Commercial debt poses a significant threat to business stability. Disrupted cash flow can inhibit a business's ability to meet essential obligations such as payroll, rent, supplier payments, and tax liabilities. Where traditional recourse such as overdrafts or short-term credit is unavailable, businesses may be forced to secure interim borrowing, often on less favourable terms, to bridge the gap, thereby compounding financial pressure.
Lost time in the administrative burden of chasing outstanding payments also diverts focus away from core business activities and has a deterring effect on productivity.
This article outlines preventative measures to avoid commercial debt, contractual best practice, and the legal machinery available to force payment, both domestically and internationally.
Marcus Williams, commercial lawyer, commented "In many cases, problems with unpaid debts stem not from bad faith, but from a lack of clear processes and safeguards. By taking time to conduct due diligence, agreeing clear payment terms, and including practical enforcement provisions, businesses can significantly reduce the risk of late or non-payment. A well-drafted contract, combined with consistent credit control procedures, provides not only legal protection but also promotes more transparent commercial relationships."
Preventative Measures and Due Diligence
The first and most effective line of defence against bad debt is pre-contractual due diligence. Before entering into any commercial arrangement, parties should carefully assess a prospective counterparty's financial health, creditworthiness and payment history.
Recommended due diligence steps
- Verification of the corporate identity, company incorporation/registration information, and regulatory standing of the business.
- Accessing credit reports and reviewing publicly available financial accounts, especially in the case of limited companies.
- Monitoring the financial health of the business throughout the duration of the contract, particularly for long-term contracts.
- Seeking industry references or utilising information from market intelligence where appropriate.
Standard terms of payment need to be agreed upfront. Businesses must determine whether the statutory default period (typically 30 days) will apply or if bespoke terms are required. If the counterparty business is a signatory to the UK Prompt Payment Code, this can be an indicator of confidence in its payment culture.
Particularly for high-risk or cross-border transactions, companies ought to also consider the use of retention of title clauses, personal guarantees, or security agreements to offer protection in the event of default.
Contractual Clarity and Commercial Safeguards
Once due diligence has been completed and there is a decision to proceed with a transaction, a contract must record the parties' agreement and deal with payment risk effectively. Reliance should not be placed on generic or boilerplate templates and one should make use of well drafted bespoke agreements which are sensitive to the specific commercial conditions.
Critical contractual terms are
- Definite and clear payment terms, late payment interest clauses and invoicing procedures.
- Defined milestones, deliverables, and performance targets that are the precedent to payment.
- Dispute resolution mechanisms, including pre-action negotiation or, where appropriate, arbitration and/or mediation terms.
- A clear position on the relevant legal jurisdiction and governing law, especially in cross-border transactions.
Compliance with statutory protections under the Unfair Contract Terms Act 1977, the Consumer Rights Act 2015 (where applicable) and related legislation is essential, especially where bargaining power is unequal.
Where payment terms are not stated in contracts, the Late Payment of Commercial Debts (Interest) Act 1998 applies automatically. This entitles the creditor to statutory interest and reasonable recovery costs. Additionally, under the Reporting on Payment Practices and Performance Regulations 2017, large UK companies must publicly disclose their payment conduct, offering useful insights for businesses.
Trust remains paramount in business relationships, by anticipating and resolving uncertainty in a contract, parties are better able to avoid disputes and ensure commercial certainty.
Anticipating and Managing Excuses for Non-Payment
Many reasons given for late payment are foreseeable and preventable with sound process management. Commonly cited reasons include:
- Alleged non-receipt of invoice
- Administrative errors (e.g. wrong contact details or email addresses).
- Alleged dissatisfaction with deliverables.
- Internal disruptions, e.g. staff changes or IT issues.
Practical mitigation steps
- Confirming and regularly updating billing contact information
- Establish an internal approval procedure with the involvement of key decision makers.
- Coordinate invoices with a business's payment run schedule wherever possible.
- Maintain contemporaneous written records and confirmations of delivery to support any subsequent claim.
Legal Remedies for Non-Payment
Where payment is not made in the circumstances where it is due, a business is required to consider the debtor's solvency and the most proportionate course of action in enforcement, having regard to debt value, cost of enforcement and recovery prospects.
Available remedies are
- Negotiation - Direct dialogue can often resolve matters amicably and preserve business relationships.
- Mediation - A structured, confidential process to facilitate settlement without court proceedings.
- Letter Before Action (LBA) - Formal pre-action letter of demand, often successful in obtaining payment.
- County Court Proceedings - Issuing a claim and, if successful, obtaining a County Court Judgment (CCJ) which can significantly impact a debtor's credit status.
Post-judgment enforcement options include
- Writ or Warrant of Control – Authorises enforcement agents (or High Court Enforcement Officers for debts over £600) to seize assets.
- Third Party Debt Order - Freezes money held by banks or other third parties.
- Attachment of Earnings Order - Puts payment instalments on a debtor's wages.
- Charging Order - Secures the debt against property owned by the debtor.
- Statutory Demand - Used as a precursor to winding-up proceedings (corporate debts in excess of £750) or bankruptcy (personal debt exceeding £5,000).
If the debtor is or appears to be insolvent, the creditor should immediately submit a proof of debt and seek legal counsel to protect his position, especially where the issue concerns cross-claims, preferences, or transactions at undervalue.
Cross-Border Debt Recovery
International debt recovery introduces an additional layer of complexity. Proper drafting of jurisdiction and enforcement provisions at the outset is essential to avoid jurisdictional disputes and enhance enforceability abroad.
The following legal instruments may be applicable:
- The Hague Convention on Choice of Court Agreements (2005) - Enables enforcement of judgments where there is an exclusive jurisdiction provision.
- The Hague Judgments Convention (2019) - This treaty expands the scope of enforceability of recognised civil and commercial judgments between contracting nations.
- The Recast Brussels Regulation (EU Regulation 1215/2012) - Governs enforcement of judgments issued pre-Brexit.
- The Civil Jurisdiction and Judgments Act 1982 - Applicable to judgments from certain non-EU jurisdictions in the post-Brexit era.
International contracting best practices and considerations:
- Insert detailed governing law and jurisdiction clauses.
- Set out process service provisions, specifically where the debtor is international.
- Obtain local legal opinions in higher-value or high-risk transactions.
- Utilise bilateral treaties or reciprocal enforcement provisions where these exist.
International enforcement should not be pursued without first assessing local procedural law and recovery prospects through qualified local counsel.
The avoidance and recovery of commercial debt requires strategic foresight, contractual rigour, and prompt action. Sound due diligence, bespoke contractual terms, and effective credit management can significantly reduce exposure to non-payment risk.
When debts do arise, decisive enforcement, whether domestic or cross-border, is essential. Legal advice should be obtained at an early stage, particularly where significant sums, foreign jurisdictions, or complex counterparties are involved. In all cases, early intervention remains the most cost-effective means of preserving cash flow, maintaining commercial integrity, and securing a favourable outcome.
Marcus Williams is a Trainee Solicitor at our London office in the Commercial Litigation department. He completed his LLB (Hons), at the University of Sheffield, and his LPC with LLM at the University of Law. Marcus has experience in assisting with several high-profile cases His area of expertise is commercial litigation where he demonstrates diligence and a tenacious attitude to achieve our clients' objectives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
