Today I wrote to my Member of Parliament Sarah Bool and the Rt. Hon. Jonathan Reynolds MP, the Secretary of State for Business, Innovation, Science & Trade regarding the serious difficulties faced by small businesses in recovering unpaid debts.
The content of my letter is below:
Dear Secretary of State,
I am writing to raise what I believe is a serious and increasingly damaging issue affecting small businesses across the United Kingdom: the difficulty, cost and time involved in recovering money that is legitimately owed to them.
For a small business, an unpaid invoice is not simply an accounting entry. It can represent wages, supplier payments, rent and cashflow.
When a customer or another business fails to pay, the financial consequences can be immediate and, in some cases, can threaten the viability of the business itself, not to mention the ability to them pay its own suppliers.
A small business may have supplied goods or services in good faith, incurred the associated costs and fulfilled its contractual obligations, only to find itself having to spend significant additional time and money simply to obtain payment for work that has already been completed.
The process of pursuing an unpaid debt can involve repeated correspondence, solicitors' letters, court proceedings, court fees, enforcement costs and considerable amounts of management time. Even when a small business ultimately obtains a judgment in its favour, there can still be significant difficulty in recovering the money.
I believe the Government should consider whether the current legal and enforcement framework provides sufficient protection for small businesses.
I will give you a first hand example of how the current system is woefully inadequate.
1.A customer, who has entered into a legally binding supply agreement, with a satisfactory credit history fails to pay.
2. Deby recovery proceedings take place, and they pay a small amount of the total.
3. They subsequently fail to make further payments and the matter is then escalated to the small claims court.
4. A hearing date is set some 10 months later.
5. One week before the hearing, it is postponed due to “lack of a magistrate”
6. The hearing is re-scheduled for 7 months later.
7. Six days before the hearing, it is postponed again (without any reason given) and re-scheduled for one week later.
8. Legal Counsel is unable to attend due to other commitments, leaving the legal fees due, and the fear of not wanting further delays, the hearing takes place without Counsel.
9. The hearing in found in favour of the Claimant, almost 24 months after the debt was due.
10. The debt remains unpaid due to ongoing enforcement.
The problem of phoenix companies
The situation becomes even more concerning where a debtor company ceases trading, is dissolved or enters insolvency while owing money to creditors, and a substantially similar business subsequently continues through another corporate entity.
I recognise that genuine business failures, restructurings and legitimate insolvencies are an important part of a functioning economy. The issue is not legitimate business rescue.
The issue is the potential abuse of the corporate structure to leave liabilities behind while substantially the same business continues operating.
Where the same directors, owners, assets, premises, branding, customers or trading activities reappear through a new company, creditors can be left in the extraordinary position of having pursued a debt successfully, obtained judgment, and still being unable to recover their money while the underlying business continues.
Limited liability should protect legitimate business activity; it should not provide a mechanism for repeatedly avoiding legitimate liabilities.
There should therefore be greater scrutiny of repeated company closures followed by the establishment of substantially the same business, particularly where creditors have been left unpaid.
The Government should consider whether there are sufficient powers to identify and investigate such behaviour and, where deliberate avoidance is established, whether there should be greater personal accountability for those responsible.
Does the Secretary of State agree, this is the damning reality of the challenge small businesses face when recovering legitimately owed debts?
In particular, I would ask the Government to consider:
- Making it quicker and simpler for small businesses to recover undisputed commercial debts.
- Strengthening measures against persistent late payment, particularly where larger businesses routinely impose extended payment terms on smaller suppliers.
- Reviewing the costs associated with debt recovery, including court fees, legal costs and enforcement costs, to ensure that pursuing a relatively modest debt is economically realistic for a small business.
- Improving the enforcement of County Court Judgments, so that obtaining a judgment does not simply become another stage in a long and expensive process.
- Considering additional penalties for businesses that deliberately withhold payment without a legitimate dispute.
- Improving access to straightforward and affordable legal assistance for small businesses that cannot justify the cost of traditional legal representation.
- Improve scrutiny of repeat phoenix activity, particularly where substantially the same business reappears while creditors of the previous company remain unpaid.
- Strengthen personal accountability where directors have deliberately or improperly used the corporate structure to avoid legitimate liabilities, while continuing to protect directors who have acted honestly and within the law.
There is an important distinction between a genuine commercial dispute and simply failing to pay an invoice that is properly due. Businesses should of course have the right to dispute invoices where there is a legitimate reason to do so. However, where goods or services have been supplied in accordance with an agreement and there is no genuine dispute, the supplier should not have to endure months, or years, of correspondence and potentially thousands of pounds in costs simply to receive money that was already contractually owed.
Small businesses are repeatedly described as the backbone of the UK economy. If that is genuinely the case, then the Government should ensure that those businesses have meaningful protection when customers fail to pay them.
The present situation can leave a small business owner in the unacceptable position of having to choose between spending further money pursuing a debt or simply writing off money that they have earned. This should never be a choice to make.
That is not an insignificant problem. Collectively, unpaid and late debts can have a substantial impact on business confidence, investment, employment and ultimately the survival of otherwise viable businesses.
I would therefore ask that the Secretary of State seriously consider whether further reforms are required to make debt recovery fairer and more proportionate for small businesses.
I would also welcome the opportunity to understand what steps the Government is currently taking to address this issue and whether there are plans to strengthen the rights and protections available to small businesses facing persistent late payment or unpaid commercial debts.
Small businesses should not have to become experts in litigation, debt enforcement and insolvency law simply to get paid for goods or services they have already provided.
I hope you will give this matter serious consideration, and I would be grateful for a substantive response setting out what action the Government intends to take.
Yours,
David Mitson
Group CEO