Taking legal action to reclaim a debt should be a last resort, and often the threat of doing so is enough to make your customers pay you. However, if your usual ways of recovering debt have failed, there are things to consider before beginning the legal process.
The court will expect you to make an effort to sort out your dispute with the other party before you take legal action. This means that court action only takes place after you have tried to reach an agreement with the customer.
This guide will help you decide if court action is right for you and the steps you need to take. It also explains how to claim, including making a claim online, and how claims are administered.
Table of Contents
Deciding whether to take your debt claim to court
Legal action should be a last resort to recover debts and you should explore all other options first:
- Take all other reasonable steps, including communicating with the customer – see our guide on ensuring customers pay you on time.
- Consider some form of alternative dispute resolution (ADR), such as mediation, negotiation or arbitration. Your contracts may already specify how disputes should be resolved. Resolution procedures or ADR processes can make it easier to control costs and are often less confrontational than court proceedings.
- Consider taking back your goods and services, if appropriate.
Mediation is a way of resolving disputes without the need to go to court. It involves using an independent third party – a mediator – who helps both sides come to an agreement. The mediator will remain neutral throughout the process. This can help maintain the business relationship once the dispute is settled. Search for a civil mediation provider on the Justice.gov.uk website – Opens in a new window.
Negotiation is when the people involved in the dispute – or their representatives, such as solicitors – discuss the issue until they reach an agreement that is acceptable to both sides.
Arbitration involves an independent third party deciding what should happen based on evidence given to them about the dispute. You can read about arbitration on the ADRNow website – Opens in a new window.
Conciliation is similar to mediation. In conciliation, as in mediation, an independent person (the conciliator) tries to help the people in dispute to resolve it. You can read about conciliation on the ADRNow website – Opens in a new window.
Early neutral evaluation (ENE) is when people involved in a dispute send evidence to an independent third person who gives their opinion on the dispute. ENE may be used to give information to people before they negotiate or use another form of ADR. You can read about ENE on the ADRNow website – Opens in a new window.
It may be better to accept a small loss and retain a large client than risk offending them. You are unlikely to keep a customer that you pursue through the courts.
Even if making a claim seems the only answer, you should consider your chances of winning. If your claim is disputed it could be difficult to prove the customer is at fault – eg that they owe you money or haven’t paid an outstanding bill. You will need to provide as much evidence as you can of the validity of your claim, such as purchase orders or invoices, copies of reminder letters or other requests for payment that you sent before resorting to further action.
Make sure the customer can pay
If the person or business you’re taking action against has no assets or has a history of bad debt then you can’t be certain of receiving all of the money owed.
Credit reference agencies can provide credit reports on businesses as well as on individual consumers. They can also give you details of any unpaid county court or high courts judgements. Make your enquiry by phone or via the agency websites. You will need to have some information ready, such as:
- the name of the business or person you want to get a credit report for
- the last known address
- why you want the credit report
If you win your claim, the customer is required to pay the sum claimed. If the correct processes are followed, they may also be required to pay your court fees and any interest as well. If they do not pay, you must be prepared to take steps to enforce the judgment. See the page in this guide on enforcing the judgment on your debt claim.
Be prepared for the costs
You will have to pay court fees in advance. However, they may be recovered from the defendant if you win. Note that:
- court fees are payable when you issue a claim and at different stages of the claim, including if you have to enforce the judgment
- if you lose, or do not succeed in enforcing your judgment, you will not be able to reclaim the court fees
- if you win and succeed in enforcing the judgment, you may be able to claim your solicitor’s fees and other costs back from the defendant
- if you refuse to consider alternative ways of sorting out your claim before taking court action, you may not be able to claim your costs back and the court may order you to pay your customer’s court costs, even if you win the case
Choosing the right legal route for your debt claim
The county court is where most claims are issued and this is where you should go first to make a claim. Only the largest and most complex cases – involving debts of at least £25,000 – are heard in the High Court.
There are three case management tracks within the county court system. Once a claim is made to the court and is defended, the county court will take into account the value of the claim and allocate the case to one of the tracks as appropriate.
The county court tracks each have a different claim limit.
- Small claims track – for simple cases up to £5,000. For example consumer claims, faulty goods, goods not supplied, goods recovery, debt, breach of contract etc.
- Fast track – for cases from £5,000 to £25,000.
- Multi-track – for complex cases and all cases over £25,000
Even once a claim has been issued it is not too late to sort out the dispute with the customer through some form of alternative dispute resolution and so avoid further court action.
The final warning letter
Whichever course of legal action you choose, you must send a final warning letter to the customer before you begin. You should do this because:
- it often prompts payment
- the courts may penalise you on costs if one is not sent
It is advisable to send the letter using a signed-for delivery service so that the customer can’t deny receiving it.
Online claims
If your claim is for a fixed amount that is below £100,000, you may be able to start a claim via the internet using the HM Courts & Tribunals Service’s Money Claim Online service. See the page in this guide on issuing your debt claim.
Using solicitors and debt recovery agents
If your case is straightforward, you could prepare the claim, present the case and handle the enforcement on your own. Most people choose not to use solicitors in the small claims track.
But there may be times when you decide you want to seek advice from a solicitor. You should note that:
- legal aid is not usually available for small claims cases
- legal costs aren’t normally recoverable
If your claim is likely to be disputed, if your claim is for a large amount or if the case is complicated, it is probably sensible to get professional help from a solicitor or debt recovery agent. You must have a solicitor for a case heard in the High Court
Choosing a solicitor
Finding a solicitor can be a challenge, and often a personal recommendation is a good way to choose. Before you make a decision, ask the following questions:
- Is there a department specialising in debt recovery?
- Does the firm have a mediator or dispute resolution service that you can consider as an alternative option?
- How will you be charged – rate per hour plus expenses or a percentage of the sum recovered?
- If they do business on a ‘no win, no fee’ basis, are there any hidden costs? Will you have to pay court costs?
See our guide on how to choose and work with a solicitor.
Debt recovery agents
Other organisations working in debt collection are debt recovery agents and credit agents.
Debt recovery agents employ solicitors and take legal action to recover your money. Find debt recovery agents on the Credit Services Association (CSA) website – Opens in a new window.
Some credit agencies, though not all, will take over the collection of debt. If successful, you will receive an agreed proportion of the total amount owing, while the agency will keep the rest. They usually try to recover debt by:
- sending out routine letters
- telephoning customers
Issuing your debt claim
If your claim is for a fixed amount that is below £100,000, you may be able to make a claim using the HM Courts & Tribunals Service (HMCTS) Money Claim Online service. For more information you can read our guide: recover your debt through court: Money Claim Online.
You can also issue your claim in a county court. To do this you need to complete claim form N1 and return it to the court.
Completing the form
- Complete the form carefully. It’s best if you can type it, but if it’s handwritten, use black ink and write in capitals. For more information, download leaflet N1A Notes for claimant on completing a claim form from the HM Courts & Tribunals Service website (PDF, 203K) – Opens in a new window.
- You are entitled to add the court fee and interest to the amount you are claiming. If a solicitor prepares the claim, other charges may apply that you can also add to the claim.
- The claim form must be signed by you or by someone authorised to sign for you.
Issuing the claim
- You can send or take the claim to any county court. If the claim is defended, the case will be transferred to the defendant’s local court.
- You should supply three copies of the claim form to the issuing court. If there are additional defendants you should send a form for each one.
- You will have to pay the court fee up front.
- Court staff will check that everything is in order, however they are not legally trained and will not be able to provide legal advice. If it is in order, the claim will be given a claim number and served.
Find your local county court on the HM Courts & Tribunals Service website – Opens in a new window.
You should gather any key documents supporting your case, such as invoices or a delivery sheet signed by your customer. You may have to submit copies of these to the defendant and to the court.
Find claim form N1 on the HM Courts & Tribunals Service website – Opens in a new window.
What happens after your debt claim has been served
The defendant is allowed 14 days from the deemed date of service of the claim to reply to the claim. However, if the defendant acknowledges service of the claim they can have an extra 14 days. The maximum is 28 days.
The Court Procedure Rules clarify the date on which a document is deemed to have been served (delivered) according to the method of service used. The date of service is an important date for court proceedings and will not necessarily be the same date the claim form was submitted to the court or the date it was sent to the defendant.
The deemed dates of service are:
- personal service – the day it was given to the person – if after 17.00, the next day is the deemed date
- first class post – the second day after it was posted
- leaving a document at the correct address – the day after it is left at the address
- fax – the same day if sent before 16.00 on a business day – if later, the next business day after it was sent
- email – the second day after it was sent
On receipt of the court claim the defendant may:
- do nothing
- pay the amount claimed
- admit the claim and make a written application about payment
- acknowledge service and have a 14 day extension to file a defence
- admit the claim and attend court to make an application about payment
- defend part of the claim, admit part of the claim and pay the admitted part
- defend part of the claim, admit part of the claim and ask for time to pay the admitted part
- issue a counterclaim
If the defendant chooses to defend the claim the defence will be sent to you along with an allocation questionnaire for you to complete. You will usually be given 14 days to return the questionnaire.
Be aware that the defendant may file a counterclaim against you. If they do, you will be able to file a defence to the counterclaim and submit it to the court at the same time as returning the allocation questionnaire. See the page in this guide on what happens if your debt claim is contested.
Sometimes the judge may deal with the case without a hearing, using written evidence. For example, if you have no chance of successfully winning the claim, or there are no reasonable grounds for you bringing the claim, it may be dismissed without a hearing.
What to do if no defence is entered
If the debtor does not defend the case, you can apply for a judgment from the court at the end of the permitted time. This is called a judgment by default. If you issued the claim online you will be able to enter a judgment online. Usually there will be no hearing and a judgment will be made in your favour. However, the debtor may be able to apply to the court to get the judgment ‘set aside’ – made void – in some circumstances, and the case may then continue.
You still won’t have the money if no defence is entered. If the defendant does not pay you, you will then have to take steps to enforce the judgment. See the page in this guide on enforcing the judgment on your debt claim.
What happens if your debt claim is contested
If a defence is entered, the case may progress to a hearing or trial at the defendant’s local court. Unless an agreement is reached first a judge will decide the case.
Even if you have started court action, it is not too late to try to reach an agreement with the defendant through some form of alternative dispute resolution – see the page in this guide on deciding whether to take your debt claim to court.
If you agree to mediate with the other party and it doesn’t work, you can still continue with court action.Both the claimant and the defendant must complete an allocation questionnaire. This helps the judge decide whether your case is suitable for the small claims track, fast track or multi-track. It also gives the option to try mediation to settle the dispute.
The small claims track
The small claims track is often referred to as the small claims court. This is informal and the hearing is usually held quickly and before a District Judge. In a small claims case:
- Evidence is not normally given under oath.
- The claimant and defendant are expected to represent themselves. You can be represented if you wish, but will not be awarded costs for this.
- You may be able to claim limited costs for loss of earnings while attending court, travelling and overnight expenses, and the costs of any witnesses and experts – such as a doctor or surveyor.
- The judge may intervene more than in the other tracks as the claimant and defendant are probably not skilled at presenting a case.
- The judge may propose to decide the case on written evidence only. You can refuse or accept this.
- At the end of the hearing the judge tells you their decision and briefly explains the reasons behind it.
- After the hearing both you and the defendant will be sent a copy of the judgment.
Small Claims Mediation Service
The Small Claims Mediation Service is a free and confidential service for court users who are already involved in current, defended small claims cases.
Mediation is voluntary and both parties need to agree to use the service. If both sides agree, a mediator will arrange a mediation appointment. Mediation appointments are usually carried out by telephone, but face-to-face appointments can also be arranged.
Anyone who takes part in a mediation appointment will need to agree to enter mediation in good faith and with the aim of achieving settlement. If acting for an organisation – such as a company or partnership – that person must have the authority of the organisation to act on its behalf.
Settlements reached through mediation can be more flexible than those available to a judge. If a settlement can’t be agreed at the mediation appointment, the case will be listed for a hearing. At any resulting hearing, anything discussed during mediation will be kept confidential – the judge will not be told what was discussed.
If you would like to use the Small Claims Mediation Service to try to resolve your dispute, you can find contact details for your local county court on the HM Courts & Tribunals Service website – Opens in a new window.
Fees for court hearings
If a hearing date needs to be arranged for the judge to determine the case, the claimant (or a defendant with a counterclaim) will be asked by the court to pay a hearing fee.
If you settle your case by mediation and the court receives notice in writing at least seven days before the hearing date, the hearing fee will be refunded. This refund relates only to small claims track cases. For fast and multi-track claims the amount of refund will be a percentage of the fee based on the amount of notice given.
The fast track and the multi-track
Both these tracks involve a longer process than the small claims track for a number of reasons:
- Procedures are much more formal and the case will always go to trial in court.
- The claimant and defendant are not expected to represent themselves. The preparation of the case can be complex and there may be witnesses to be cross-examined.
- Costs are usually awarded, including court fees and legal costs.
Recovering interest on unpaid debts
You have the right to ask your customer to pay interest under three circumstances. Only one sort of interest can be applied at any one time.
Interest permitted by a contract
Interest written into the contract takes precedence over other forms of interest. However, it must amount to a ‘substantial remedy’. In other words it should cover the cost of late payment or deter late payment and should be a fair alternative to statutory interest.
Interest claimed on an issued claim form
This is simple interest only and is at a flat rate of 8 per cent. It only applies if the case is won or is undefended.
The interest runs from when payment was due until judgment is given by the court. If payment is made before judgment, interest stops at that date. In some circumstances interest can be charged after judgment.
Statutory interest on commercial debts
Statutory interest can be claimed under the Late Payment of Commercial Debts (Interest) Act 1998. In some circumstances costs of up to £100 can also be claimed.
- The rate of interest is 8 per cent over the Bank of England reference rate – the base rates are set on 30 June and 31 December. You can download base rate information from the Bank of England website – Opens in a new window.
- Statutory interest does not apply when you sell to the public. Both seller and buyer must be acting in a commercial capacity.
- For contracts made since 7 August 2002, all businesses and the public sector can claim against all businesses and the public sector.
- Statutory interest can be claimed after late payment has been received. The limit is six years in England and Wales.
- The interest usually runs from 30 days after it was due and claimed. A contract or custom and practice may change this, but only if it gives a substantial remedy.
- A contract can’t exclude statutory interest, but it is not compulsory to claim it.
Enforcing the judgment on your debt claim
It can be difficult to enforce any judgment made by the courts. There are a number of steps you can take to recover what you are owed following a court decision in your favour.
First, it is advisable to check that the debtor can afford to pay you. You can apply to the court for an order to obtain information from the judgment debtor. This orders your debtor to go to court for questioning under oath about their finances. Download leaflet EX324 on how to apply for an order from the HM Courts & Tribunals Service website (PDF, 189K) – Opens in a new window.
Once you know your debtor’s circumstances, you can decide whether it’s worth applying to the court for one of the enforcement actions described below.
Bailiffs
A bailiff is authorised to remove and sell someone’s belongings in order to pay money owed to a person or organisation. County court bailiffs are responsible for enforcing county court judgments. High Court Enforcement Officers enforce High Court judgments.
A warrant of execution
This allows court bailiffs to take goods from your debtor’s home or business, although there are safeguards in place and certain goods cannot be taken. After a holding period the goods or assets will be sold at auction. Fees and expenses will be taken from the proceeds and you will be given the remainder.
Attachment of earnings order
The court can make an order instructing the employer to make deductions from the person’s wages or salary at source – an attachment of earnings order. This usually applies to an individual person in employment, but it can apply to private pensions too.
You can read answers to frequently asked questions about how attachment of earnings orders are processed on the Centralised Attachments of Earnings Payments (CAPS) website – Opens in a new window. To make an enquiry, you can contact the CAPS Helpdesk on Tel 0845 408 5312, or by email at caps@hmcts.gsi.gov.uk.
Third-party debt orders and charging orders
A third-party debt order is where the court orders a freeze on money held by a person, institution or organisation, which might otherwise be paid to a defendant against whom you have a judgment. Thus the holder is the third party and the orders will prevent withdrawal of the money until the court decides whether all or part of it should be paid to you.
A charging order is when the court places a ‘charge’ on the debtor’s property, equivalent to the amount you are owed. The property could be a house, stocks or shares, or money. A charging order does not oblige the debtor to sell their property, but if they do, they must pay you before they can take the rest of the proceeds. Find leaflet EX325 about third-party debt orders and charging orders on the HM Courts & Tribunals Service website – Opens in a new window.
Receiver for an equitable execution
If you believe that you can’t recover your debt using the methods above, you can apply to the court to approve a receiver – who you have selected – to conduct an equitable execution.
This involves the receiver collecting money which the debtor is owed, eg rent, in order to repay you. You should seek legal advice before applying for a receiver to determine whether it’s the most appropriate course of action for your business.
Winding up or bankruptcy
If the customer is solvent, as a last resort you can apply for a bankruptcy or winding-up petition, to stop the business from functioning. See the page in this guide on winding up and bankruptcy petitions.
Winding up and bankruptcy petitions
Most suppliers, investors and staff try to get their money by issuing a claim. But you can issue a winding up (company) petition or a bankruptcy (individual) petition instead.
Winding up and bankruptcy are also ways of enforcing a judgment after a claim has been won, in an effort to actually get your money. Debts will be paid in the following order of priority:
- secured creditors – fees and charges of liquidation/bankruptcy
- floating charge holders – companies only
- preferential debtors, including unpaid wages to employees
- unsecured creditors, including HM Revenue & Customs
- interest payable on debts
- shareholders – companies only
How winding up works
- It applies to a company rather than an individual.
- After the winding up the company ceases to exist.
- If the company is insolvent at the time, not all the creditors get paid in full.
- Rules apply and each creditor gets a percentage of what they are owed.
For more information on winding up, see our guide on compulsory liquidation for companies and limited liability partnerships: the process.
How bankruptcy works
- Bankruptcy applies to a person or a general partnership. If it is a general partnership, all the partners are made bankrupt.
- The assets are sold and the proceeds are paid to the unpaid creditors.
- Each creditor gets a percentage of what they are owed.
For more information on bankruptcy, see our section on insolvency information for sole traders and individuals.
The threat and how it works
Often the mere threat of winding up or bankruptcy is very effective. But if the customer still refuses to pay, you might consider the following steps:
- A statutory demand, from a legal stationer or solicitor, or downloadable, can be prepared and issued by the creditor without necessarily using a solicitor to complete the paperwork for you.
- The demand must be delivered to the customer, preferably by hand or by post, using the special delivery or registered mail services. In the case of a registered company, the statutory demand should be served at the registered office.
- On receipt, the customer has a fixed number of days to pay or respond.
- If they do not do so, you can issue a winding up (company) or bankruptcy (individual) petition.
- If you follow all the procedures correctly, and the court finds in your favour, the customer will be wound up or made bankrupt. However, just because you issue the petition does not mean you get priority over whatever money becomes available.
The law assumes that a statutory demand merely paves the way for a petition. But it can be a very powerful debt collecting device in its own right, without the need to proceed to a petition. If the demand results in the issue of a petition (not an order for winding up) it may be publicised on the internet. This means that small businesses have an effective debt collection tool against customers of all sizes.
You should seek legal advice before you act, and you should only act if the money is definitely owing.
You have to pay fees to bring an action and the court will add these to the amount owed. However, this is no guarantee you’ll be reimbursed. Find leaflet EX50 – a guide to court fees on the HM Courts & Tribunals Service website – Opens in a new window.
As a last resort, if the amount you’re owed is more than £750, you can apply to make an individual debtor bankrupt, or issue insolvency proceedings if the debtor is a limited company. Such proceedings can be costly.
Appointing a liquidator or trustee
Where a company is put into liquidation or a person is made bankrupt, you may have to appoint a licensed liquidator or trustee in bankruptcy.
Insolvency practitioners charge fees to the money recovered and you may have to guarantee these fees if the money recovered is not enough.
Recovering debt from elsewhere in the European Union
There are a number of methods of recovering debt from a person or business in another European Union (EU) member state. Where one of the parties is in a different member state from where the case is to take place this is known as a ‘cross-border’ claim.
For more information you can read leaflet EX725 on making a cross-border claim in the EU from the HM Courts & Tribunals Service website – Opens in a new window.
European Order for Payment Procedure (EOP)
The EOP is a relatively quick and easy way of recovering an uncontested debt from a person or business in another EU country. The process and forms involved are the same across the EU. There’s also no need to use a lawyer.
European Small Claims Procedure (ESCP)
If the value of your claim is less than €2,000, you could use the ESCP – which is for low value claims in cross-border cases. As well as using standard forms across the EU, the ESCP also sets time limits to speed the process up.
European Enforcement Order (EEO)
An EEO provides a simple method for enforcing your uncontested judgment in another country within the EU. However, if the claim is defended, then you must follow the normal rules of the court for enforcing a judgment abroad.
Find leaflet EX375 on EEOs on the HM Courts & Tribunals Service website – Opens in a new window.
Forms for use in cross-border claims
The forms required to make a claim through EOP, ESCP or EEO can be obtained online from the European Commission. Find forms for recognising and enforcing judgments in the EU on the European Commission website – Opens in a new window.
CASE STUDY
Here’s how I recovered a debt using the law
Devereux Decorators has been providing heritage and contemporary decorating services in Leicestershire and London for nearly 30 years. When director Gail Devereux-Batchelor came up against a client who refused to pay, she took the company’s case to the county court to recover the debt.
What I did
Issue reminders and warnings
“Before we went down the legal route, we gave the customer every chance to pay. We had done the work just before Christmas and completed it on time to our usual high standard. We submitted our invoice in January.
“Over the next three months, we telephoned the customer several times and sent written reminders. In mid-April, we issued a final reminder, warning the customer that we intended to pursue the matter legally if she failed to pay.”
Start proceedings
“When no money was forthcoming, we contacted our local county court for advice. They were extremely helpful and sent us the relevant form plus lots of useful information.
“We attached as much supporting paperwork to our claim as we could, including employee timesheets and copies of quotes. It wasn’t too onerous, since we have good systems in place that made it easy to retrieve the relevant documents.
“The claim was below £5,000, so the case was put into the small claims track of the county court.”
Attend the hearing
“The county court forwarded our claim to the customer, who decided to defend it on the basis that she was unhappy with the work done. This was in spite of no complaint being made. Because the claim was defended, it automatically went to a court hearing.
“A date was set by the court and both parties were given an opportunity to describe their case. A judge presided, but the process was surprisingly informal. The whole thing took about two hours and the judge handed down his decision on the spot.
“He ruled in our favour and set a date for the customer to pay what was owed. Because we won, we were also able to claim for our costs in bringing the claim and interest on the debt.”
What I’d do differently
Get a deposit
“Making the claim was a lesson to us to insist on a deposit on commencement of a job. While a deposit is no guarantee that the customer will pay the balance, it does give some indication of an intention to pay. It also means you won’t be completely out of pocket if you decide not to take legal action.”
Obtain payment on completion
“Sometimes you can persuade a customer to pay by stopping the service you provide or taking back goods supplied. In our case, that wasn’t possible, since you can’t take paint off walls! We could have requested that the customer paid before we left the premises.”
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Every effort has been made by the author(s) to ensure this article’s accuracy but it does not constitute legal advice tailored to your circumstances. If you act on it, you acknowledge that you do so at your own risk. We cannot assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.
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