Q. I have recently chased a number of debtors by bringing county court claims against them. In a couple of these claims the cases have been stopped because the court agree with the defendant that I have sued the wrong person. I have even had to pay court costs to people who owe me money for unpaid invoices. How can this be?

A. This problem will arise because of uncertainty over the precise legal identity of your customer. Businesses often make assumptions about who their customers actually are. This may not cause any problems as long as invoices are being paid but, if payments stop, then who does the creditor chase? It is a common misconception that if a creditor has delivered an invoice that remains unpaid then it is entitled to sue the name on the invoice. However, an invoice is only a demand for payment under the terms of a contract. To be certain who is responsible for paying an invoice it is essential to establish the precise identity of the parties to that contract.

There are usually three main ways in which people carry on business. An individual person can be a sole trader. That person is then personally liable for the liabilities of that business. Two or more individuals can conduct a business as a partnership. Usually any of the partners will be personally liable for all the liabilities of the partnership. Other businesses are traded as limited companies. However, only in the most exceptional circumstances will the shareholders and directors of a limited company be personally liable for company debts. A sole trader, a partnership and a limited company are all entirely separate legal entities. Just because your business deals with one person who places orders or answers the telephone does not necessarily mean that he is the customer personally. He may be an employee of the customer. If that individual is sued then he will have a good defence to your claim because you will have sued the wrong person.

Simple fact finding exercises at the beginning of a trading relationship can ensure more effective credit control and recovery if that relationship should go sour. Identify whether a customer is a limited company or not. Ensure that you have the exact name of the company and registration number. Similar is not the same! ABC Limited and ABC (UK) Limited are completely different companies. Sue the wrong one and you will be liable for their costs.

If the customer is not a limited company then make sure you know whether it is a sole trader or a partnership and that you have details of all partners. If a partnership fails to pay its invoices a partner you have never met can be just as liable as the partner you deal with on a daily basis.