A new wave of dispute resolution

Don’t leave it too late


UK businesses write off millions of pounds every year in unpaid bills – often unnecessarily. The problem is often at its most serious at the start of the year, when trading conditions become tougher, supply chains get stressed and contracts are tested.

Bad debts are written off because there is a general perception that the cost, time and risk associated with recovering the money often outweighs the financial benefit. However, there are now solutions that make recovering bad debts viable, by eliminating the need to pre-fund the cost of taking legal action, removing the financial risk and speeding up the resolution process.

How big is the problem?

Unpaid or late payment of invoices is a huge financial drain on businesses, with research consistently showing that businesses are often owed many thousands of pounds.

Sage Pay, one of the largest electronic payment providers, estimates that small business owners spend on average two weeks a year chasing unpaid invoices.  Other research by insurance website Simply Business showed many small businesses experience problems with non-paying customers and nearly half were left with significant debts.

However, rarely does the issue of unpaid or late payments gain much attention. And it takes a major event such as the collapse of a big company for the media to look at the issue of payments in the supply chain. The collapse of outsourcing company Carillion dominated the headlines, not least because of the significant impact on its suppliers: Carillion owed up to 30,000 businesses around £1 billion in unpaid bills.

But business failures, or companies just not paying their suppliers, are not the only reasons why suppliers are paid late, or not at all.   Another big problem is the institutionalised practice of late payment.   Experience shows that buyers that owe money exploit their supplier’s fear of pursing bad debts as a strategic tool. Government data shows that many of the UK’s biggest companies pay bills late, seeking to retain as much cash in their own accounts as possible.

Why is the government not doing more to help?

The government has tried to address the issue – but thus far with little impact. In April 2017 the government required all large UK companies, those employing over 250 people, to publish specific information regarding their payment policies, practices and actual performance, including the average time taken to pay supplier invoices.  You would expect such a naming and shaming policy to force business to change – but the actual impact has been limited.

In October 2018, the Department for Business, Energy & Industrial Strategy (BEIS) began looking at the issue of late payment of invoices.  As part of this review, BEIS asked businesses to help it to create a responsible payment culture for small businesses, and is now reviewing the responses.

According to BEIS’ own data, 32% of SMEs report that late payments result in them delaying payments to their own suppliers; 25% admit that late payments force them to rely on their bank overdraft; and around 15% say late payments mean they struggle to pay staff or business bills. Around half of SMEs report additional costs to their business due directly to late payments. Indeed, late payment is seen as a major obstacle to business success among 33% of SME employers.

SMEs are also often harder hit by late payments as they have greater difficulty accessing temporary finance, which can come at a high cost. They also often lack the internal resources and credit systems for managing late payments and, as a result, do not tackle the issues quickly and see debts mounting up.

How can businesses prevent late payment issues?

There are several things you should do before you commit to dealing with any company. The first is check their financial strength.  This can easily be done and costs nothing using the Companies House online report and accounts checking facility. Keep in mind, though, that the report and accounts give an historic perspective reflecting a company’s last financial year filed – they may not accurately reflect its current or future financial performance

For larger companies, check the government’s payment data, as outlined above.  Carry out a Google check, as this can often highlight late and non-payment issues. And, always check contracts thoroughly to understand what payment terms you are committing to.

When should I get help?

The Courts encourage companies to negotiate a settlement before beginning legal proceedings. However, as there is no fixed time limit for negotiations to conclude and defendants are often incentivised to delay the financial outcome, the impact on a small business could be catastrophic.

Another issue is that lawyers typically bill you based on the number of hours worked – so the longer a case drags on, the more it costs; the reality is that lawyers have no incentive to find a quick solution.  You will also typically need to make an upfront payment before you even begin litigation to cover the court fee to issue the claim form (this can be as much as £10,000), as well as fees for the barrister and any expert witnesses you require.

There’s little doubt that the current system is stacked against SMEs and we think it’s time for change.  The good news is that alternative forms of managing commercial disputes are beginning to emerge.  The award-winning Escalate process, for example, gives you the comfort of knowing and capping the fees at the outset.  Escalate charges a fixed percentage, 30%, of the damages that are actually recovered, and that fee is not paid unless you win your case. All costs are included in the fee and there are no upfront costs, such as court fees, expert witness and barrister fees, to pay.  In addition, a built-in insurance policy means that an SME would never have to pick up any adverse costs order if the case is lost. Escalate targets a settlement inside three months – which compares to the 18-month duration of a typical court case under a traditional litigation process.

So, what should I do?

In summary, and in order to avoid late or non-payment issues, our recommendation is always to carefully check who you are dealing with and walk away if necessary – even though this can be a hard decision to make.

If you have already suffered losses then do not automatically assume the costs of recovery outweigh the benefits.  Investigate solutions such as Escalate that can reduce the risk and offer certainty of costs with no initial payments.

For advice on recovering bad debts, or for more information about the Escalate process, please talk to Andrew Pay on 01392 455972 or email andrew.pay@kitsons-solicitors.co.uk

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