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Money owed by a business customer: whether they can pay decides it

A business customer has stopped paying, the reminders have stopped being answered, and the next step feels like a legal one. Before anything is sent, the enquiry worth making is into the customer rather than into the contract.

Most unpaid commercial invoices arrive with liability already settled. The goods were delivered, the work was signed off, nobody raised anything at the time. Proving that the money is owed is seldom the hard part, and a creditor who spends heavily on proving it has usually paid to establish something the debtor was never going to contest.

The question that decides the outcome is whether the customer has money at all and, if some exists, where you sit in the order it goes out. That is a commercial enquiry rather than a legal one, it can be made without the debtor learning anything, and it can be made before any money is committed to proceedings in England and Wales.

None of that is an argument for waiting. A business in difficulty pays out of a pool that is getting smaller, distributed according to who is pressing, who is still needed, and who holds security over the assets. Patience moves a creditor down that order rather than protecting the relationship they believe they are protecting.

The debtor is already choosing who to pay

A failing company rarely stops paying everyone. It carries on paying the lender whose facility keeps the account open, the landlord whose premises it cannot trade without, the tax authorities once enforcement becomes real, and above all the suppliers whose goods it still needs to keep selling. Everything else moves into a category that finance staff manage rather than pay.

Creditors discover the consequence of that the wrong way round. The moment you make your final delivery, or suspend the account, you stop being an operational necessity and become an administrative task. Leverage comes from being needed, and it is highest before the last consignment leaves your warehouse. Suspending supply is often correct, but it turns you from a priority into a line on a list.

The small payment on account deserves more suspicion than it gets. A company that has already decided which creditors it will disappoint still sends modest sums to the ones it wants to keep quiet, because a creditor holding a fresh payment does not escalate. Part payments arriving irregularly, in amounts nobody agreed, and never against the invoices you asked them to clear, are a way of managing a creditor rather than a sign of good faith.

A judgment against an empty company is an expense

A judgment of the court in England and Wales is a formal record that a sum is due. It is not money, and by itself it moves nothing. Turning it into cash means enforcement, which is a further set of steps, each carrying its own cost and each capable of returning nothing.

What defeats enforcement is not usually concealment, but the fact that a trading company frequently owns very little outright. The vehicles are financed, the plant is leased, the stock may be subject to other suppliers reserving ownership of it, and the book debts are commonly charged to a lender ranking ahead of everybody. A business can look substantial from the outside, with premises and staff and vans in its livery, and hold almost nothing an enforcement agent may take.

Money at a bank is caught as it sits at a given moment, and an overdrawn account holds nothing at any moment. A judgment against a company that already carries others adds an entry to a record its directors stopped reading, at real cost to the creditor and with nothing recovered.

The signals that a customer is failing

Distress announces itself commercially before it appears in any formal filing. The signs are ordinary enough to be dismissed one at a time, which is why they are missed.

• The paperwork starts moving between entities. You are asked to reissue an invoice to another company in the same group, or to a name differing from the one you contracted with by a single word. The request is presented as an accounting tidy up, and it can change who actually owes you.
• A dispute is born the moment you chase. A complaint about quality or shortfall is raised for the first time in reply to a demand, concerning a delivery that was accepted without comment. Sometimes the complaint is real and was never voiced. More often it buys time, because a disputed debt cannot be pressed in the same way.
• The person you deal with changes. The finance contact leaves and is not replaced, calls are routed to advisers, and communication that used to be in writing moves to the telephone.
• Your own sales team knows before your finance team does. Buyers talk, and word that another supplier has moved the account to payment in advance travels around a trade before it reaches any credit report. Salespeople hear it and rarely pass it on, because it sounds like gossip rather than a warning.
• The public record starts to move. Filings at Companies House slip, the registered office moves to an adviser's address, security is granted to a new lender, directors resign, and a fresh company appears with familiar people behind it. Each has an innocent explanation, and most of the time that explanation is the right one.

The judgement lies in the combination and in the sequence, not in any single item. Reading these signals as a set separates a customer having a difficult trading period from one whose directors have accepted the outcome and are arranging what follows. No credit score performs that reading for you, and it is where creditors talk themselves into the answer they prefer.

What your own paperwork already decided

Much of your position was fixed when the account was opened. Terms reserving ownership of goods until they are paid for are common in supply contracts and worth less than sellers assume, because the goods have usually been resold, installed or mixed with others by the time anybody goes looking. A director's personal guarantee is worth what that director actually owns, frequently a jointly owned home already charged to a lender, and such guarantees are often unsigned or given by someone who has since resigned.

Commercial debts in England and Wales generally carry an entitlement to statutory interest. In practice that is bargaining material rather than recovery, since creditors commonly waive it to secure the principal. If your business carries credit insurance, the policy conditions matter more than the debt does: cover commonly depends on overdue accounts being notified and on the insured not continuing to supply, and good claims are lost by handling a customer sympathetically.

One thing is worth attending to at once, whatever else is decided. A debt that is disputed turns on proof of delivery and acceptance rather than on the invoice, and that proof tends to sit with the warehouse, the driver's records or a messaging thread on somebody's phone rather than in the accounts system. It is cleared out when a job closes, which is generally well before anybody has decided whether the debt will be pursued.

Insolvency is not a recovery route

Creditors reach for the threat of winding the company up because it is the most frightening thing available, and it is also the most frequently misused. Where a debt is genuinely disputed on substantial grounds, that threat is improper, the debtor can move to restrain it, and the creditor can end up paying for the privilege while the invoice stays unpaid.

Even used properly it tests solvency rather than collecting anything. Where it works, it works because a company that can pay decides paying is cheaper than the consequences. Where the company genuinely cannot pay, the process gathers whatever assets exist for all creditors and distributes them in an order putting ordinary suppliers behind secured lenders, employees and the costs of the insolvency itself. The creditor who brought the process has funded it for the benefit of everybody in that order.

There is a version of this that creditors find harder to accept than the loss itself. The trading business survives under new ownership, the debt stays behind in the old company, and the same people ask whether you will supply the new one. Refusing costs a customer you may want. Agreeing writes off the old debt in all but name. That is a commercial decision, and no legal analysis makes it for you.

When to write it off instead

Some debts should be closed rather than pursued. Where the debtor holds nothing worth enforcing against, where the directors have abandoned the company, or where an insolvency is under way in which ordinary suppliers rank near the bottom, spending on recovery adds cost to a debt that was not going to be recovered.

The same applies where you have a real quality problem you have not confronted. Formal pressure invites the customer to put in writing a complaint that has so far only been muttered, and a grumble that costs nothing while it stays informal becomes a pleaded defence and occasionally a counterclaim worth more than the invoice. An honest assessment of your own delivery belongs at the beginning, because the demand is what causes the other account of events to exist.

Writing off is not the same as getting nothing. Relief may be available for VAT already accounted for on a supply that is never paid for, and a debt properly written off is ordinarily deductible against profits. Both are matters for your accountant, worth raising rather than assuming.

So the valuable part of this is not the chasing, which most businesses do well enough themselves, but the ability to tell, when an account first goes quiet, which of two categories a debt belongs in: the one where pressure applied in the right place recovers the money, and the one where every pound spent is a second loss on top of the first. They look identical from the creditor's side of the ledger, and they are not told apart by the size of the debt or by how badly the customer has behaved.

This guide is general information about how these matters usually run. It is not advice, and nothing becomes advice until terms are agreed in writing. Brandleys Legal Ltd delivers reserved legal activities alongside regulated partners.