Business Debt Reform Aims to Help Small Business Owners Recover Outstanding Debts

Pursuing outstanding commercial debts has long been a problem for small and medium sized businesses. It seems now though that the Department for Business Innovation and Skills has recognised the impact of outstanding debts on the cash flow of such businesses and feels it is time to act.

The Department has highlighted the impact of grossly unfair contract terms and practices of large companies on small and medium sized businesses and points to figures of £39.4 billion being owed to said businesses. This it claims is seriously affecting their ability to manage finances and plan for growth.

At present The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses the right to;

–   Charge 8% interest above the Bank of England Base Rate for late payment.

–   Charge administration costs for chasing late payments

–   Ensure that payment contracts do not infringe a business’s right to claim said interest and administration costs.

–   Enforce mandatory 30 day payment terms for transactions with public authorities, and

–   Enforce mandatory 60 day payment terms between businesses (unless agreed otherwise and is not grossly unfair)

There is evidently some statutory support for small businesses to recover money owed to them, but there is still too much outstanding to small and medium businesses which are impacting on their management and growth as a result of unfair terms and business practices by larger companies. Representative bodies can take claims on behalf of small and medium sized businesses, but their involvement at present is limited.

In a Consultation Paper published on 3 February 2015, the Department seeks to create a better framework to aid recovery of debts by small and medium sized businesses and expand the role of business representative bodies.

In the Consultation Paper, the Government seeks to create a statutory definition for ‘grossly unfair’ to provide greater scope for small and medium sized businesses to succeed in claims for late payments and outstanding debts. The suggestion seems to be that if a small business can show that the large business’s contract terms and practices are ‘grossly unfair’, the existing business representative bodies will have more powers to challenge the large business under the 2011 EU Late Payment Directive. The hope is that this will in time level the playing field between large and small businesses in the UK and reduce the amount of outstanding debts having to be chased by small businesses.

The proposals aim to greater utilise the 2011 EU Late Payment Directive and expand the role of representative organisations to take a proactive role against grossly unfair contract terms and business practices. The hope is that this will lead to a reduction in such grossly unfair terms and practices used by large businesses.

A note of caution must be sounded though; the changes considered in the consultation paper will not avoid businesses disputing claims for unpaid debts, in fact the changes may encourage businesses to dispute debts to avoid prompt payment or delay payment.

It is therefore going to be very important for small businesses with disputed debts to seek immediate legal advice, put in place debt recovery procedures and ensure its claims are progressed swiftly and successfully to secure its cash flow. This will be even more critical if the Consultation Paper proposals take effect.

Manisha Modasia and Michael Rutter from the Dispute Resolution Department specialise in helping businesses recover disputed debts and can be contacted on 01254 222 324.

Manisha Modasia

About Manisha Modasia

Manisha Modasia is a Solicitor within the Dispute Resolution department at Forbes Solicitors. Manisha’s blogs cover her specialism in advising individuals, partnerships and company’s on contract disputes, recovery and disputing debts, emergency injunctions and remedies when facing disputes both business to business and business to consumer this includes also commercial agents disputes, intellectual property disputes and disputes arising out of contested wills. Manisha also writes about key changes in the law and regulations in relation to civil and commercial claims and case law which impacts on the Dispute Resolution.
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