Bad Debts and Small Claims

When do you need to involve a solicitor?

As a solicitor who deals with commercial disputes, one of the most common types of enquiry that I deal with on a weekly basis is from business owners about recovering debts, particularly smaller debts.

 Common areas for confusion are whether they should take on court proceedings themselves, or whether a solicitor is needed, how a claim to court is made, when it is worth taking court action, and whether any legal fees incurred can be recovered from the debtor.  This article attempts to provide some answers.

In the current economic climate it is becoming more pressing for smaller business to address their bad debts, even the smaller ones, in order to improve cash flow. In theory the “small claims court” is the ideal arena to be able to do this without using a solicitor. In practice the trouble is that even where small claims are concerned, the courts system for somebody who is not legally trained can be confusing, off putting and time consuming.

You no doubt have your own tried and tested credit control methods, such as phoning a debtor, meeting with them, agreeing dates for payment, and writing to them threatening court action if you do not get paid.  Court action should always be a last resort, and you should give the debtor a clear opportunity and deadline to pay before you start court action. Once your usual methods are exhausted, one way of trying to get paid is to use the courts to sue your debtors. If your debt is under £5000, then unless the claim is incredibly complicated, it will be treated by the court as a small claim.

Contrary to popular belief, there is no such thing as a separate “small claims court”.  The county courts throughout England and Wales use a small claims “track” to deal with lower value and more straightforward claims.  All this means is that the court has slightly different and simplified rules to deal with small claims. The idea of the small claims track is so that relatively low value and simple claims can be dealt with in a cost effective, quick and uncomplicated way, and so that members of the public can use the court system themselves without having to resort to using a solicitor

In addition to the preparation and hearing for a small claim being simpler than those for higher value claims, the significant difference on the small claims track is the rules about legal costs.  The small claims costs rules can work both to the advantage and disadvantage of the parties involved.  In higher value claims that are not dealt with on the small claims track, the general rule that the courts use (put very simply) is that the winning party is ordered to pay the losing party’s legal costs (i.e. the costs of their solicitor or barrister) at the conclusion of the case.  Costs can commonly run into thousands and tens of thousands, which is why you should always seek advice from a solicitor before launching court proceedings for a claim worth over £5000. If you lose you could be faced with a very large costs bill from the winning party, and so you must seek specialist advice on the likelihood of your claim succeeding and the risks of having to pay costs if you lose. 

That costs rule does not apply to small claims in most cases, so the financial risks involved, even if you lose, are far less.  In a small claim the court will order the losing party to pay any court fees that the winning party had to pay, and some very limited costs and expenses, but apart from that the losing party will not usually be ordered to pay the winning party’s legal costs (except where that party has behaved unreasonably). The disadvantage to the small claims costs rules is that  if you are the winning party and you used a solicitor to prepare your claim form, deal with court matters and preparation up until the hearing and to attend the hearing on your behalf, the solicitors costs could well be into thousands of pounds.  If your claim was for less than £5000, it is clear that it is frequently not worth using a solicitor in a small claims matter if you are not going to recoup those costs from the losing party.

For the above reasons, many businesses do not hesitate to take legal advice when there is a high value debt involved, because it makes sense commercially to incur some legal costs if there is chance a large debt together with legal costs will be recovered with a solicitor’s assistance.  However, when the debt is for a relatively small amount many businesses are understandably reluctant to get in touch with solicitors, and are even reluctant to spend their own time trying to use the court system when they are busy trying to run their business, so many smaller debts get written off and are unrecovered.

It is still helpful to consult a solicitor even in relation to debts under £5000.  Most solicitors will not charge you just to have an initial brief telephone discussion about the debt you want to recover, and will be happy to advise you as to the advantages, disadvantages and likely costs of using a solicitor, and whether those costs make it sensible to instruct a solicitor to recover your debt.  They can also advise you as to things like whether you are still within the legal time limits to recover the debt. 

Having spoken to a solicitor, you might decide that it is worth incurring a certain amount of solicitors costs just to have somebody else deal with the matter and to get things started.  On the other hand, if the solicitor’s advice is that your small claim would be best dealt with without a solicitor, and you are confident and have the time to go through with the claim yourself, then you can start your claim by filling in a claim form.  Claim forms are available from your local county court (there is one in most towns) and also on the useful courts service website (www.hmcourts-service.gov.uk) .  Court staff will usually assist over the telephone or over the counter.  For straightforward debt recovery claims you also have the option of using the on-line claims system at www.moneyclaim.gov.uk .

All you need to do to complete the claim form for a debt claim is to set out clearly the amount of the debt, and what it relates to, and attach any relevant invoice or agreement, then sign the form to declare that it is true.  You can claim interest if you wish.  Once you have completed the claim form, there is a whole series of court leaflets which explain the process, including one that explains how to claim interest  (again available at courts or on-line).  When you issue your claim by submitting your claim to the court there will be a fee to pay.  Court fees range from £30 for a claim not exceeding £300, to £108 for a claim not exceeding £5000.  The fee is to cover the court’s costs of dealing with your case.  Full details of fees are available from your local county court.

Unfortunately sometimes there is not really any way of knowing at the start of a claim what the outcome is going to be. The debtor might dispute your claim, and defend it, for example they might dispute the quality of the goods or services you provided, or whether you provided them according to what was agreed, in which case the small claims process will go on for several months and will need a hearing to decide the outcome.  On the other hand the debtor might admit your claim, and pay in full, or apply to the court to be able to pay by instalments. Alternatively, a very common scenario is for the debtor to ignore your claim, in which case it is a simple process to apply to the court for a county court judgment in your favour. 

What must always be remembered is that by suing the debtor you will obtain a county court judgment against them (a CCJ), you will not automatically get your money.  The debtor might simply not have the money to pay, and for that reason you should always try to find out as much as possible about their financial circumstances before launching court proceedings.  Once you have judgment you may well have to apply back to the court to enforce the debt.  Using bailiffs, or obtaining a charge over the debtor’s property are two common methods that are used to enforce a judgment.  If you have obtained judgment without a solicitor, you may then wish to consult a solicitor about enforcing it.

The advantage of dealing with a small claim yourself is that you won’t have a solicitors bill to pay.  If you obtain your judgment but the debtor still can’t or won’t pay, then at least you will only be out of pocket by the court fees, and not by solicitors fees too.  The disadvantage of doing a small claim yourself is that it will take up more of your valuable time than if you simply hand the matter to a solicitor.  Also, even for small claims matters the court procedures can often be off putting and confusing.  There is a middle ground, which is that some solicitors will get the claim started for you for a modest charge.  If the claim is not defended or replied to they will often be able to obtain judgment in your favour without the need for a hearing, so keeping costs fairly proportionate to the size of the debt.

If you would like advice regarding any of the above, contact Sarah Coates-Madden at:

Sandersons Solicitors

17-19 Parliament Street

Hull

HU1 2BH 

Tel:       01482 324662

Fax:      01482 223110

e-mail:  enquiries@sandersonssolicitors.co.uk

 Source: Federation of Small Businesses, September 2008