Companies rush to law in pursuit of unpaid debts

SUING customers for debt has become a way of life for many British companies.

The number of organisations taking legal action has increased dramatically in the past 12 months. The proportion of small businesses using solicitors to recover debts has risen from 24 per cent to 41 per cent during that period, according to the Forum of Private Business.

Debt collection agencies are used by 38 per cent of small businesses, compared with 23 per cent last year. Lawyers who might once have seen the work as being beneath them are now eager to provide the service.

Tim Richards, head of the debt collection unit at City lawyers Linklaters & Paines, advises swift action when debts become due. He said: 'The fact that you aren't being paid may be the first sign that your customer is having financial difficulties.'

British companies are much more likely to resort to legal action than their counterparts in Europe, according to the European Business Survey published by accountants Grant Thornton.

While the Portuguese rely on the telephone to persuade customers to pay, the British are more likely to call up their lawyers. 'The whole idea is to ensure that your debts are brought to the top of the pile,' said Mr Richards.

Booth & Blackwell, a West End law firm, has installed a computer system to deal with debt recovery. Issuing a writ costs pounds 15. The firm then levies a percentage charge for debts recovered, decreasing from 7.5 per cent on the first pounds 1,000 to 2 per cent on debts of more than pounds 10,000.

Senior partner Trevor Sears believes that customer relations are not as damaged by legal action as many people believe. 'It doesn't do a business any good if they make threats which they don't carry through,' he said. 'Clients who do it seriously will be taken as serious by the people they supply.'

Many debtors have become adept at delaying the time of payment and are no longer upset by the sight of a solicitor's letter or writ. These are the kinds of customer who decide which bills to pay by the amount of pressure put on them by the creditors.

Atlas Copco Tools, an air tools manufacturer with a pounds 12m turnover, is typical of many businesses in its changing attitude to debt. 'We've tightened up by at least a week,' said Martyn Brooke, who is in charge of its debt recovery unit.

Mr Brooke does not use debt collection agencies - 'they aren't interested in the customer' - although he instructs solicitors when necessary. But he is still reluctant to take legal action. 'I'm a great believer in debt counselling. If you can help customers out, they will always come back to you. If they are willing to help themselves, I'm always willing to help them,' he said.

For debts of more than pounds 600, solicitors can take action in the High Court rather than the County Court. Delays of up to a month are quite common in the County Court, whereas the matter can be handled immediately in the High Court.

Another advantage of suing is the entitlement to interest. Until April, companies could claim the court's official interest rate of 15 per cent on unpaid debts. The rate has dropped to 8 per cent but is still attractive.

The increased interest in debt recovery is a byproduct of the recession. But it will not go away as economic conditions improve. Whole industries have changed their billing practices and hard-headed debt recovery practices have become respectable.

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