What Is A Letter Before Action? Our Guide
Businesses rely on steady cash flow to operate smoothly, and unpaid invoices can create major hurdles… With this in mind, you might wonder: what is a letter before action and how can it help recover debts?
UK small businesses face an average of £22,000 in overdue payments, translating to an economic loss of £2.5 billion annually. In fact, customers paid nearly 50% of small businesses’ invoices late between June 2023 and June 2024, according to Apollo.
Unpaid invoices not only frustrate business owners but can also threaten their financial stability.
Therefore, if your business makes a major purchase and fails to pay the invoice, that causes problems for the seller. One legal procedure such a creditor can consider is to send a formal letter before action.
In this article, we’ll take a closer look at debt recovery options, including the role of a letter before action… also known as an LBA or letter before claim.
Debt recovery options for overdue payments
When a customer misses an invoice payment deadline, you can explore several options before escalating the situation:
Initial steps include:
- Sending written reminders
- Contacting the customer directly
- Considering commercial mediation
If these initial approaches fail, more formal steps include formal debt recovery procedures such as:
- Hiring a debt collection agency
- Issuing a letter before action
- Applying for a county court judgement: for more details, find out – what is a CCJ?
Without any success, enforcement measures such as charging orders become an option. Here is our recent article on the subject – what is a charging order?
What is a letter before action?
A letter before action is an initial, formal communication in a legal dispute, typically sent before the start of court proceedings.
This letter outlines the details of the complaint – including the facts of the case, the legal basis for the claim and the specific demands or actions required.
Legal representatives often draft and send these letters on behalf of their clients. The letter before action achieves several key purposes, by:
- Warning the recipient about potential legal action if they fail to address the issue
- Encouraging parties to resolve disputes without resorting to formal court proceedings
- Helping both parties to understand each other’s positions and to consider alternative dispute resolution methods
- Complying with the Civil Procedure Rules (CPR), which govern all civil litigation cases in England and Wales
For creditors, sending a letter before action demonstrates serious intent to recover a debt. It is often the creditors’ last attempt to resolve the situation amicably.
Also, find out what bailiffs can take from a limited company in debt.
When and how to send a letter before action
Courts in the UK expect claimants to take certain steps before commencing proceedings, with the details listed in a Ministry of Justice’s guide: Practice Direction: Pre-Action Conduct and Protocols.
A key step for a creditor owed money to take involves “writing to the defendant with concise details of the claim” which brings us to the letter before action. Typically, a letter before action includes:
- The claimant’s name, address and contact details
- A summary of the facts and legal basis for the claim
- The specific demands or actions required
- A deadline to respond or comply
- The consequences of failing to meet the demands
The sender may also include copies of relevant documentation as evidence, along with the letter before action.
Our advice: Receiving a letter before action
There is a clear knock-on effect between late invoice payments and insolvencies. A business that fails to receive timely invoice payments may struggle to meet its own financial obligations.
We strongly advise any business facing difficulties in paying its debts when due to contact an experienced insolvency practitioner promptly.
One potential solution an insolvency practitioner might suggest is a company voluntary arrangement (CVA):
- This procedure allows a company to continue trading while repaying its debts through a structured agreement.
- A CVA can improve cash flow and alleviate creditor pressure, potentially rescuing the business from insolvency.
However, if such a recovery is not possible, a creditors’ voluntary liquidation (CVL) often presents a better option than a compulsory, forced liquidation. In a CVL, the insolvency practitioner converts the business’ assets into cash to repay creditors as much as possible.
For any company owing money to the government, we recommend reading our HMRC debt management and collection guide. One potential solution is a time to pay arrangement, which spreads liabilities out over a 6-12 month timeframe and reassures HMRC that a business is trying to get out of debt.
At Hudson Weir, our team of highly qualified insolvency practitioners and chartered accountants has extensive hands-on business experience. We understand the pressures businesses face in such situations and can help find a resolution.
For further information on the implications of receiving a letter before action, or assistance with clearing business debts, please contact us.
