9th December 2019
When you raise an invoice, you do so in the full expectation that it will be paid. Where this does not happen, the customer will need to be chased and debt recovery action taken where appropriate. However, did you know that you only have a set amount of time in which to act before a business debt cannot be recovered?
In this article, Sarah Everton, commercial debt recovery lawyer with Myers & Co Solicitors in Stoke-on-Trent, provides an outline of the time limits that apply to most business debts under the Limitation Act 1980 and the steps you can take to prevent your debts becoming time barred.
In most cases, you will have six years from the date the invoice fell due for payment in which to seek recovery of the amount owed. If you fail to take action within this time, the customer will be within their rights to refuse your request for settlement.
However, there are two circumstances in which an extension to this time limit can be secured. The first is where, within those six years, the customer has acknowledged the debt in writing. The second is where, within those six years, the customer has made a part payment on account.
In these circumstances, the clock will be reset so that the six year period starts to run again from the date on which the acknowledgment or the part payment was made.
By way of example, if you delivered an invoice due for payment in February 2014, the limitation period will expire in February 2020. If an acknowledgement or part payment was received in January 2016, the limitation period will not run out until January 2022.
The usual time limit for recovering commercial rent arrears is also six years, unless the lease was granted by deed in which case it is twelve years. However, where the rent is being claimed from a former tenant or their guarantor under the Landlord and Tenant (Covenants) Act 1995, notice of intended recovery must be given within six months of the rent becoming due for recovery action to be taken.
If you have already taken action to recover the debt and obtained a court order in your favour, then you will have six years from the date of the judgment in which to take enforcement action to ensure the debt is paid or else secured, for example via a charging order against the debtor’s property.
If you are getting close to the time limit for recovery of a debt, then the safest course of action is to issue court proceedings to ensure your right of recovery is preserved.
However, where the debt is disputed and you are in active negotiations about a possible settlement deal, then you may be able to use what is known as a standstill agreement to stop the clock running while you try to iron out acceptable terms.
In the event settlement cannot be achieved, time will start to run again when the agreement is terminated and a claim will need to be issued before the extended deadline passes.
Where the time limit has expired, the debtor will usually have an unequivocal right to refuse to make payment. It is important to note that expiry of the time limit does not mean that the debt is cancelled – it just means that the debt cannot be legally recovered through the court. With that in mind, it may be worth considering whether there is anything you can do to persuade the debtor to make payment on a voluntary basis – for example, by agreeing not to bar them from operating an account with you in the future.
As with most things in business, time is of the essence when it comes to debt recovery and it really does pay to get a handle on outstanding accounts as soon as possible.
By acting promptly you can ensure that recovery times are kept to a minimum, that accounts with potential disputes on them are quickly identified and appropriately actioned and that the issue of limitation periods never needs to be considered.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.