For small businesses, it may be either too time consuming to pursue outstanding debts or impractical to employ a collection agency (owing the size or circumstances of the debt). However, a simple strategy is to issue a formal letter of demand, which serves as both a final notice and a precursor to taking the matter to court.
This article examines the mechanics of issuing a letter of demand, how to follow the matter up and what to do if you receive a letter of demand.
What is a Letter of Demand?
The letter of demand is a short letter addressed to the debtor (person who owes you money). This may be the debtor’s business address (if they are a sole trader) or the debtor company’s registered office. It should set out the nature and details of the debt with copies any relevant contracts or documents in support. Importantly, it should clearly establish what you want from the debtor (most commonly by using the words such as “hereby demand repayment”) and when (seven or fourteen days is a typical time frame). The letter must also indicate that you will take the issue to court should they fail to pay and will not notify them any further after this letter of demand.
If you would like to offer the debtor a chance to repay the sum quickly at a discount, you should speak to a lawyer about negotiating “without prejudice” as to your claim. Strictly speaking, a lawyer is not necessary to issuing a letter of demand, but highly advisable if you have not successfully done so before. Using a lawyer is also advantageous if there are numerous debtors, as they can be instructed to negotiate for you directly with each debtor. Having a solicitor on your side also lends a great deal of credibility to your claim that you will pursue the matter in court.
The letter should ideally be sent by registered post, although facsimile can be an acceptable alternative. Importantly, you should not send a letter of demand without being willing to take the matter to court. An evasive debtor has possibly been in this situation before and may know that you are “bluffing”. Sending multiple notices also creates the impression that your first threat wasn't very serious and can be construed as improperly harassing the debtor.
It is a known strategy for some businesses that are in financial difficulty to deliberately not accept a registered mail letter, as it is likely to be a letter of demand. While irritating (and in the long-run, a futile strategy) it is still somewhat necessary for you to “go through the motions” of attempting to settle a debt amicably, even if you have a suspicion that the debtor will simply ignore or evade the demand. Should you need to take the further step of pursuing the matter in court, showing evidence of your attempts to collect the debt will assist you in recovering your court and reasonable collection costs.
What if I have received a letter of demand?
To begin with, it will not help to ignore or evade the demand, as there is a good chance that anyone who has taken the time to reduce the issue down to a formal statement at least intends to see it through. If you are simply unable to repay the debt (but accept that the debt exists), writing back to your creditor (the person you owe money to) and explaining the situation will at least open the possibility of negotiating a means of settling the debt without having to go to court.
Alternatively, if you dispute the debt (or the way in which the creditor has calculated it) then you should seek legal advice and be prepared to ultimately defend the matter in court.