A government release from the start of 2021 stated that £23.4bn was owed to firms across Britain by invoices which are, per their payment terms, late.
This position is causing strain on many businesses as it impacts cash flow and, possibly, the ability to continue trading. Although this situation impacts many businesses, it puts the greatest strain on small to medium-sized enterprises which do not typically have large cash reserves. According to the Federation of Small Businesses (FSB), approximately 50,000 businesses close each year as a consequence of late payments.
In partnership with international law firm Morrison & Foerster, this article considers:
- The legal rights of businesses that have supplied services or products which have not been paid in accordance with respective payment terms
- What the options available to businesses are when it comes to pursuing payment of late invoices, with an emphasis on the needs of small businesses
- Detail on the certain key steps being taken by the government to facilitate recovery by suppliers which are owed these monies
Naturally, suppliers can also have an open conversation with customers who have failed to pay. However, these are often time consuming and do not lead to a satisfactory result.
Rights accruing under current legislation
The Late Payment of Commercial Debts (Interest) Act 1998 grants a number of legal rights to suppliers facing non-payment. The act provides that:
- Suppliers are entitled to claim a statutory interest rate of at least eight per cent above the Bank of England base rate on any late payment
- This statutory interest starts to accrue the day after an agreed payment date or, where no such date is agreed, 30 days after the latest of delivery, invoice and (where applicable) acceptance
- Once this statutory interest begins to run, the supplier is entitled to an additional fixed amount which is determined according to the size of the debt, as listed here:
- £40 owed per invoice on debts up to £999.99
- £70 owed per invoice on debts ranging between £1,000 – £9,999.99
- £100 owed per invoice on debts of £10,000 or more
- Suppliers also have an implied contractual right to be paid the reasonable costs of recovering the debt, less the fixed sum described above.
Temporary measures granted due to coronavirus
In March 2021 legislation was passed to extend certain temporary measures, which were introduced by the Corporate Insolvency Governance Act 2020. The temporary measures that were extended include the:
- Temporary prohibition on creditors filing winding-up petitions on the basis of statutory demands or where coronavirus has had a financial effect on a company, which has now been extended to 30 June 2021
- Suspension of personal liability for wrongful trading, which has now been extended to 30 June 2021
- Carve out for small suppliers from the s233B contractual termination right restrictions (which prevent a supplier from terminating a contract for the supply of goods or services for the reason of entry into a formal insolvency process), which has now been extended to 30 June 2021
- Relaxation of certain requirements regulating the stand-alone moratorium, which has now been extended to 30 September 2021
The extension of these measures provides additional breathing space for companies during the period in which restrictions remain; they may also cause additional strain to creditors. If you have any questions in relation to these changes, or any other restructuring questions, please let us know.
Prompt Payment Code and Small Business Commissioner Complaints Procedure
The Prompt Payment Code was established in 2008 as a voluntary agreement whose purpose is to promote good payment practices. Companies which are signatories to the code agree to pay suppliers within an agreed time and must ensure that they have proper processes in place to manage any issues which may arise. The terms of the code, and the consequences of non-compliance with it, are published on the code’s website.
Changes made to the code during January 2021 require that finance directors, CEOs or, in the case of businesses with fewer than 50 employees (small businesses), business owners take personal responsibility by signing the Code. Signatories to the Code acknowledge that suppliers may charge interest on late invoices and that breaches will be investigated by administrators of the Code. Further, with effect from 1 July 2021, signatories to the Code will be required to pay 95 per cent of invoices from small businesses within 30 days, which is a reduction on the current requirement to pay 95 per cent of invoices within 60 days (which shall remain the timeline for payment to larger businesses).
Breaches of the code will continue to be published on the code website and the website of the Small Business Commissioner (SBC). This has proven to be an effective deterrent in the past, with BT notably improving its rate of payment from 60 per cent of all invoices being paid on time in 2019, when it was suspended from the Code, to 94.5 per cent of invoices being paid on time in 2020 in an effort to be re-instated as a signatory.
Responsibility for the code was transferred to the SBC in March 2020 as part of a process to place all late payment initiatives under one banner. The SBC, amongst other things, is tasked with providing an in-house complaints handling function for small businesses which are experiencing payment issues in connection with the supply of goods or services to larger businesses with which the small business has a previous, current or potential supply relationship.
In order to lodge a complaint with the SBC the following conditions must be met:
(1) A business which lodges a complaint with the SBC must:
- Have a staff count of fewer than 50 people
Have its registered office or principal place of business in the UK
Not be a public authority
(2) Any such small business must submit its complaint to the SBC within 12 months of the date on which the matter to which the complaint relates took place, or began to take place.
(3) A complainant must first approach the larger business and attempt to resolve the issue prior to submitting a complaint to the SBC.
After adjudicating on the complaint, the SBC has discretion to publish a report on it, which may include recommendations on how to remedy this dispute and also how to avoid similar disputes in the future. The SBC may also name the respondent business in the published report. The SBC’s findings, however, are not legally binding and the parties are therefore not legally obliged to follow any of the SBC’s recommendations.
Critics of the code’s framework note the lack of legal power given to the SBC to enforce payment and place fines on businesses which are not adhering to the criteria of the code. Consequently the government has promised to consult on the benefits of giving new powers to the SBC which would enable the SBC to:
- Impose fines on large businesses which do not comply with information requests
- Impose fines and binding payment plans where payment does not take place
However, at this stage such powers have not been granted and small businesses ought not to rely on the possibility that these will be granted in the near future.
Initiating court proceedings
Where a late debt is owed, a creditor may issue a claim through the courts for the payment of the debt (as well as interest and costs). The court in which proceedings are initiated will depend on the amount at stake. In particular:
- Straightforward money claims up to £10,000 can be issued in the County Court Money Claims Centre (CCMCC) or online at Money Claim Online and dealt with via the small claims track. The small claims track is a simplified system for dealing with lower value claims, which is generally quicker and cheaper than the standard court procedure
- Claims for more than £10,000 and up to £100,000 must be issued in the County Court
- For debts over £100,000, the claim must be issued in the High Court
In order to initiate court proceedings in each case, the creditor will file a Part 7 claim form with the relevant court. It is also usual practice to send a letter before claim prior to starting court proceedings, in accordance with the Practice Direction on Pre-action Conduct. In a straightforward debt claim, the debtor should provide a response within 14 days of receipt of the letter before claim.
Negotiation or mediation
Court proceedings can be time consuming and expensive, particularly where external lawyers are involved. Even if a party is self-represented, litigation can consume significant management time and detract from other commercial objectives. Litigation can be especially detrimental where the parties have an established and ongoing commercial relationship.
Court proceedings should therefore generally be seen as a last resort to collection of a late debt. As a result of the coronavirus pandemic, many businesses are suffering from cash flow issues and parties on both sides should be prepared to explore options to find a constructive solution to allow debts to be repaid and commercial relationships to remain intact. Early communication around these issues with customers is important and can help businesses to prepare more accurate cash flow forecasts in order to navigate their way out of the current situation and resume trading in as normal a manner as possible.
In discussions with debtors, it may be helpful to refer to the UK government’s guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the coronavirus emergency, which was first issued in May 2020 and updated on 30 June 2020.
Although the guidance is non-binding, it provides a helpful framework for contracting parties to assess and resolve disputes in the current context. The overriding objectives parties are encouraged to have regard to are:
- Supporting the restart of the economy
- Preventing unnecessary insolvencies
- Supporting the long-term viability of contracts and businesses
The specific recommendations include:
- Parties are strongly encouraged to make prompt payments in accordance with their contractual and legal obligations, particularly with respect to SMEs and individuals who may not have the same resources as large businesses
- Parties should consider carefully, and reasonably, what reliefs may be available, including whether an extension of time for performance should be granted, how additional costs should be dealt with and whether terms should be renegotiated to preserve the viability of the contract in light of coronavirus
- Parties are encouraged to resolve contractual issues early and responsibly, through negotiation or mediation, rather than letting them escalate into formal intractable disputes
In approaching a negotiation, parties should be prepared to take a flexible and creative approach. It may be that, for example, staged or delayed payments, an agreement to forgo interest or accept a smaller sum for upfront payment, or an agreement to place future orders could achieve a mutually acceptable solution. Parties should also always consider the consequences of failing to settle, in particular the cost, delay and lost management time caused by a protracted dispute or litigation. Parties should designate settlement correspondence or discussions “without prejudice” if they want to be free to make proposed concessions or offers without the risk of the other party being able to later refer to them in any court proceedings if a settlement is not reached.
Parties could also consider some form of mediation, if their negotiations reach an impasse or the dispute would benefit from a more structured dispute resolution mechanism with input from a third party intermediary. There are various fast-track dispute resolution services recommended in the guidance, including the Low Value Disputes Model Adjudication Procedure and the Pandemic Business Dispute Resolution Service. Small claims track court cases will also be referred for resolution to the Small Claims Mediation Service where all parties agree to mediation.
This article has highlighted the various actions which small businesses may consider when pursuing overdue invoices from suppliers, including the option to consult the SBC and raise a complaint, as well as the option to pursue a debt claim in the courts. It is worth noting, however, that a key consideration for small businesses, in particular, is maintaining an ongoing commercial relationship with the customer in question. Therefore, it makes sense for businesses to consider informal methods of recovering a debt, such as negotiation and mediation, before pursuing more confrontational approaches.