mark means insolvency should be a serious consideration.

As creditors, we always ask the question, “will they pay if I push them hard enough?” With this in mind, should we push harder at the beginning for undisputed debts? Or, are we in danger of pushing them over the edge prematurely? Should we, instead, work with them?

It’s worth reflecting on this, but, if the commercial questions have all been asked and answered, and all other options have been exhausted and the debtor simply won’t pay, what are the next steps?

They are as follows:

  1. A letter before action is required. This can also detail the fees to be incurred and any interest likely to be payable, whether it’s contractual or not.
  2. Issuing proceedings will immediately attract a court fee – it will be served within a few days by 1st class post and the customer – now the defendant – has 14 days within which to respond.
  3. Acknowledgement of service. The defendant can buy themselves another 14 days by filing a notice of intention to defend, which takes the period of time out to 28 days from the date of service.
  4. If no defence is filed a County Court Judgement can be applied for.

The County Court Judgement will allow the creditor to enforce it through one of many options available, such as a High Court Enforcement Officer, a third-party debt order or, of course, insolvency, as this is still an option even after the County Court Judgement.

An important point to note here, is that each enforcement option does incur a court fee and whatever solicitors’ costs can be agreed with the lawyer – some of which may be irrecoverable. If the creditor chooses to explore several enforcement options then the break-even point of insolvency reduces with every option you choose.

Summary

To summarise then, the key here is to have your crystal ball ready and know what each option will deliver. Or, alternatively, you need to gather as much data about your customer as you can – financials and previous history will always help. But, as debt collectors, we must ultimately make the decision to use the most cost effective means at our disposal to obtain payment in the shortest time.

For low value debt, the Count Court process is the best option – but it’s not the quickest. Each creditor can use the insolvency process, either in part or in whole to collect their overdue accounts. The winder letter is a cost-effective option for all ranges of debt values, but what do you do if the customer doesn’t pay? You can still go down the County Court route, as you are not committed to the insolvency route, or you can present a petition. Essentially, it’s all about bluff. Just how far can the debtor go?