Debt recovery and the new Small Claims limit
For claims issued after the 31st March 2013 the financial limit for the Small Claims procedure has risen from £5,000 to £10,000. This affects the way creditors approach debt recovery and may lead to delaying tactics by debtors.
Benefit to Debtors - the ability to delay payment by running a defence without liability for legal costs
The benefit for debtors (and the downside for creditors) is that under the Small Claims procedure a successful creditor cannot normally recover their legal fees if they win their claim. That means that a debtor can now fight a Small Claim of up to £10,000 without the risk of having to pay the cost of the creditor’s lawyers even if their defence is weak. That means that the cash strapped debtor can use the court procedure to delay payment of a barely disputed debt for some months and only suffer an additional cost of a few hundred pounds for the creditor’s court fees if and when they eventually lose or admit the claim and are ordered to pay. This system can be (mis)used as an unofficial credit facility for the debtor in financial difficulty. If the court were to establish that the debtor was following this strategy and had no honest belief in their defence then it may order costs against them, but in reality this is difficult to prove. If before issue there is no genuine dispute and the creditor believes that the debtor cannot pay then they could consider serving a statutory demand on the debtor. Many people use this as a debt recovery strategy but it is in fact a mechanism leading to formal insolvency. Using it for debt collection can backfire as it is easily defeated and the creditor will be ordered to pay the debtor's costs for applying to set aside the statutory demand - creditors beware. Click here for more information on Statutory Demands.
Benefit to Creditors
Creditors can now pursue a debt of between £5,000 and £10,000* under the Small Claims procedure and not be at risk of paying the other side’s legal costs if they lose (unless they have behaved unreasonably in the claim) and Small Claims can be completed more quickly– which improves cash-flow for creditors with successful claims.
Before claims between £5,000-£10,000 came within the scope of the Small Claims procedure a defendant debtor could be ordered to pay the creditor’s solicitors’ costs of many thousands of pounds if they defended a claim and lost and as a result they were usually compelled to admit a claim early to avoid incurring liability for those legal costs. If the claim is below £10,000 debtors no longer have that risk/incentive and can spin out their argument with only the liability for court fees accruing. In some cases the court fees will be considered by the debtor to be a reasonable price for the time to pay that they create by defending a claim. Creditors beware as it may become more difficult to recover debts between £5,000 and £10,000.
Small Claims – should you use solicitors?
Maybe, assuming a claim and counterclaim is within the Small Claims limit then it may be that you need less legal advice than you would need in a claim outside the Small Claims procedure and where you are against solicitors and at risk of paying those solicitors’ costs if you lose – those adverse costs are often greater than the original debt. Whether you need help with a Small Claim will depend on the particular circumstances of the case. You should ask for quotes on a fixed, capped and/or no win no fees basis so that you can make a commercial decision in the full knowledge of your cost liabilities. You may also ask to be quoted for ‘unbundled’ help at various key stages of a Small Claim with you doing the ‘leg-work’ in-between. This will reduce costs. Ask a question or get a quote.
* Assuming that the defendant does not bring a counterclaim exceeding £10,000 and/or taking the claim out of the Small Claims procedure
Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.