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Legal Actions Explained for Insolvent Business Partners

4 August 2020

Legal Actions Explained for Insolvent Business Partners

How do I deal with creditors legal actions?

This is not a legal lesson or is it comprehensive - rather it is intended to guide you through the maze of actions that a creditor can take against the business. There are some practical tips on what to do when these actions occur.

The key in all situations is communication. Provided your creditors are kept fully involved and informed most will go along with deals to achieve a satisfactory outcome. In our experience taking legal action is the action of an exasperated creditor (or one with a proper credit control procedure that is rigorously applied).

County Court Summons

Meaning - A creditor has tried to recover their debt from you or the partnership but without success. You may have offered an informal deal but now their patience is wearing thin.

You may have tried to stave payment off claiming the debt is invalid or issued a counterclaim. They have issued an action to commence recovering their money in the County Court

What can I do, what should I do?

You have time to pay the claim of the creditor. Try to offer a payment deal sensibly before the action will be heard in the court. Try to do a deal or pay the debt. If you cannot pay it look at Are we Insolvent page. If you cannot pay it the partnership could be insolvent.

You can dispute the claim if it can be proven the debt is not correct. Look, carefully, at the forms for detailed instructions on how to defend the claim.

County Court Judgment

Meaning - Having pressed for payment the creditor has now got the court to agree that there is a valid claim for the money. You have 30 days from the date of the Judgment to pay in full plus any costs incurred. Otherwise the Judgment will be registered at the courts and with credit reference agencies.

Remember an outstanding Judgment is proof of a partnerships insolvency and allows a creditor to wind the partnership up as if it were a company.

What can I do, what should I do?

If possible always try to pay the debt within 30 days of Judgment. This will ensure that the Judgment is "set aside" and will not be registered with credit reference agencies. If you cannot pay it then this of course further proves insolvency. If it is registered then getting credit in future becomes much more difficult.

If you are under real cashflow pressure but are attempting to trade out call the creditor/ their solicitor or the bailiff and try to agree a phased payment. Often they will agree but they may use the non-payment to push for further action such as distraint or winding up.

You may be surprised at how long a time you can spread payment through this type of deal. Think about it, the creditor just wants paid, even at 50 per week this is better than bankruptcy or liquidation - because they will, inevitably, lose the whole amount in liquidation.


Meaning - As the creditor has not been paid under the judgment the creditor can apply to the court for a warrant of execution. If the debtor is in another area the court can forward this to the local court. A notice of warrant will be issued to the debtor. If payment is not made a bailiff of the court can be sent to collect payment or seize goods.

What can I do, what should I do?

As always a deal can be struck with the creditor and or the bailiff to repay over time. You have demonstrated an inability to pay the debt and are offering to settle in a period to be agreed. For small debts this is often acceptable to the creditor.


Statutory Demand

Meaning - Usually this action is taken after a creditor has obtained a Judgment. It is a formal demand for payment of an undisputed debt (over £750) - the debt must be paid within 21 days of the demand being issued.

Failure to pay a statutory demand can lead to a winding up petition being issued. In any event, the creditor has to pay to issue this document/action and it is now becoming much more serious.

What can I do, what should I do?

Warning! This action means the creditor is serious about getting the debt paid. If you don't pay the debt in the 21 days they can go to the final step of issuing a winding-up petition against the business or seek a bankruptcy petition against the individual partners..

If you cannot pay the debt, talk immediately to a turnaround practitioner, review the contents of this website and make a plan for survival - such as a SIMIVAPVAPartnership Administration or urgent refinancing. Or if the business is simply not viable talk to an insolvency practitioner.

Taking Control of Goods

Meaning - A bailiff (for the County Court) or Sheriff (for the High Court) has visited your premises and obtained entry under a distraint notice. He /she has asked for payment of the proven debt. If you have not paid this plus the court and his costs he can "take control" of the goods, equipment, fixtures, stock etc on the premises.

Effectively if you do not reach a deal or pay in full he can remove and sell the assets in 5 days. To sell the assets after they are covered in this way is a criminal offence. If the bailiff has obtained a walking possession he can force entry to recover the goods after the 5 day period.

What can I do, what should I do?

Unknown to most people unless in debt; Sheriffs and bailiffs are an unusual breed. They will rely upon ancient laws to obtain entry to your property - such as open doors and windows. But they cannot force entry. Simply: your best defence is to close and lock all doors and windows where they can gain access !

It is also not usually possible for the bailiff to possess or remove goods that do not belong to the company - if you have a debenture the goods therefore are charged to a bank. Whilst this is not possession bailiffs do not (usually!) want to get embroiled in arguments with high street banks. If the goods are subject to HP then they cannot be taken.

In reality isn't this is just deferring the inevitable? The business is probably insolvent if a bailiff is calling.

Once walking possession is in place it is STILL possible to do a deal with the bailiff to keep the goods whilst making regular payments - default and he may remove them without notice.


Meaning - A popular tool for landlords where rent or other payments are not made. If the landlord has agreed a payment deal and the company is not keeping to it the landlord has various powers.

Distraint means that an agent of the landlord can effect entry to remove goods or assets for sale to pay for the debt due. He /she does not need to wait for a long period for this to happen. In theory 1 day to 1 week after a rent payment is due they can distrain. Nor does he/she need a judgment.

What can I do, what should I do?

If you cannot pay the debt, you need to point out that the goods belong to the bank or other secured creditor (if they do of course!?) You should really take professional turnaround or insolvency advice. The business is plainly insolvent and you could be breaking the law by continuing to trade. It is possible for a turnaround practitioner to help in these circumstances - BUT you have left it very late.

Proposing a PVA, SIMIVA or entering administration is a solution, but having demonstrated the inability to deal with the cashflow problems are you sure the business is viable?

Winding Up Petition

Meaning this is one of the most serious action that can be taken against the partnership. Clearly the business has breached any trust the creditor had, deals have failed, cheques bounced and generally the partners have not kept their word.

See the Winding up the Partnership page for more details.

If a creditor elects to wind the business it is serious in its intent to recover the money it is owed and / or to put the company out business. Remember, typically a WUP costs over £1200 to action.

What can I do, what should I do?

Other than pay the debt very little. On payment the debt will have increased because of the costs of the plaintiff (creditor). If the action is clearly unfair or an abuse then you MUST take legal advice immediately.

If the petition is fair and indefensible, then in due course the petition hearing will be published. At this stage the bank will find out and they will FREEZE the partnerships bank account to prevent any misfeasance or sale of assets at undervalue or other illegal acts by the partners. Clearly, once advertised a fair petition will lead to a court appointed liquidator taking over.

Make very sure that all management actions have been carefully noted and the assets of the business have not been disposed of.

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