A Civil Courts Structure Review – Interim Report published last month by Lord Justice Briggs has proposed the introduction of an online court and effectively raising the small claims threshold to £25,000.
The Civil Courts Structure Review was commissioned in July 2015 by the Lord Chief Justice and the Master of the Rolls, to coincide with a programme for reform of the courts by Her Majesty’s Courts and Tribunals Service (HMCTS). The interim report is one stage of the review which is due to be completed by the end of July 2016.
The review accepts that current court structure is antiquated and hampered by the reliance on paper-based systems and procedures. It suggests that full modernisation and reform is unachievable without up to date and efficient IT.
The report proposes the creation of an Online Court, which would be designed for the resolution of cases up to the value of £25,000. The Online Court would adopt a three-tier structure involving:
Stage 1 – An automated process using software to assist litigants in identifying the nature of and issues in dispute;
Stage 2 – A mix of conciliation/mediation and case management conducted mainly by a ‘case officer’ by telephone or online but not face to face; and
Stage 3 – A determination by judges either on the documents, by telephone, by video or face to face.
The report also proposes a centralisation of enforcement in the County Court. The time scale for implementation is 4 years, although the report accepts that this is an ambitious target.
An Online Court and a move towards a more IT focused and paperless Court system which improves the service Court users currently experience is certainly a welcome change.
However, the report proposes that legal costs would not be recoverable through the Online Court, effectively raising the small claims threshold to £25,000. The inability to recover costs from the losing party is contrary to other EU Countries such as Germany which allow fixed recoverable costs in litigated cases. Even the European Small Claims procedure which is designed for low value debts under €2,000 euros allows the successful party to recover costs.
If there was an opportunity to recover legal costs from the other side if they were successful with their claim or defence, even more people would opt to use legal representation. Instead people are missing out on the benefit of legal representation simply because they cannot afford to write off legal costs due to an inability to recover these costs from a losing party in small claims cases. The effective rise of the small claims threshold to £25,000 may further deny people access to legal representation. It does a disservice to our legal system which has built up a good reputation internationally and makes it less attractive to use compared to other legal systems.
Lord Justice Briggs has welcomed any comments in response to the report to be emailed to [email protected] by the end of February. Please feel free to download our response which was sent on 22nd February 2016.
Yes, I’d like to download your response to the report
by Lord Justice Briggs
We frequently hear about the extent to which late payment is damaging UK businesses. While laws are in place, few take up their entitlement and so far, despite various ideas, suggestions and initiatives there’s been little change to the payment culture in the UK. But the tide appears to be turning – and FDs may be the key to it all.
FDs are all too well aware of the impact overdue invoices can have on cash flow, creating a vicious circle with firms paying late; in many instances because their own customers are paying late.
Although there is a great deal of focus on the impact this has on small businesses – that’s certainly where the government is focusing its energy – almost every firm is affected in one way or another, even if it’s just the fact that they have to pay people to chase payments day in, day out.
There is also the reputational cost to consider as the poor payment practices of big firms and imposition of unfair terms by some of the larger retailers are being exposed. But even this doesn’t appear to be changing behaviours. The practice of paying late has become ingrained in business culture. It’s no surprise then that efforts to change the culture has so far failed to yield any noticeable change.
The late payment legislation already in place to deter late payers is seriously underutilised (the Late Payment of Commercial Debts (Interest) Act 1998). Our own polling shows that suppliers are bankrolling their customers for an average of 95 days, from the point of issuing an invoice before they threaten legal action with a solicitor’s letter before action (LBA) – the threat of taking the customer to court to enforce payment. This is a 7% increase compared with Q4 2014, when the average time from invoice to LBA was just 90 days.
The Department for Business, Innovation & Skills has started to take steps to assist businesses to arbitrate and mediate without recourse to the courts. A new small business conciliation service is to be launched to help settle disputes outside of court, along with a small business tsar who will put a special focus on this issue. Minister for small business, industry and enterprise Anna Soubry said recently they would tackle the power “imbalance” between small and large UK businesses.
It’s a start, but with a very small proportion of invoice claims ending up in disputes, I fear this will not get to the root of the problem and change the payment culture we now have in the UK.
At the heart of the issue is a fear of upsetting customers and damaging client relationships. Fundamentally (and quite reasonably) businesses don’t want to rock the boat by taking a more robust approach and enlisting legal expertise to recover money owed.
STRIKING A BALANCE
While it’s important to maintain good relationships with customers, a balance needs to be struck between acting in a way that could be interpreted as aggressive versus being too passive when it comes to enforcing your payment terms.
What’s really needed is a change of mindset by business, not government.
First of all, stop thinking of the credit control function as a drain on resource – think of it as a part of the business that can make a financial contribution – almost a profit centre if you like, making best use of regulations introduced in 2013. These allow firms to claim interest and compensation plus reasonable costs of collecting the debt where these exceed the compensation. I have seen substantial companies all but pay for their credit control salaries from late payment compensation on invoices.
Not only that, if a past or current customer has consistently paid you late, you can recover compensation and interest retrospectively on every invoice paid late going back six years.
Although few businesses are aware of this six-year rule, a small but growing number of firms are now utilising the Act to take on late payers, past and present, recovering very significant sums to compensate them for the administrative and legal costs they have incurred chasing overdue invoices. They are turning their customers’ poor payment performance into a business asset.
Compensation levels range from £40 for invoices up to £999.99, to £70 per invoice between £1,000 and £9,999.99, and £100 for invoices over £10,000. This is intended to cover the cost of your collections team.
I accept this is not going to win you any friends, and may even pose a threat to the client relationship – so start with ex customers first. If the market you operate in is quite niche you may find word will spread that your business has taken a stand and as a consequence your invoices reach the top of the pile for payment sooner than they may have done previously.
To take advantage of this legislation, all references to interest or other compensation need to be removed from your terms and conditions to allow the new legislative terms to bite. Provide the new terms to customers and confirm when they will come into effect. If you have a contractual clause allowing you to recover indemnity costs, you will also have a better chance of recovering costs if, exceptionally, you find yourself going legal.
Make it standard practice within the credit team to set out very clearly the sum that your customer will need to pay, in addition to the debt, in any letters chasing payment and on phone calls. It doesn’t need to be aggressive; you are simply stating that in order to protect the financial viability of your business you will need to impose the costs stated unless payment is made by the date specified.
As soon as a payment is overdue you can claim the compensation, and interest in due course, but you may wish to waive this if payment is made immediately. Make sure that customers recognise this legal liability.
You can also claim the reasonable costs of recovering the debt as and when they are incurred. You don’t issue an invoice for the interest, compensation or costs. You just write and tell your customer the amount due. It’s as simple as that.
Firms with a good record of paying their customers within terms, but who have suffered at the hands of their customers who pay late, have the most to gain. Those that have paid late themselves could find they are on the receiving end of compensation claims and should be declaring this as a contingent liability.
The tide is slowly turning and FDs need to be prepared for claims against their businesses as well as consider the opportunities to make claims themselves. As awareness continues to grow, the implications for businesses from both an asset and liability perspective are huge, and could change the culture of payment in the UK for good.
FDs open to both the opportunities and the challenges provided by legislation will be best prepared as they see an increasing and inevitable trend for late payment itself to be marginalised.
What do you think of when you think of the court process? A severe looking man in a wig bashing a gavel and shouting? A room full of clerks scribbling away with quill pens like in a Dickens novel?
The reality is that the modern court process for debt recovery is very different – for the first stages of the process there’s no courtroom and not even a Judge. Instead there’s just a computer system in an office block in the Midlands.
So what happens when a claim is issued?
For the purpose of this article we are assuming that a Letter Before Action has already been sent to the debtor, they have not responded, and so specialist debt recovery solicitors have been engaged.
The first thing the solicitors will do is compile the essential information necessary to issue a Legal Claim. This includes basic contact details such as name and address for the Claimant (the person who wants their money) and the Debtor (the person who owes the money). The solicitor will also put together what is known as the Particulars of Claim (or POC for short). This is a brief summary of what is owed, why it is owed and details of any additional interest, compensation or costs that should be added on to the debt.
Once all this information has been compiled it is sent electronically to the County Court Bulk Centre (CCBC) using a system known as Secure Data Transfer. This is a completely automatic process available to selected debt recovery solicitors and other high-volume Court users. It is not available to individual claimants.
Once the information is received by CCBC it is automatically checked for basic errors such as missing address information, non-UK postcodes, etc. Provided the information passes this validation process the data is then entered onto CaseMan – the Court Service computer system. At this point the case is allocated a Claim Number which is the unique reference henceforth used to refer to this case.
Every day all the cases received up to midnight the previous day are loaded onto CaseManager and then Claim Forms (N1) are printed for each case and posted out to the debtor. It is important to stress that this entire process is completely automatic – at no point is a Judge (or anyone else for that matter!) looking at the case and deciding which party is right or not.
If the debtor does not respond to the Claim Form within 14 days then an electronic request for Judgment can be made against the debtor (known as Default Judgment). Again it’s important to stress this is completely automatic – if the debtor has not responded then the Judgment will be entered regardless of the merits of the case. No human being (and certainly no Judge) will have looked at the case.
Once Judgment has been entered, Enforcement action can be taken to recover the debt. It is only if the Claim is defended that there is the potential that you will have to go to Court for a trial. On average only 16% of Legal Claims are defended and far fewer (3%) actually reach a trial. If you do find yourself, having to go to trial you will in fact be surprised that the settings are far less formal than anticipated. Less Dickensian Court room and more modern office rooms within close proximity of the Judge who will listen to each side and make a decision and provide reasons for their decision accordingly
Looking to file a claim? Make a head start by downloading our free Letter Before Action guide which will kick start the debt recovery process.
Free Letter Before Action Template – Lovetts Solicitors
There has been an alarming increase in cashflow difficulties faced by UK businesses during the past year, exceeding levels last seen during the recession. In 2015, 56% of County Court Claims to recover debt, resulted in a County Court Judgment (CCJ) because the debtor was unable to pay. This is the highest level seen in over 6 years. The findings underline warnings from George Osborne that 2016 has opened with a “dangerous cocktail of new threats” and support recent reports of a downturn in business confidence.
We have seen a similar pattern in our own debt recovery activity. The number of cases where the Claim has converted to a County Court Judgment was 44% in 2015, up from 38% in 2014. There have been various warnings about the state of the UK economy; with some saying it may be the toughest year for the global economy since the financial crisis. Our own figures show the percentage of Claims to CCJ conversion increased by 6%, from 2014 to 2015 – this is quite a year on year jump.
It is a concern that the conversion reported by the Civil Justice is even higher than during the recession, a strong indication that UK businesses are under increasing financial pressure – both those acting to recover debts and those issued with CCJs. We would therefore urge businesses to be vigilant and act quickly if payment from customers is late, or customers who usually pay promptly are starting to drag their feet. It could be a sign that they are facing financial difficulties and by acting promptly and getting ahead of other potential creditors.
Good terms & conditions will strengthen a credit controller’s position when a customer pays late and protect your business from bad debt. However, terms & conditions are useless unless they have been properly incorporated into a contract between you and the customer. For example, there is a misconception that if you refer to your terms on an invoice, your terms will apply to the contract. This is not correct because an invoice is considered a post contract document and only terms & conditions referred to before or at the point a contract is formed will be valid.
So how do you ensure your terms & conditions apply? Here are 4 ways you can incorporate your terms & conditions and protect your business:
1. A Signed Contract Or Credit Account Application Form
Out of the 4 ways, this is the most important. A signed credit account application form or contract enclosing your T&C and expressly stating that the terms will apply to all future dealings between the parties will ensure incorporation. An application form or contract will also help establish who you are actually contracting with. If the company stated on the application form or contract does not show up on your searches, ensure you make enquiries and get clarification from the customer in writing as this will protect you should you need to take legal action and enforce a judgment later on.
Some form of signed application form or contract is also vital if you trade with customers overseas, especially in the Middle East as they will often refuse to recognise a debt without a signed contract.
2. Create A Paper Trail Referring To Your T&C’s
When a quote or estimate is sent to a customer, ensure that it makes reference to your T&C. When you receive a purchase order, be vigilant to any reference to the customer attempting to incorporate their T&C and reject them. The easiest way is to do this is to send an order confirmation form once again reiterating your T&C will apply.
3. Create An Email Footer Referencing Your T&C’s
More and more business is done by email meaning contracts can be formed immediately upon acceptance without necessarily having a clean paper trail as mentioned at item 2.
To ensure incorporation of your T&C, make it Company practice for everyone to have an email footer making reference to your T&C and if possible create a link to your website T&C page. An example is set out below:
AN Example Limited
Co. Building ABC-123
London, E1 3XP
Unless otherwise expressly agreed in writing, the T&C of AN Example Ltd – see www.anexample.com/terms – shall apply to and govern any purchase arrangement between AN Example Ltd and the customer
4. Obtain A Guarantee
If you are giving credit to a company you are taking a calculated risk. To reduce the potential risk you could seek to obtain a signed document with a personal guarantee from a director or even a cross company guarantee from a parent company. The guarantee is a promise to accept responsibility for the customer’s debt in the event they fail to pay it. This will give you leverage and some additional protection especially if the customer becomes insolvent.
Previously: For the Cost of a Coffee, a Solicitor’s Letter Prompts Payment in 84% of Cases
There are various points you should consider before “going legal”. Some of these should be considered before you give instructions to a solicitor to warn the customer by letter that court proceedings will be started unless they pay the debt within a specific deadline, i.e. 7 days.
Things to consider before “Going Legal”:
1. Be Sensible
The court’s overriding object in every case is to deal with the case justly. So, before sending a Letter Before Action (LBA) or starting an action, you need to do everything a sensible person would to make sure:
•the customer knows exactly what you are claiming.
•you have dealt, as far as possible with any queries or disputes raised by the customer.
•you have given the customer a reasonable time to respond to your answers to its queries.
•you have done everything reasonably possible to avoid going to court.
•But that’s the aim of a good credit control procedure anyway!
2. Record Promises To Pay In Writing
Make sure any promises to pay the debt are recorded in writing (email is fine). Preferably get the customer to put them in writing to you. If the customer does not put their offer in writing, write to them yourself confirming what was discussed and agreed between you and them.
3. Commercial Considerations
•What is the most appropriate way of dealing with this customer?
•Will you upset them with further action? Do you mind upsetting them?
•What is the commercial position?
•Do you want to deal with them again?
4. Know What It Costs
You need to know the cost of the steps you are taking. Make sure you are familiar with the potential Legal Costs of taking legal action.
5. Cost/Benefit – Is It Worth It?
You need to be satisfied that the cost of taking proceedings, and possible enforcement, is worth the risk.
•Is it a case where the customer “won’t” pay rather than “can’t” pay? You may want to carry out credit checks before risking the costs. For example, are there any unsatisfied County Court Judgements CCJ’s?
•If you are doubtful about a customer, you can instruct a solicitor to check if there are any current winding up petitions i.e. petitions which have been presented but where no winding up order has yet been made. These will not be revealed by the normal credit searches. A small charge for this service is normally made.
•Have you spoken to the customer recently?
•Have you checked that your customer is still there? I.e. the owner of a restaurant may have sold it and left but the new owner will still be trading under the same restaurant name.
•You need to consider the case as a whole right at the beginning. You must be aware from the outset of the potential costs of taking proceedings and of possible abortive enforcement.
•There is no “right answer” as to when to pursue a customer and when to give up (unless the customer is insolvent). You have to test things for your market and customers to find the right balance. One thing is for sure. If you don’t try and collect the money, you won’t get paid!
6. You Know Your Customer Better Than Anyone.
Credit reports can tell you something but the data is fairly historic. Your company has recently dealt with the customer and will have as good a “feel” as any for the customer.
Prevention is of course better than cure when it comes to late payments and bad debts in a business of any size and that means having robust terms and conditions in place to offer legal protection if a customer fails to pay when due. But Terms & Conditions aren’t worth the paper they are written on if the terms are not enforced and sadly this is proving to be the case amongst many SMEs through fear of alienating customers.
In fact we’ve found that 58% of small to medium sized businesses wouldn’t claim compensation for fear of damaging customer relationships. This is despite the fact that almost 1 in 4 businesses are being paid, on average, one to two months late. Furthermore, 60% wouldn’t make any claims from ex-customers because it would affect their reputation.
While the Government has plans to create a dispute resolution service to help tackle late payment to small businesses, in many cases there’s no dispute to be resolved, it’s simply one business failing to pay another in order to protect their own cash reserves.
Claim What Is Rightfully Yours
So what’s to be done? Well, in our experience, the fear of upsetting customers or creating a bad reputation are unfounded. Businesses need to take a stand and claim what is rightfully theirs. It’s not difficult and doesn’t need to be costly. Indeed there are regulations now in place that can effectively make debt recovery cost free! So there really is very little to lose from taking action, whether it’s instructing a Letter Before Action to be issued (at the cost of a “very cheap” cup of coffee) to claiming late payment compensation.
Take Action With Late Payment Compensation
The Late Payment act allows any business paid late to claim interest for the period the debt was overdue, plus compensation, if their contract terms allow it. The entitlement to claim interest and compensation remains for six years on each and every invoice (or payment point) paid late, unless clear assent is proven against the claimant. That means you can recover compensation of between £40-£100 per invoice, plus reasonable costs on any debts, which are now paid, but were paid late over the previous six years.
A lot of this comes down to the terms and conditions which form the basis for the relationship – if it’s made clear from the outset that compensation will be claimed if payments are overdue, then there’s no surprises and in fact, it can often incentivise customers to pay within terms to avoid the additional cost. This is the best way to get a grip on the bad debt culture that is so pervasive in the UK today.
Lovetts has secured Lexcel accreditation once again, having first achieved the Law Society’s top accolade in 2012. Lexcel recognises excellence in law management and is the Law Society’s legal practice quality mark for the highest standards in legal practice management and client care.
Lexcel sets the required standard in seven different areas, including financial management, people management, risk management and client care. Assessment includes conducting background checks and a probing on-site visit from an experienced, trained Lexcel assessor.
Our clients’ needs and interests lie at the heart of everything we do at Lovetts. Lexcel accreditation recognises our commitment to providing a personal and ethical service.With this mark of quality from Lexcel, our clients can be assured that Lovetts operates best practice, supported by a dedicated team of professionals.
The Lexcel assessment stated, “Once again, Lovetts has demonstrated excellent adherence to Lexcel requirements. Its policies and systems are considered and sophisticated and are applied diligently and consistently. In addition, the people at the firm display high degrees of compliance and client focus. In short, Lovetts covers a single area of law – debt collections – and performs it expertly. Only the very best firms gain and maintain accreditation, helping clients find legal practices they can rely on.”
The legal right many UK businesses have to claim late payment compensation is being stymied by a fear amongst firms that doing so will upset their customers and lead to loss of business.
A recent survey of credit personnel* within small to medium sized businesses by Lovetts has found that 58% would not claim late payment compensation for this reason. This is despite the fact that almost 1 in 4 businesses are being paid on average 1-2 months late.
The survey found that only 22% get their bills paid within terms, 49% are paid within the following month while 23% have to wait 1-2 months after the payment due date.
Cost is not a barrier to taking action, the survey found that less than 5% of firms are put off by the cost. Furthermore, 20% don’t think it would be worth the bother and 18% of the businesses surveyed think it would take too much time.
As such 48% never claim compensation, leaving just 20% that said they do. Surprisingly, when asked about claiming compensation from ex-customers, which businesses are able to do going back 6 years if their terms and conditions allow it, almost 60% said they wouldn’t because it would affect their reputation.
The perception that action will lead to loss of custom is actually quite far removed from the reality in our experience and as such, it is a real concern that so many businesses live in fear of upsetting their customers by claiming what is rightfully theirs. A lot of this comes down to the terms and conditions which form the basis for the relationship – if it’s made clear from the outset that late payment compensation will be claimed if payments are overdue, then there’s no surprises and in fact, it can often incentivise customers to pay within terms to avoid the additional cost. We would really urge credit professionals to reconsider this highly cautious attitude to help get a grip on the late payment culture that is so pervasive in the UK today.
Philip King, Chief Executive of the Chartered Institute of Credit Management said: “Our CICM UK Credit Managers’ Index is showing demand for credit is largely on the up. This adds to the wider picture of an improving economy and greater trading confidence amongst UK businesses. However, it is important that firms taking on new customers, extending credit, and expanding their order books have robust terms and conditions in place that will protect them should bad debt become an issue. It is also important that they use all of the tools at their disposal including late payment legislation, best-practice credit management, and the Prompt Payment Code (PPC). Preserving good customer relations is important but so is preserving the future of your business.”
* Survey of 149 Credit Professionals, September 2015
Our client is a major company which deals in shares. They had a debt in China for just over £4,000 which they instructed Lovetts’ overseas prelegal department to recover on a no collection, no fee basis.
The Challenge
The debt was for services our client had provided in respect of dealing with shares and issuing share certificates for their client, a Chinese company. The debtor refused to engage with the client in relation to the unpaid invoices. The Courts of England and Wales had jurisdiction but even if Court proceedings were issued and a Judgment obtained China would not recognise it as an enforceable Judgment, because China only recognises foreign judgments under specific treaties with particular jurisdictions. China has not entered into such a treaty with the UK.
The Solution
It was important to establish some engagement in relation to the debt. The key to any debt collection, whether in the UK or overseas, is to ensure you speak to the right person even if you have to escalate it as far up as the CEO. The debtor failed to engage with Lovetts and it was not possible to make contact with anyone with sufficient authority within the debtor Company. Through extensive research and investigation, Lovetts was able to find the details of the debtor’s third party accountants and subsequently made contact with them regarding the debt.
The Benefit
The accountants would have been under a duty to refer our correspondence onto its client, our debtor. They would also at the same time be made aware of a potential liability that would have to be accounted for in any accounts drafted by them. The accounts did in fact refer to our correspondence and they also made a senior member of the debtor Company aware of the debt. Accordingly, the debtor settled the debt within two weeks of the debt being referred to Lovetts and all on a no collection no fee basis. International Debt Recovery: send us a message or call 01483 457500