Unpaid invoices are more than an administrative inconvenience. For businesses, late or non-payment can affect cash flow, disrupt operations and place pressure on relationships with suppliers, employees and other creditors.

Unfortunately, even businesses with sound contracts and established payment processes may eventually encounter a client who simply does not pay.

The question then becomes: what can you legally do when a client owes your business money and refuses to pay?

Debt recovery in South Africa can range from relatively straightforward communication and negotiation to formal legal proceedings. Understanding the available options, and knowing when to obtain legal assistance, can help businesses recover outstanding amounts while avoiding unnecessary delays and costs.

What Should You Do When a Client Does Not Pay?

Before immediately resorting to litigation, it is important to establish exactly why payment has not been made.

There is a significant difference between a client who has overlooked an invoice, a client experiencing temporary financial difficulty, and a client who actively disputes the debt or refuses to pay.

A sensible debt recovery process will generally begin by reviewing the documentation relating to the transaction.

This may include:

The signed agreement or contract;
Quotes and accepted proposals;
Purchase orders;
Invoices and statements;
Payment terms;
Emails, WhatsApp messages and other correspondence;
Proof that goods were delivered or services rendered; and
Previous promises or arrangements regarding payment.

These documents may become important evidence if the matter ultimately proceeds to legal action.

Step 1: Follow Up on the Outstanding Payment

The first step is often the simplest: contact the client.

Confirm that the invoice was received, remind the client that payment is overdue and request a specific date by which payment will be made.

Importantly, businesses should keep a written record of communication regarding outstanding debts.

A telephone conversation may resolve the problem, but following that conversation with an email confirming what was discussed can create a useful record.

For example, if a debtor confirms that the amount is outstanding and undertakes to pay it, that communication may become legally significant later.

Repeated informal follow-ups should, however, not continue indefinitely. When promises of payment repeatedly come and go without money arriving, it may be time to move the matter into a more formal recovery process.

Step 2: Review the Contract and Payment Terms

Before commencing formal debt recovery proceedings, review the agreement governing the transaction.

The contract may contain important provisions relating to:

When payment becomes due;
Interest on overdue amounts;
Breach of contract;
Notice requirements;
Dispute resolution procedures;
Mediation or arbitration;
Jurisdiction;
Legal costs; and
Cancellation or termination.

Following the correct contractual process is important, particularly where the debtor disputes liability.

If there is no formal written contract, this does not necessarily mean that the debt cannot be recovered. Other evidence, including correspondence, quotations, invoices, proof of delivery and the conduct of the parties, may help establish the existence and terms of an agreement.

Step 3: Send a Formal Letter of Demand

When ordinary payment reminders have failed, a formal letter of demand is often the next step.

A letter of demand generally records the amount outstanding, the basis of the debt and the period within which payment must be made. It may also explain the consequences should the debtor fail to comply.

The purpose is not simply to send a more intimidating version of an invoice.

A properly prepared demand can demonstrate that the creditor is serious about recovering the debt and can provide the debtor with a final opportunity to resolve the matter before further legal action is considered.

Depending on the circumstances and the legal process that may follow, there may also be specific requirements that need to be satisfied before proceedings are instituted.

Businesses should therefore consider obtaining legal advice rather than relying on generic letter-of-demand templates found online.

Does Sending a Letter of Demand Stop Prescription?

This is an important distinction for South African businesses.

Sending a letter of demand does not necessarily interrupt prescription.

Under the Prescription Act 68 of 1969, many ordinary debts prescribe after three years. Prescription generally begins to run once the debt becomes due, subject to the particular circumstances and exceptions contained in the Act.

The consequences can be significant. A creditor who spends years sending reminders and letters without taking appropriate action could ultimately find that prescription has become an issue.

South African courts have confirmed that a letter of demand does not, by itself, constitute the legal process contemplated in section 15 of the Prescription Act for judicial interruption of prescription.

For this reason, businesses should not assume that repeatedly demanding payment indefinitely preserves their right to recover the debt.

If a debt has been outstanding for a considerable period, obtaining legal advice sooner rather than later is advisable.

Step 4: Consider an Acknowledgement of Debt

In some circumstances, the debtor does not dispute owing the money but cannot settle the full amount immediately.

An Acknowledgement of Debt (AOD) may then be appropriate.

An AOD can formally record that the debtor acknowledges the outstanding obligation and set out how and when it will be repaid.

Depending on the circumstances, it may address matters such as:

The amount acknowledged as owing;
Instalment amounts;
Payment dates;
Interest;
What happens if an instalment is missed;
Legal costs; and
The consequences of default.

An AOD should not be treated as a casual administrative document. Its wording can have significant legal consequences.

An express or tacit acknowledgement of liability by a debtor can also interrupt prescription under section 14 of the Prescription Act, after which prescription may begin running afresh in accordance with the Act.

Businesses should therefore consider having an attorney prepare or review an AOD before it is signed.

Step 5: Consider Formal Debt Recovery Proceedings

When a debtor refuses to pay, ignores demands or disputes the debt, legal proceedings may become necessary.

The appropriate process will depend on several factors, including:

The amount owed;
The nature and complexity of the dispute;
The terms of the agreement;
Whether liability is disputed;
The available evidence;
The debtor’s financial circumstances; and
The appropriate court or dispute resolution forum.

Litigation should not automatically be viewed as the first or only option.

A commercial attorney can assess the claim and advise whether negotiation, mediation, arbitration or litigation is likely to provide the most appropriate route to recovery.

The objective should be commercially sensible debt recovery, not litigation simply for the sake of litigation.

What Happens If the Debtor Disputes the Invoice?

Not every unpaid invoice is a straightforward debt collection matter.

A client may allege that:

The services were not completed;
Goods were defective;
The amount invoiced is incorrect;
Work was not authorised;
Contractual obligations were not fulfilled;
The creditor breached the agreement; or
The client has a counterclaim.

At this point, what initially appeared to be debt collection may become a contractual or commercial dispute.

The documentation surrounding the transaction becomes particularly important.

An attorney can assess the merits of the respective positions and advise on the most appropriate strategy for resolving the dispute.

How Long Do You Have to Recover an Unpaid Debt?

Businesses should pay careful attention to prescription.

Under the Prescription Act, different prescription periods apply to different categories of debt. For many ordinary contractual debts, the applicable period is three years.

However, determining exactly when prescription begins, whether it has been delayed or interrupted, and which prescription period applies is a legal question that depends on the facts of each matter.

For example, the Act provides that prescription may be interrupted by an express or tacit acknowledgement of liability by the debtor.

Prescription can also be judicially interrupted by service on the debtor of legal process through which the creditor claims payment of the debt, subject to the requirements of the Act.

The safest approach is therefore not to wait until the three-year mark is approaching before obtaining advice.

What If You Obtain Judgment and the Debtor Still Doesn’t Pay?

Obtaining judgment does not necessarily mean that payment will immediately follow.

If a debtor fails to satisfy a judgment voluntarily, further enforcement measures may need to be considered.

The appropriate enforcement mechanism will depend on the debtor’s circumstances and the assets or income that may lawfully be available for execution.

This is another reason why the commercial realities of debt recovery should be considered before embarking on litigation.

Winning a case and successfully recovering money are related, but they are not always the same thing.

A sound debt recovery strategy considers both.

Can You Recover Legal Costs from the Debtor?

The recovery of legal costs will depend on factors including the agreement between the parties, the legal proceedings instituted and any costs order ultimately made.

Some commercial agreements contain clauses dealing specifically with legal costs arising from a breach.

However, businesses should not automatically assume that every rand spent pursuing a debt will ultimately be recoverable from the debtor.

The likely legal costs should form part of the commercial assessment of whether and how to pursue a claim.

How Can Businesses Reduce the Risk of Unpaid Invoices?

The best debt recovery matter is often the one that never becomes necessary.

Businesses can reduce their exposure by implementing stronger credit and contracting procedures from the outset.

This may include:

Using properly drafted written agreements;
Clearly defining payment terms;
Requiring deposits where appropriate;
Establishing credit limits;
Conducting credit checks where appropriate;
Invoicing promptly;
Following up as soon as accounts become overdue;
Keeping accurate records;
Including appropriate breach and dispute-resolution provisions in contracts; and
Escalating problematic accounts before they become significantly overdue.

Clear commercial agreements do not guarantee that every client will pay, but they can substantially improve a business’s position when a dispute arises.

When Should You Contact a Debt Recovery Attorney?

There is no requirement to wait until a debt has been outstanding for months before seeking legal advice.

Businesses should consider speaking to an attorney where:

A substantial amount is outstanding;
Payment promises are repeatedly broken;
The debtor disputes liability;
The debtor appears to be experiencing financial difficulty;
There is concern about prescription;
A contract contains specific dispute-resolution requirements;
A letter of demand has been ignored;
An acknowledgement of debt is being considered; or
Formal legal proceedings may be necessary.

Early legal intervention can sometimes prevent a relatively straightforward debt from developing into a lengthy and expensive dispute.

Commercial Debt Recovery and Dispute Resolution

Unpaid debts can place unnecessary pressure on otherwise healthy businesses. Acting promptly and strategically is therefore important.

At Louw Bruwer Attorneys Incorporated, we assist businesses with commercial disputes, debt recovery and litigation, from assessing contractual rights and issuing formal demands to negotiating settlements and instituting legal proceedings where necessary.

Every debt recovery matter is different. The appropriate strategy should consider not only whether a claim is legally enforceable, but also the most practical and commercially sensible way of achieving an outcome.

If your business is struggling to recover an outstanding debt or you require advice regarding an unpaid account, contact Louw Bruwer Attorneys Incorporated to discuss your options.

Disclaimer: This article provides general information and does not constitute legal advice. Legal advice should be obtained based on the facts and circumstances of a particular matter.

Debt Recovery in South Africa: What to Do When a Client Won’t Pay