Can You Claim Interest On An Unpaid Debt?
Introduction
As a business owner, there’s nothing worse than supplying goods and/or services on credit and then having to wait for payment. A question we are often asked is: can you claim interest on an unpaid debt?
Contractual Interest On Unpaid Debts
If you have a written contract with your customer or client, it is possible it will contain a clause providing for contractual interest on unpaid debts.
In an ideal world, an interest clause in a contract will set out:
- The percentage rate of interest in the event of late payment.
- The date from which interest can be claimed in the event of late payment.
- The date to which interest can be claimed in the event of late payment.
Statutory Interest On Unpaid Debts
Statutory interest is interest you are entitled to claim by reason of an Act of Parliament. These include:
- The Senior Courts Act 1981;
- The County Courts Act 1984; and
- The Late Payment of Commercial Debts (Interest) Act 1998.
Interest Under The Senior Courts Act 1981
Section 35A of the Senior Courts Act 1981 gives the High Court power to award interest on claims that are issued in the High Court. This power is discretionary and this means the High Court can reduce or remove a claimant’s claim for interest if it believes the claimant has acted unreasonably.
The percentage rate of interest under the Senior Courts Act 1981 is 8% per annum.
Interest Under The County Courts Act 1984
Section 69 of the County Courts Act 1984 gives the County Court power to award interest on claims that are issued in the County Court. As with claims for interest in the High Court, this power is discretionary.
The percentage rate of interest under the County Courts Act 1984 is also 8% per annum.
Interest Under The Late Payment Of Commercial Debts (Interest) Act 1998
The Late Payment of Commercial Debts (Interest) Act 1998 came into force on 1 November 1998. It was introduced to help businesses recover the cost of late payment from their customers and clients.
Under the Late Payment of Commercial Debts (Interest) Act 1998, simple interest can be claimed at the rate of 8% per annum on ‘qualifying debts’.
To claim interest under the Late Payment of Commercial Debts (Interest) Act 1998, both purchaser and supplier must be acting in the course of a business.
Can You Claim Contractual Interest And Statutory Interest?
The answer to this question is “no”.
Contractual Interest Or Statutory Interest: Which Is Best?
The answer to this question is “it depends”. Contractual clauses providing a contractual entitlement to interest on an unpaid debt will vary from contract to contract. In many cases, however, the rate of contractual interest will be higher than the rate of statutory interest.
What Are The Benefits Of Claiming Interest On An Unpaid Debt?
There are a number of benefits associated with claiming interest on an unpaid debt. These include:
- Helps to recover the cost of debt recovery.
- Encourages timely payments.
- Contributes towards administration costs.
- Reflects market interest rates.
- Protects against inflation.
How Do You Calculate Interest On An Unpaid Debt?
To calculate interest on an unpaid debt, you can take the following steps:
- Multiply the amount of the unpaid debt by the rate of interest you are looking to claim. This will give you the annual rate of interest.
- Divide the resulting sum by 365. This will give you the daily rate of interest.
- Multiply the daily rate of interest by the number of days the debt has been overdue. This will give you the total amount of interest you are entitled to.
Many businesses wanting to claim interest an unpaid debt turn to the services of a firm of debt collection solicitors.
Conclusion
Yes, you can claim interest on an unpaid debt. This claim can be founded on a contractual basis or on a statutory basis. In the context of a business relationship, late payment legislation has been introduced to specifically compensate businesses for customers and clients who fail to pay on time.
There are a number of benefits to claiming interest on an unpaid debt. The most important of these is helping to recover the cost of debt recovery.