What steps can creditors take and what can be done to prevent it?

If your client’s company has debts it cannot pay and pressure from their creditors is building, there will understandably be anxiety about any action that can be taken against them. Some creditors, such as HMRC, have a powerful range of enforcement measures at their disposal and can act quickly if they think there is deliberate avoidance of paying what is owed.

Here we look at the escalatory steps creditors can take, from payment demands and threats of legal action to petitioning the court to wind up a business.

Late payment demands

If your client misses a scheduled payment to a supplier, HMRC or another creditor, the first contact is likely to be a polite email or phone call reminding that payment is due and a request to make it as soon as possible. If the payment is not made, your client can expect to receive a more forceful payment demand and interest might even be added to the debt.

What can be done?

At this stage, your client should be communicating with their creditors, explaining the situation clearly and giving them a realistic time frame of when the payment will be made. If money is owed to HMRC, they can be contacted to set up a Time to Pay (TTP) arrangement to pay what is owed in instalments. 

County Court Summons

If the creditor is ignored or a payment agreement isn’t adhered to, they may choose to take legal action. A County Court Summons is the first stage of that process. It is a formal payment demand that sets out how much is owed.

What can be done?

Once the summons is received, your client will have 14 days to respond by either disputing the debt or making the payment. If neither is done, a County Court Judgment could be issued. If your client cannot afford to pay in full, the creditor can be contacted with the aim of setting up an informal payment arrangement.  

County Court Judgment (CCJ)

With this comes increased pressure. If the debt is valid and the amount owed is not paid, a County Court Judgment will be issued. The debtor has 30 days in which to challenge the CCJ or pay up before it is registered with the credit agencies. If payment isn’t made or challenged, the CCJ will show on your client company’s credit file for six years, making it more difficult and expensive to secure credit in the future. 

Importantly, having a CCJ issued against a business acts as proof that they are insolvent which enables creditors to take even more serious action.

What can be done?

The first step is to check that the CCJ is accurate. If there are any errors, an application can be made for it to be set aside by the court. If the details on the CCJ are correct and it isn’t disputed, every effort should be made to make payment. If your client is not in a position to pay the debt in full, they should contact the creditor to try to make a payment plan.

Enforcement Action

If the debt isn’t made in full or as per the terms of a payment plan, the creditor can choose to take enforcement action. They will commence action by sending a Notice of Enforcement requesting the debt be paid within 7 days.

If the debt is not paid, they can appoint a bailiff to enter the business premises and make a Controlled Goods Agreement –  an inventory of the assets they can seize to cover the debt. They will also try to make a payment plan. If there is a refusal to sign the Controlled Goods Agreement or to stick to the terms of a payment plan, the bailiff can seize company assets and sell them at auction to recover the debt.

What can be done?

If the business is financially viable and your client wants to save it, it is still worth trying to make a deal with the creditor if possible.  If no deal is made, losing company assets and equipment could be the beginning of the end for the business.

Statutory Demand

A Statutory Demand is the next step in what is now a serious situation. The CCJ has the effect of proving the debt in law – the Statutory Demand goes further by making a formal demand for that debt to be paid. At this point there are 18 days in which to challenge the demand, or 21 days to pay the debt in full or reach a repayment agreement.

What can be done?

The Statutory Demand can be challenged, but only if there are genuine grounds for doing so. If the debt cannot be paid in full, advice should be sought from an insolvency practitioner immediately. They will help your client to understand what options are available, such as proposing a Company Voluntary Arrangement (CVA) to repay what is owed over time or putting the company into Administration. Alternatively, if the business is no longer viable, the best approach could be to close it down voluntarily via a Creditors’ Voluntary Liquidation (CVL).

Winding Up Petition

If a Statutory Demand isn’t paid or challenged, a creditor can issue a Winding Up Petition against the business. This is something a creditor will only do as a last resort once they have exhausted all other options.

Once a Winding Up Petition is received, there will be just 7 days in which to pay what is owed. If this doesn’t happen, the petition will be advertised in The Gazette and made public. The company’s bank accounts will then usually be frozen and it will become very difficult to pay the debt or continue to trade. A date for the court hearing will be set, typically 8 to 10 weeks after receiving the petition. At the hearing, the likelihood is that the court will grant a Winding Up Order and the company will be forced into Compulsory Liquidation.

What can be done?

Action must be taken quickly and decisively if the business is to be saved. It is worth trying to raise the money to pay the debt using emergency funding. If funding isn’t immediately available, a request can be made to the court to grant an adjournment to give more time to make the payment.

If payment cannot be made, entering into a Company Voluntary Arrangement could be an option. At this point, however, the creditors might be unwilling to accept a payment plan. In that case, you could explore whether Administration or Pre-Pack Administration is viable. If the business is no longer profitable and has no realistic prospect of recovery, a Creditors’ Voluntary Liquidation can lead to a better outcome than being forced into Compulsory Liquidation by the court.

If your client’s business is struggling with unmanageable debts and creditors are threatening to take action, our licensed insolvency practitioners can help. Contact us today for a free consultation or to arrange a meeting at one of our nationwide network of offices. We can help you and your client to understand the options and take the right steps to protect their business.