How Do I Recover Unpaid Business Debts?

Unpaid invoices damage cash flow and profitability. Chasing payment is time-consuming, but businesses have legal options to recover what they’re owed. The key is knowing which approach to use and when to escalate.

Most payment issues can be resolved without legal action. Before considering formal steps, businesses should:

Being proactive at this stage often secures payment and avoids disputes later.

Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses are entitled to statutory interest on late payments at 8% above the Bank of England base rate. You can also claim fixed compensation of £40, £70 or £100 per invoice depending on its value.

These rights apply automatically to business-to-business transactions unless the contract specifies alternative interest terms.

If reminders are ignored, the next step is a Letter Before Action. This is a formal letter required under the Pre-Action Protocol before issuing court proceedings.

The letter must set out:

A Letter Before Action from a solicitor often prompts payment. It also demonstrates compliance with pre-action requirements if court proceedings become necessary.

Where a debt remains unpaid, you can issue a claim in the County Court or High Court (for debts over £100,000).

A claim form is filed with the court fee and particulars of the claim. The court serves these on the debtor, who has 14 days to respond.

If the debtor ignores the claim or does not file a defence, you can apply for judgment in default. If the debtor defends, the matter proceeds to a hearing where both sides present their case.

A successful claim results in a County Court Judgment (CCJ) against the debtor. This is a court order requiring payment and remains on the debtor’s credit file for six years.

A CCJ does not guarantee payment. If the debtor fails to pay, you must take enforcement action. Options include:

Enforcement action requires additional court fees and may not succeed if the debtor has no assets or income.

In some situations, insolvency procedures may be more appropriate than court claims. A statutory demand is a formal written request for payment of an undisputed debt.

Statutory demands are available for:

The demand gives the debtor 21 days to pay. If they fail to do so, you can petition for:

Statutory demands should only be used for undisputed debts. If the debtor has a genuine dispute or counterclaim, the demand may be set aside and you could face costs sanctions.

The courts discourage using statutory demands purely as a debt collection tactic. They are intended for situations where the debtor is genuinely unable to pay and insolvency is appropriate.

If a company ignores a statutory demand, you can present a winding-up petition to the court. This is a public process that usually forces the company into compulsory liquidation.

However, winding up is expensive and should be a last resort. Costs include the court fee of £2,600, a deposit for the Official Receiver (usually £2,775), and legal costs.

You may recover little or nothing if the company has no assets. Other creditors may be paid in priority to you, particularly secured or preferential creditors. Winding up a company does not guarantee payment. You become an unsecured creditor in the insolvency, and recovery can take months or years with no guarantee of any dividend.

Most business debts must be recovered within six years from the date they became due under the Limitation Act 1980. For debts arising from a deed, the limit is 12 years.

Once the limitation period expires, the debt becomes statute-barred and cannot be enforced through the courts. The period can be extended if the debtor acknowledges the debt in writing or makes a payment towards it.

Businesses can instruct debt collection agencies to chase payment. Agencies typically charge either a fixed fee or a percentage of the debt recovered (often 10-25%).

Debt collection agencies can send letters and make telephone calls but cannot take legal action unless they employ solicitors. Their effectiveness depends largely on the debtor’s willingness to pay.

Debt recovery requires a balanced approach. Misusing statutory demands or adopting overly aggressive tactics can expose your business to counterclaims or accusations of harassment.

Statutory demands are particularly serious and can backfire if used incorrectly. They should only be used for genuinely undisputed debts where insolvency proceedings are a realistic and appropriate next step.

The most effective approach is one that is legally robust and commercially sensible.

If you’re owed money and aren’t sure of the best next step, our litigation team can help. We’ll assess your situation, guide you through your options, and act to recover what you’re owed, whether through negotiation, court proceedings or insolvency measures.

Don’t let unpaid debts put your business at risk. Contact us on 01604 344562 (Northampton) or 01908 916096 (Milton Keynes), or email [email protected].