If your business is owed money, the impact on cash flow can be considerable. Since interest rates have improved you could also be losing potential returns on investment, so it is important to keep a tight control on business debts.
When chasing late payments, you can ask for interest on the money owed. The most straightforward way to do this is to apply interest on money outstanding as agreed in a contract you have with your debtor.
‘Even if you do not have a formal contract, it is still possible to ask for interest. The continued accrual of a high rate of interest can be a very motivating factor to a debtor to pay you as soon as possible,’ says Monica O’Neill, dispute resolution solicitor with Wollens Solicitors in Devon. ‘When you expend time and money in chasing debts, you will inevitably want some recompense for lost income or the lost opportunity to gain interest on money in your account.’
Monica O’Neill outlines your options for claiming and being paid interest on debts, both before you have to take action in court, and then what you are entitled to should the matter have to be decided by a court.
Can you claim interest on a debt owed to your business?
If you have a contract with a commercial entity which owes a debt to your business, then it is very likely that the original contract agreed between you will contain certain terms 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 say that interest runs from the date the payment became due, to the date that payment is received. The contract should also specify the agreed rate of interest upon late payment.
However, if you do not have a contract, then the majority of commercial debts (which means business to business debts, rather than from a private consumer) fall under the Late Payment of Commercial Debts Act 1998.
The Act provides that in the absence of an agreed contractual rate of interest, a business can claim statutory interest on money that is paid late.
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.
Can you claim interest after a court judgment?
Yes. 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 at a rate set by the rules, which is currently 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 if it applies, is entirely down to the judge’s discretion.
This was illustrated clearly in a recent case in 2024, where the High Court made an unusual award of prejudgment interest in favour of the applicant, due to the misconduct of the defendants during the course of the proceedings and before the matter came to court. This was a case where the defendants refused to vacate a property, requiring a possession order and damages for trespass.
The award of interest on the prejudgment debt was deemed appropriate by the judge because it was clear the property should have been vacated at least three years earlier. The refusal to leave and the defendants’ behaviour caused multiple delays. Had the defendants vacated the property when asked, and not put forward a false defence or asked for adjournments, the applicant would have had the benefit of a judgment three years earlier. The claimant was deprived of his property due to these delaying tactics, while the defendants enjoyed rent free use of land.
Can you claim interest on legal costs recovering a debt before a judgment?
If you have to take a debtor to court and you are successful, the debtor is likely to have to pay your legal costs or at least part of those 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.
This will be based on the same factors as above, and may be allowed if the judge feels that the unreasonable behaviour of the debtor meant that you had been unduly prejudiced by having to find the means to pay your lawyers in order to bring your case to court.
Interest awards on legal costs prejudgment are not unusual, and are often allowed to accrue from the date you actually made payment to your solicitors (as opposed to simply being served with an invoice).
What interest can you claim on the judgment debt itself?
The Act allows for an interest rate of 8% for all commercial debts from the date that they become outstanding.
If a debt has gone to court and been awarded by a judge, then the court rate applies.
How we can help
We have many years’ experience in this area and can help you to claim interest on debts owed, whatever the circumstances. Contact us to discuss your options.
For further information and assistance, please contact Monica O’Neill in the dispute resolution team on 01392 539199 or email [email protected]. Wollens Solicitors has offices in Torquay, Exeter and Barnstaple in Devon.
