A recent rise in civil court fees could have a direct impact on the future success of your business. The government-led changes, which come into effect in April this year, are expected to push more businesses to the brink of insolvency and increase the number of SMEs seeking business rescue solutions.
The government has announced its intention to increase court fees for creditor claims worth more than £10,000. The new fees will be set at 5 percent of the sum being claimed, up to a cap of £10,000 for claims above £250,000. However, fees for claims worth less than £10,000 (which account for 90 percent of all claims) will remain at their current levels.
The worry is that the rise in court fees will make it increasingly difficult for small and medium-sized enterprises to pay the fees involved in challenging late and unpaid invoices. The Law Society believes the number of cases brought by SMEs could fall by as much as half, leaving many businesses with unassailable cashflow problems.
What do the new fees mean for SMEs?
Calculations comparing the costs of a claim now and after the new rules have come into force show just how stark the changes will be. Under the current system, a claim made by an SME for £190,000 will incur a court fee of £1,315, which equates to just 0.7 percent of the unpaid invoice.
However, under the new rules, a claim for the same amount would attract court fees of £9,500, equivalent to 5 percent of the total amount. To make matters worse for UK businesses, the fee will have to be paid up front and in full, effectively acting as a barrier to entry for the justice system.
There are also concerns that the increased fees will actually provide an incentive for larger companies to hold onto payments for as long as possible causing severe cash-flow problems. Some less scrupulous businesses will be prepared to run the risk of legal action in the knowledge that many SMEs will not be able to afford to bring a claim. The argument is that this will deny smaller businesses their chance at justice.
The court fee price hike has caused such concern that the Lord Chief Justice of England and Wales, Lord Thomas, along with six senior judges, responded to the Ministry of Justice’s consultation in a written statement that warned of the potential for a “disproportionately adverse impact on small and medium enterprises.”
The Bar Council reiterated this view, stating that: “Cashflow is the lifeblood of small businesses that many end up having to pursue late payments and other debts through the court system and end up being insolvent. Imposing a 5 percent fee will make many businesses think twice before making that claim.”
One less weapon in the small businesses’ armoury in preventing an insolvent situation.
As a country that prides itself on its small business economy, these changes could cripple SMEs and work to destabilise the recovery.
The problem is not only the affordability of litigation, which some SMEs regularly rely on to issue proceedings and recover debt. The new upfront charges will also restrict a company’s ability to commence legal proceedings to increase pressure and ultimately reach a settlement. In fact, whatever way you look at it, small businesses will lose out.
The government has indicated that these changes will come into force before the new court term in April 2015. As a result, we expect to see a significant rise in the number of claims being made in the next month as claimants seek to avoid the increase in court fees. The Law Society has made a claim for judicial review to challenge these proposals, the response to which will be eagerly awaited by small and medium-sized enterprises across the UK.
If you have concerns over a Court case and the insolvency impact on your company’s viability call 08000 746 757 to speak to someone who can help.