Debt Recovery - Your money or your interest

It is crucial to all businesses whether large or small that proper systems are in place to recover unpaid bills from late paying clients.  It is perhaps surprising therefore that more businesses do not make use of their statutory right to claim interest on the debt at 8% above the Bank of England’s Base Rate pursuant to the Late Payment of Commercial Debts (Interest) Act 1998.  This important piece of legislation provides an essential tool which no self-respecting business wishing to maintain its cash flow should ignore.  The purpose of this article is to explain to businesses when their right to claim this interest arises and what practical steps should be taken to recover that interest as well as the debt.

From the 1 November 2002 any business whether large or small will be encompassed by the legislation.  Therefore not only should your business consider whether to claim the penalty interest as part of its credit control procedures but businesses should also be aware that they are leaving themselves open to potentially large claims for penalty interest if they in turn do not meet debts owed to other businesses. 

Can the right to penalty interest be excluded?

Yes.  If the parties agree as part of their contractual arrangements to charge a different rate of interest then the Act will not apply.  However, any such contractual remedy for late payment must be “substantial” otherwise it will be void and the debtor will be unable to rely upon it.  The purpose of this rule is to prevent large businesses abusing their bargaining position.  Examples of contractual terms which might be struck down by the Courts include, imposing an interest rate on late payments which are significantly lower than the statutory rate or a credit period which is abnormally long.  It is very unlikely for example that a rate of interest at or below the base rate would satisfy the requirements in the act.

What if my business is within the UK but outside England?

England and Wales share the same system of law and whilst Northern Ireland has its own legal system, matters of contract law have not been devolved to the Northern Ireland Assembly. The

Act applies to Scotland but the Scottish Parliament has the power to amend or replace the Act

When is a payment late?

Where there is an agreed credit period, the payment is late if it is made after the last day of that period.  The parties can have an implied credit period which arises by custom or a course of dealing.  If no credit period has been agreed then the Act sets a default period of 30 days running from either the delivery of the goods or performance of the service by the supplier or the day on which the invoice was raised whichever is the later. 

Practical steps you should take

So you now understand precisely when you could charge penalty interest or alternatively are liable for it as a business.  Assuming that you wish to take advantage of the Act what positive steps should you take to protect your right to interest?  In short you should send a letter to your debtor including the following information:-

·         the fact that you are claiming interest under the Late Payment of Commercial Debt (Interest) Act 1998;

·         the daily rate of interest that you intend to claim;

·         how much is owed and the rate at which the interest will continue to accrue;

·         what the principal debt is for quoting the original invoice number;

·         to whom payment should be made;

·         by what date;

to what address; and by what method (cash, cheque, electronic transfer etc).

Credit Control

Of course the whole point of the legislation is to discourage the late payment of debts and the best method of doing this is to specify clearly on all written communications, credit application forms, order confirmations, invoices and contracts in advance that you will be relying upon the Act.  We can advise you on the appropriate wording.

Collecting the debt and interest

Hopefully by informing the customer both in advance and after the debt has arisen of your right to the interest as above you will collect the debt without having to resort to litigation.  Ultimately however, no self-respecting businesses’ credit control can ever be effective unless there is a willingness to take the debtor to Court if necessary.  If you find yourself in this unfortunate position please contact us and we will advise you.

If you are unsure of the answers, Andersons Solicitors can provide them.
 

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