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Pressure from Creditors Legal Actions Explained

1 April 2022

Pressure from Creditors Legal Actions Explained

Dealing with creditor pressure and legal actions

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).

Due to Coronavirus most legal actions were not possible on companies had been forced to close or whose debts could be shown to be due to the pandemic. These restrictions were lifted in September 2021. Debts of under £10k was enforced following March 2022.

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:

County Court Summons

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.

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, 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.

County Court Judgement

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 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.

Notice of Enforcement

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.

What can I do, what should I do?

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. 

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 £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.

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 CVA or Administration or urgent refinancing. Or if the business is simply not viable talk to an insolvency practitioner.

Controlled Goods Agreement (formerly Walking Possession)

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.

What can I do, what should I do?

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. 

Commercial Rent Arrears Recovery (CRAR)

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.

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 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?

Winding Up Petition

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.

See the Winding up 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.

Relieve creditor pressure and call us on 0800 9700539.

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