Oct 24
If your business is owed money, the impact on cash flow can be considerable. Whilst the ability to recover interest on late payments does not immediately alleviate the impact on cash flow, improved rates of interest can mean that the interest accruing on late payments is not inconsequential. Also, ensuring that you claim the interest on business debts may have a deterrent effect and serve to prevent late payments from becoming a frequent issue.
The most straightforward way to apply interest on money outstanding is often from the terms of any written contract you have with your debtor.
However, where there is no written contract in place, it may still be possible to recover interest on the outstanding money if this is a commercial debt (a business to business debt, rather than that from a private consumer).
Adam Colville-Robins in the Dispute Resolution team at Raworths based in Harrogate, explains.
If you have a written contract with a commercial entity which owes a debt to your business, then it may be the case that the original contract agreed between you will contain a term specifying that interest is claimable on any money that is not paid in accordance with the terms of the contract.
The contract should specify when interest starts to accrue. This will typically provide that interest runs from the date the payment became due, to the date that payment is received. For example, if your standard invoice provides for payment within 21 days, interest will often begin to accrue from the 22nd day that the invoice remains unpaid until the date that payment is made. The contract should also specify the agreed rate of interest upon late payment.
However, if you do not have a written contract, then the majority of commercial debts fall under the Late Payment of Commercial Debts Act 1998. This act provides that in the absence of an agreed contractual rate of interest, a business can claim statutory interest on debts. This statutory interest rate is currently 8% over the Bank of England base rate.
Depending on the economy, 8% over the statutory base rate can be significant, and can often be a lot higher than a rate agreed in a business contract. However, you should note that if your contract contains a different interest rate, you must use your contract rate.
There are provisions set out in various legislation in the UK that apply interest to debts due following a court judgment, given by either the High Court or County Court.
The standard provisions allow for interest to accrue from the date on which the judgment was given. This is currently at a rate of 8%.
If your contractual rate is different to this, and you have been claiming interest against late payments in accordance with the contractual rate, this will change from the date judgment is given, and the court rate will apply going forward, unless the contract specifically states otherwise.
In some circumstances the standard court rate, or indeed any rate thought appropriate by a judge, can be applied against the amount of the debt before the judgment was given.
Generally judges do not like to apply interest before the judgment is given, the feeling being that until the amount is judged to be owing, the interest should not accrue.
However, when circumstances require it, sometimes courts will apply a rate of interest to prejudgment debts too. The rate, and whether it applies, is entirely down to the judge’s discretion.
If you have to take a debtor to court and you are successful, the debtor may have to pay part of your legal costs. Funding the court case will have had an impact on cash flow too, so what is the position with regard to interest on the legal costs you have expended?
If an order for payment of legal costs is given by the court, then this order is also considered to be a judgment debt, and from the judgment date interest can accrue until paid.
In the same way as with a judgment debt, it is possible for a judge to use their discretion to apply interest on the legal costs you have paid before the costs became subject to a costs order.
Raworths has many years’ experience in commercial disputes. For further information and assistance, please contact Adam Colville-Robins or another member of the Dispute Resolution team.
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.
Published on 4 October 2024
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