Whether the problem is a temporary cash flow blip or a more fundamental issue with financial resources, falling behind with payments to creditors can have significant consequences. This can result in creditor enforcement action that may lead to your business being put into Liquidation. In the rest of this blog, we take a closer look at what such enforcement action entails.
Second stage routine debt collection
Once an invoice has been submitted and goes unpaid past its due date, a more insistent and eventually escalating process starts with a firm request for settlement. Following this are stronger demands and the start of reminders of the potential consequences. Interest may also be added, and court proceedings could be threatened.
Your response:
In a word, communication. Talk to your creditor, explain the problem and agree a timetable for paying them. Ignoring initial threats only leads to escalation and by communicating with your creditor, you will understand each other’s position and can find a way forward that is outside of costly and stressful court proceedings.
County Court summons
The next step for an unsatisfied creditor is issuing a County Court summons, which could lead to the one thing nobody wants to happen – the court issuing a County Court Judgment (CCJ) against the Company. There are just 14 days to reply to the summons, although a further 14-day extension can be requested but is not automatic.
Your response:
At this stage it is advisable to pay the debt in full immediately. If this is not possible, contact the creditor to offer a workable payment plan. If the debt is disputed, the reasons must be lodged with the court now. The summons will include details of how to do so.
County Court Judgment (CCJ)
If the debt isn’t settled and the Court rejects any defence, it can declare the debt valid and issue a CCJ against the Company. If the debt is still unpaid 30 days after the CCJ has been issued, it is deemed to be effective and represents proof that the Company is insolvent and will open the door to more serious action being taken by the creditor.
The CCJ will be registered with the credit reference agencies and will stay on their records for six years, potentially affecting the business’s ability to obtain credit.
Your response:
Even now, the debt can be paid off before the CCJ becomes effective and the company’s credit rating will not be affected. For this to work, the debt must be settled within 30 days, plus any costs. The CCJ will be set aside and will not be registered with the credit reference agencies.
Even if the debt can’t be settled within 30 days, it’s worth talking once more to your creditor to try to negotiate a payment plan, always assuming the business is still viable.
Enforcement action
If the CCJ is not paid, the creditor has the option to take enforcement action to try to recover their debt by sending a Notice of Enforcement to the business’s address requesting that full payment of the debt is made within seven days. Failure to comply means that an enforcement agent can enter the premises and take control of goods that can be sold to cover the debt.
The enforcement agent’s priority will be to persuade the Company to agree to some form of instalment repayment plan. They’ll also insist that a Controlled Goods Agreement is signed, which is a list of company assets they can seize that cover the value of the debt. Even if the agreement is refused, the business’s assets can still be removed immediately and sold without further notice.
Any failure to make the agreed payments allows the enforcement agent to re-visit and physically remove the assets for sale.
Your response:
Even at this stage there is the potential to agree a deal with the creditor to settle the debt over time and prevent further enforcement being taken.
Statutory Demand
This when matters start to get really serious. A Statutory Demand is a formal demand for a debt that has already been proven, usually evidenced by an unsatisfied CCJ. Once the Statutory Demand has been received from the creditor, there are 21 days to pay the debt in full. Failure to do so allows the creditor to escalate enforcement by issuing a Winding Up Petition against the Company.
Your response:
There is now a determined creditor that is very serious about collecting their money. If the debt cannot be repaid or this very real threat is ignored, the creditor will be in a position to close down the business. Even if only some of the debt can be paid but not all, this is the last chance to take independent professional advice while there are still positive options for a business rescue available.
These might be proposing a Company Voluntary Arrangement (CVA), which if agreed by 75% of creditors (by value) halts all enforcement action and allows all or a proportion of the debts to be repaid over time. Alternatively, it may be possible to restructure the business through an Administration, which again puts a protective ring round the Company to prevent any further action by creditors.
Winding Up Petition
Failure to respond to a Statutory Demand within the 21-day time limit allows the creditor to issue a Winding Up Petition against the company. This is the last, and ultimate, enforcement action by a creditor. The result is the Company being put into Liquidation if the debt is still not paid.
Once a Winding Up Petition has been issued, there are just seven days to take action before the company’s financial plight becomes public knowledge. The Company’s bank accounts will be frozen, making it very difficult to trade without permission from the Court through what is known as a Validation Order. The date for the Court hearing of the Petition will usually be 8-10 weeks after the Petition was issued. The Court will then decide whether a Winding Up Order should be granted. If it is, the Company will go immediately into Compulsory Liquidation.
Your response:
This is a very serious situation and the survival or closure of the Company now depends on the decisions taken. This should be done with expert professional advice to ensure the best route forward is taken and that all proceedings are conducted correctly and without any further consequences.
The first priority is to attempt to find the funds to settle the debt. This may take time, so there is the option to ask the Court for an adjournment, but clear evidence of the proposed funding route will need to be presented.
Another solution may be to put together a CVA, thereby imposing a deferred payment arrangement on the creditor who has presented the Petition. Administration is an alternative too, depending on the financial and commercial circumstances of the Company.
It may be that the Company is now unviable. Subject to professional advice, if closure and Liquidation is inevitable, the better route may be to put the Company in Creditor’s Voluntary Liquidation (CVL) which could lead to a better outcome for creditors and other stakeholders than through a Compulsory Liquidation.
None of the formal insolvency solutions (CVA, Administration or CVL) can be initiated without the involvement of a licensed insolvency practitioner.
How we can help
We have extensive experience assisting business owners and directors with creditor enforcement action, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.