What measures can creditors take against a business? How should directors respond?
Creditor pressure is often one of the first signs of financial difficulty encountered by businesses.
If not addressed and action is not taken, creditor pressure can often be the start of a downward spiral that can be highly stressful, leading to bad decisions being taken, insolvency and possible liquidation. In this article our Licensed Insolvency Practitioners look at the different actions that Creditors may take to get paid and how businesses should respond, because initial, gentle reminders can quickly end up becoming stronger threats or even a Winding Up Petition.
- Initial requests for payment of overdue invoices.
Once the deadline for a supplier’s invoice payment has passed, the creditor may issue an initial, usually courteous, reminder that the payment is due and ask for it to be settled quickly. But pressure will quickly ramp up if payment is not received with stage 2 being a sterner and more formal overdue payment demand being issued, usually setting a specific time period for its settlement.
Additionally, interest may be charged on the outstanding debt. If payment is still not received, the next step is likely to be a formal notification from the creditor that they intend to initiate legal action to recoup the outstanding balance, which usually starts with a Letter Before Action.
What action can be taken?
There are many reasons why a business is paying later and later, and it might not be the fault of the company, as was often the case during the Covid pandemic, for example. However, this will not stop creditors wanting payment, and the main thing not to do is ignore the payment demands. The best advice is to stay in contact with the creditor(s) concerned and explain why the payment is late, what you are doing to remedy the position, and give a reasonable timeline for payment.
As a general rule, creditors would rather not resort to legal action, which takes time, money, and effort, and quickly leads to bad will and difficult working relations. If you communicate regularly, explain and commit to a reasonable payment timeline, it is likely that creditors will be sympathetic, at least initially, and be willing to work with you, providing, of course that agreements are adhered to.
- County Court Summons
The next step up the creditor pressure ladder is a County Court Summons. This often happens if a business fails to keep in contact with its creditors or does not stick to any agreed payment plan.
The creditor (often in conjunction with a solicitor), may then proceed to issue a County Court Summons which might result in a County Court Judgment (CCJ) against the business. Although not all creditors will adopt such a stance, HMRC will always proceed towards taking legal action of some kind.
Businesses receiving such a summons only have two weeks to answer the summons, although an additional two weeks might be granted upon application to allow more time to make the payment or to decide what other course of action to take.
What action can be taken?
A County Court Summons is serious and must not be ignored. It is not too late, however, (although not recommended to do so habitually) to settle the outstanding invoice(s) or negotiate a time plan to settle, and so avoid any further legal action and costs.
If at this stage the decision is to contest the debt, then it is imperative to respond to the summons in the time frame indicated. The summons contains comprehensive instructions on how to challenge the claim.
- A County Court Judgement (“CCJ”)
A County Court Judgment is an official ruling from a court of law following a County Court Summons. It is a statement that the court has found in favour of one of the parties in the dispute, and sets out the terms of the ruling, which in creditor cases means how the debt is to be repaid if the judgement is in favour of the creditor.
Once a County Court Judgment is issued, there is still the chance to settle the debt prior to the CCJ being finalised and if that is done the business’s credit score will be unaffected.
If the outstanding invoice(s) and any associated charges is/are settled within a month of the Judgement being issued, the CCJ will be nullified and will not be entered into the company’s credit report – where it would otherwise stay for 6 years – and documented with the various credit bureaux. However, if the debt remains unpaid after 30 days, the CCJ is considered to be proof of insolvency and further action may be taken, including enforcement action to recover the debt. It’s important to note that this will involve further costs and does not guarantee a recovery.
Enforcement action often involves dispatching a Notice of Enforcement to the business address of the debtor, asking for the full payment of the debt to be made within seven days. Failure to do so will enable an enforcement agent to visit the business premises and seize goods that can be sold to cover the debt.
When the enforcement agent arrives at the location, their primary goal is usually to convince the debtor to come to an agreement to pay back the debt in full or in instalments. However, they will also request that a Controlled Goods Agreement is signed, which outlines the company’s legal property and chattels that can be taken to make up the value of the debt. If the payments consented to are not made, the enforcement agent can return and take those assets. The items will then be held or sold without delay to fulfil the debt. The business will, of course, not be in a position to trade with such goods until the debt has been settled.
Are there any possibilities available when faced with a CCJ?
Once a CCJ has been issued, and it is still proving difficult/impossible to pay the debt in full, about the only option left is to try, once more, to negotiate with the creditor to settle the debt in instalments. This will help to avert any further activity, such as a winding up petition.
If you cannot come to an agreement on payment, and there is refusal to sign a Controlled Goods Agreement, the enforcement agent is allowed to take away and sell items listed in their inventory at once.
- A Statutory Demand for Payment
A Statutory Demand is a serious step-up in a situation that has already been proven to involve non-payment of a debt. This action is normally taken after a County Court Judgement has been issued.
If you are served with a Statutory Demand, there is a 21-day period to settle the debt completely. If this deadline is missed, the creditor has the option to take it further by filing a Winding Up Petition against the company.
What actions can be taken?
If the debt cannot be met in full, then this is the time to seek help from a licenced insolvency practitioner – we have 5 here at Antony Batty. There are still some options available, although the insolvency practitioner will need to examine all required data to make the most informed recommendations.
One potential option is a Company Voluntary Arrangement (CVA). If this is agreed with the creditors, this would prevent any further court proceedings and give the business the possibility to pay back the debts over time. Another option could be to restructure the company through an Administration procedure.
Both a CVA and an Administration are used when there is a prospect of saving the business. However, if it is clear that there is no prospect of saving a business and that closure is the only feasible course of action, it could well be that Creditors’ Voluntary Liquidation (CVL) would be the best possible outcome from a difficult situation and reduce the potential for any of the company’s liabilities being placed on its directors.
- A Winding Up Petition
A Winding Up Petition filed against a business by a creditor is about as serious as it can get and can lead to the closing of a company if the debt is not paid.
Once a Winding Up Petition has been put forward, the company has a minimum of seven days to act before the petition is published in the London Gazette at which point it becomes public knowledge, with all the reputational damage that comes with it, and the resulting freezing of the businesses banking accounts, making trading impossible.
Depending on the Court and the length of the petition listings, a court hearing is typically scheduled 8-10 weeks after the petition is issued, whereupon a decision will be made on whether or not a Winding Up Order is granted. If this happens, the company will be in compulsorily liquidation and The Official Receiver (an officer of the Court) is normally appointed and all trading must cease (if it already has not done so).
What action can be taken?
This is usually the point of no return. To be certain that all the business’s options have been explored you should contact one of our Insolvency Practitioners just to make sure that this is the case – preferably before the winding up petition is heard.
Talk to us if you are under Creditor Pressure
If you are having difficulty settling your debts and are facing financial difficulties as a business and don’t know what to do, contact us now to arrange a free initial appointment with our Bournemouth office.