Written ByKeith Steven
Managing Director
Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He is the managing director of KSA Group Ltd - a specialist firm of turnaround and licensed insolvency practitioners. Keith was nominated for Turnaround Practitioner of the Year 2014 at the National Insolvency and Rescue Awards in 2014.
What legal actions can creditors take? What can be done?
If you are facing creditor pressure on a frequent basis then this is a sign that your business is likely to be insolvent.
This is not a legal lesson nor 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 and so relieve the pressure.
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).
Barrister, Eirlys Lloyd of KSA Group, has written detailed reviews of the law on corporate debt enforcement and Commercial Rent Arrears Recovery (CRAR) – see the PDF articles below:
Meaning – A creditor has tried to recover their debt from your company but without success. You may have offered an informal deal but now their patience is wearing thin.
You may have tried to put 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.
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, look at Are we Insolvent? page. If you cannot pay the debt, the business 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.
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.
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 creditor pressure but are attempting to trade out, call the creditor or their solicitor. Often they will agree but they may use the non-payment to push for further action such as 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 to be paid, even at £50 per week this is better than bankruptcy or liquidation – because they will, inevitably, lose the whole amount in liquidation.
As the creditor has not been paid, a Notice of Enforcement can be sent to the debtor requesting payment. The debtor has seven days notice to pay back in full. If payment is not made, the Enforcement Agent will visit the debtor’s premises. If payment still is not made, control can be taken the goods.
What is important to note is that an enforcement officer (EA) can’t just turn up. They have to give 7 clear days notice (excluding Sundays and bank holidays). An instalment arrangement can be agreed with an EA but only after a visit (on 7 days notice) and a Controlled Goods Agreement written and signed. The essence of this procedure is that the debtor (you) are given written notification of all processes. In other words, once the creditor starts to enforce, the procedures must be followed. The whole procedure is started with service of a Notice of Enforcement. The EA’s authority is derived from a Writ of Control.
As always a deal can be struck with the creditor 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.
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 £5000 . 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.
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 CVA or Administration or urgent refinancing. Or if the business is simply not viable talk to an insolvency practitioner.
Meaning – A bailiff (for the County Court) or High Court Enforcement Officer (Enforcement Agent) has visited your premises and obtained entry after an Enforcement Notice has been issued. They can take control of the goods with a Controlled Goods Agreement. After prior notice (seven days), If, at the visit, neither payment is made nor a CGA signed then goods could be removed at that stage for sale or disposal.
The EA can only enter by the normal mode of entry, i.e. the door (but they cannot climb in windows). In commercial enforcement they can force entry on the first visit.
Once a debtor is served with a Notice of Enforcement it is essential that he has to hand, all documentation relative to goods on his premises, which are owned by third parties. The Ministry of Justice guidance states that third party goods should not be removed. However if the documentation is not to hand then they could be removed.
It may still be possible to make a deal with the bailiff or Enforcement Agent.
Meaning – A 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.
The recovery process is called Commercial Rent Arrears Recovery (CRAR). The lease (either legal or equitable) must be in writing. It is the written document/paper that the landlord is relying on to enforce arrears. The minimum period of arrears before CRAR kicks in is seven days. This seven day minimum period must be the case at the time of the service of Notice and again at the time of the EA’s first visit. So if between the service of the Notice and the first visit the arrears are reduced to six days, CRAR does not apply. If there is no written lease, a judgement is now necessary.
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 CVA or entering administration is a solution, but having demonstrated the inability to deal with the cash flow problems are you sure the business is viable?
Meaning this is one of the most serious action that can be taken against the company. Clearly the business has breached any trust the creditor had, deals have failed, cheques bounced and generally the company have not kept their word.
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.
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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"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director. If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020. Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly. I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim. This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork". It isn't worth the risk. If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP) or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. 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