Coping with Sole Traders? Debt Recovery Just Became A Good deal Harder

Chasing unpaid debts is, sadly, challenging many companies need to devote time for you to. But are you aware the challenge has turned into a whole lot harder in recent weeks – with real implications for money flow?

Governments of hues have, for several years now, been taking well-publicised action to protect small businesses from overtime of debts. However, a brand new measure created by the courts in October 2022 – the Pre Action Protocol for Debt Claims -has reversed the progress made in most cases.

The protocol has laudable objectives – in trying to protect individuals from overbearing debt enforcement by businesses. However, since the meaning of individuals also consumes sole traders, and because of the way the protocol works, small , medium-sized businesses could find unscrupulous sole traders playing the system.

Whereas enforcement would previously kick in within weeks, the onerous new rules could leave business people needing to wait months before they can do something to force payment of invoices for service or goods purchased, although not paid for, by sole traders.

For instance, under the previous rules, creditors only needed to provide information on the total amount and 7 days to pay, as well as offer details of organisations that offer debt advice . The new rules extend time it takes to issue court proceedings by some five weeks.

The new rules also put down a list of information to become provided by the creditor by way of a letter of claim before any issuing of proceedings. The letter must give the debtor Thirty days to pay for your debt, and the creditor must also consider any offer in the debtor to pay by instalments.

The creditor should also include copies of relevant documentation and if your debt has not arisen subject to the terms of a written agreement, provide sufficient information about how your debt has arisen for the debtor so that you can clearly identify and comprehend the debt.

Thankfully there are things you can do to at least limit your exposure if you're dealing with sole traders.

1. Know your debtor. Continually be clear where you stand handling a sole trader. The last thing you want to do is jump through each one of these extra hoops only to find out that you're actually dealing with a limited liability partnership or limited company.
2. Take a hard take a look at changing your payment terms. Under the best case scenario using the new Pre Action Protocol, the delay can often mean recovery will require a minimum of Three or four months – and quite possibly longer – before you can start referring to issuing court proceedings. Taking this into account, do you really wish to give sole traders 60 or 90 days payment terms?There isn't any reason why you cannot offer much more limited payment terms – say payment within Fourteen days. You certainly don't want to risk offering extended payment terms that self-limit how long you have to let things run before you even you will want into enforcement.
3. Review your internal credit control procedures. If your payment terms are 14 days, then start dealing with the problem around the fifteenth day. Even underneath the former regime – where enforcement was relatively swift – clunky or inconsistent internal credit control processes can mean companies have experienced a debt problem for 3 or 4 months before considering enforcement. Underneath the new rules, with this type of internal delay considered, you may be getting close to nine or ten months before recovering what by then is an extremely old debt. Few smaller businesses could cope if the kind of delay became the norm.
4. Change terms and conditions to include provision for recovery of costs.As the new rules are more likely to mean proceedings will not be issued and costs will be incurred on a pre-action basis, making this type of change provides you with a contractual to recover such costs out of your debtor, avoiding unnecessarily eating into your profits.
5. Don't ignore disputed debts. For many smaller businesses, there's a type of ethos that says, particularly for debts below lb10,000, “we’ll just disregard the dispute and issue proceedings – the courts can deal with it”. That's not sustainable. By using the courts to pursue a debt that's in dispute, companies run the risk of the courts saying that is definitely an unreasonable approach – and as a result could find themselves burdened using the costs from the case. Debtors can also stay the proceedings and compel companies to comply with the protocol before the proceedings can continue. So this really does become an ill-advised approach. If you have given yourself the ability to recover costs incurred on a pre-action basis, it seems sensible, regardless, to tackle disputes head-on about this basis, avoiding the gamble of “I'll help you in court”.
6. Consider bankruptcy measures.This is really a high-risk approach, not appropriate in all cases. Strictly speaking it is not a debt recovery tool because you are in fact telling a legal court that your debtor can't pay the debt. But it's a nuclear weapon that may be deployed in the right circumstances. The debt needs to be over lb5,000 and should not be a disputed debt. If those hurdles are cleared, the Pre Action Protocol doesn't apply to bankruptcy. If you think you are well on strong ground, and consider settlement of the debt to become critical for your own business, this method might just get you your money quicker. This can be a very costly option, though. And the risk is you realize that your debtor's financial position is much more precarious than you've gambled upon, and issuing a bankruptcy petition does actually push on them the advantage. If so, you're not going to recover your debts in the end.

In short, the Pre Action Protocol for Debt Claims does have the capacity to result in a real headache for companies that are unprepared for it, and who do lots of business with sole traders. However, it do not need to create problems if businesses tighten up their contractual terms and credit control procedures, and also have clear debt recovery measures in place. With these mitigating steps, even though you may still notice a a little more sluggish cash flow in some instances, it should not become a problem.