When a business should use a debt recovery solicitor

Stage 1: What to do before involving solicitors

Solicitors are most effective when the groundwork is done. Before escalating, confirm that the debt is properly evidenced, that the invoice actually reached the right entity, and that there is no live dispute about the goods or services supplied.

Interest and compensation you can claim

Where a contract does not provide its own remedy, business creditors can usually claim statutory interest and fixed compensation on late commercial payments under the Late Payment of Commercial Debts (Interest) Act 1998. Statutory interest runs at 8% above the Bank of England base rate, and fixed compensation is payable per invoice on a sliding scale according to debt size, with a further right to reasonable recovery costs above that sum.

If your contract contains its own interest provision, that will normally apply instead, provided it offers a substantial remedy. Claiming interest and compensation properly from the outset improves recovery and signals that the account is being handled seriously.

When instructing a solicitor becomes proportionate

The decision is commercial. Weigh the debt value against likely recovery cost, the debtor's ability to pay, the value of the ongoing relationship, and the message sent to your other customers.

• The debt is material to your cash flow and internal chasing has stopped working
• The debtor has gone silent or is giving repeated unfulfilled promises
• There are signs of financial distress and other creditors are circling
• A limitation date is approaching
• The debtor has raised a spurious dispute to delay payment
• You need the formality of legal correspondence to unlock a payment process
• There is a personal guarantee, retention of title or security worth enforcing

Stage 2: The letter before action

A letter before action (also called a letter before claim) sets out the debt, its basis, the interest and compensation claimed, and a deadline for payment, and states that proceedings will follow if payment is not made. In business-to-business debts a reasonable period - commonly 14 days - is usually given.

The letter matters for two reasons. It is frequently effective on its own, because it demonstrates that the creditor has moved from credit control to legal process. And it discharges the pre-action conduct expectations of the Civil Procedure Rules; failing to send one can affect costs later, even if you win.

Stage 3: Court proceedings

If the debt remains unpaid and undisputed, the usual route is a claim in the County Court, issued online through Money Claim Online or the Business and Property Courts for larger or more complex claims. Court issue fees are payable on a scale linked to the value of the claim, and are recoverable from the debtor if the claim succeeds.

An undefended claim can result in judgment in default relatively quickly. A defended claim is allocated to a track according to value and complexity, which determines the procedure, the timetable and the costs that can be recovered.

Statutory demands and insolvency pressure

A statutory demand is a formal demand for payment which, if unmet, can support a winding-up petition against a company or bankruptcy proceedings against an individual. It is a powerful tool because of the consequences of a petition, and for that reason it is tightly constrained.

It should not be used where the debt is genuinely disputed on substantial grounds or where there is a credible cross-claim. Presenting a winding-up petition in those circumstances can be restrained by injunction and can result in adverse costs orders. Insolvency thresholds and procedure also apply, so take advice before using this route.

• Only appropriate for clear, undisputed debts above the relevant statutory threshold
• Compresses the timetable dramatically compared with a civil claim
• Can trigger insolvency, in which case you may recover little or nothing as an unsecured creditor
• Can damage a commercial relationship beyond repair
• Misuse carries a real risk of injunction and costs

Stage 4: Enforcing a judgment

Judgment establishes the debt; it does not collect it. If the debtor still does not pay, you must choose an enforcement method, and the right one depends on what assets and income the debtor has. Enforcement carries its own fees, which are usually added to the debt but must be funded upfront.

Costs, timescales and realistic expectations

Timescales vary considerably. A letter before action gives a result or does not within a few weeks. An undefended claim can produce judgment in a matter of weeks; a defended claim commonly takes months, and a multi-track trial can take a year or more.

On cost, remember that recovery of legal costs is limited on the small claims track and capped by fixed recoverable costs regimes in the fast and intermediate tracks. Budget on the assumption that you will bear part of the cost even when you win, and weigh that against the debt.

• Court issue fees scale with claim value and are payable upfront
• Enforcement fees must generally be funded before the step is taken
• Interest continues to accrue on judgment debts
• Recovery is only as good as the debtor's solvency

Preventing the next bad debt

The most cost-effective debt recovery work happens before the sale. Terms of business, credit checks and disciplined invoicing prevent far more losses than litigation recovers.