How to recover debts from a struggling company

It can be both difficult and costly (in terms of time and money) when attempting to recover a debt owed to you. This is further exacerbated if you find yourself in an all-too-common predicament; you are one of many creditors of a struggling business. This article intends to provide a helpful summary of the options available to you, should you find yourself in this position, as well as the services that the Birkett Long Disputes Team can provide to facilitate the recovery of a debt.

The main options

The main options open to a party looking to recover a debt can be summarised as follows:

1. Court proceedings

2. Insolvency proceedings

3. Settlement

1. Court proceedings

If a creditor pursues their debt in Court and is successful, either in a trial or by default (whereby the debtor fails to respond to the Claim within the prescribed timeframe), the Defendant (i.e. the Debtor) will have a County Court Judgment (a “CCJ”) on their name.

A CCJ will affect the Debtor’s credit rating and may make it difficult for them to borrow money or get credit for 6 years from the date Judgment was awarded unless the debt is paid, in full, within 30 days from the date of Judgment being awarded to the creditor.

If the threat of a CCJ is not enough, the Judgment will open the door for a creditor to enforce that Judgment to recover the monies owed to them. The creditor will have 6 years from the date Judgment was awarded to enforce it. Enforcement is usually carried out by instructing bailiffs or seeking to obtain a charge on a property owned by the debtor, with the view of recovering the funds in the sale proceeds or seeking an order for sale of the property at the court’s discretion.

Therefore, although the debtor may not have the means to pay at the date you obtain Judgment, the debtor’s finances may improve over the next 6 years which will provide the creditor with the opportunity to enforce Judgment during this timeframe.

When deciding to pursue a debt through Court there is a strict process to be followed, both during Court proceedings and prior, within the pre-action stage. 

In the pre-action stage, a creditor must send a formal pre-action Letter of Claim. This is a letter that the Court would expect the parties to send under the Pre-Action Protocol on Debt Claims. The Letter of Claim puts the debtor on notice that the creditor may proceed with Court Proceedings in the event payment of the debt is not made within a certain timeframe, with the timeframe depending on whether the debtor is a company or an individual. If a Letter of Claim is not sent before issuing Court Proceedings, there is the risk that the Judge may sanction a claimant for failing to comply with the Pre-Action Protocol on Debt Claims.

It is often the case that the debtor makes payment of the debt when they are in receipt of a Letter of Claim which would then prevent the need to incur the cost/time in commencing Court Proceedings, when the threat of the same may be sufficient in recovering the debt.

A Letter of Claim is a letter that Birkett Long would be happy to draft and send to the debtor for you. This letter will help:

1)   Encourage early payment without the need for Court Proceedings; and

2)   Ensure compliance with the Pre-Action Protocol.

If a Letter of Claim does not recover the monies and the claim is issued, and the debtor then files a defence to the claim, the Claim is then allocated to the respective Court depending on the value of the claim – otherwise known as “Track Allocation”. Each “Track” will have certain rules to follow up to and including a trial, otherwise known as “Directions”. There can be sanctions for non-compliance with the Directions.

The Track your claim will be allocated to will also have an influence on the amount of money (i.e. your legal costs) you will recover from the Debtor. For instance, if your debt is under £10,000, you should expect your Claim to be allocated to the Small Claims Track (otherwise known as the Small Claims Court). In these types of claims, costs that you incur, apart from the Court Fee, will not be recoverable from the Defendant even if you are successful with your Claim. Instead, only very limited costs are recoverable from the Defendant. With a claim in excess of £10,000, the Claimant should expect to only recover between 50-80% of their costs. However, costs are always at the discretion of the Judge, who may award more/less than this.

Furthermore, though judgment in the creditors favour is the ultimate aim, this on its own does not guarantee the debt being paid.

If the company you are attempting to claim from has no money to pay the debt, a County Court Judgment is unfortunately not going to change that. This is why you should, in the first instance, investigate the Company’s assets prior to commencing Court Proceedings and consider whether it is proportionate to pursue. This is something Birkett Long is happy to assist you with and help you decide whether it would be financially worth proceeding with a claim in Court, considering the associated risks/costs with the same.

2. Insolvency proceedings

Another option for pursuing a business for a debt can be by way of insolvency proceedings. A creditor to a company debtor may start a process, otherwise known as “Winding Up Proceedings” against another company debtor.

As part of the process, it is often advisable to serve a statutory demand on the debtor; this is a written notice that asks for payment of the debt (if the debt is more than £750) within 21 days, threatening a winding up petition being started if it is not paid. This is a useful tool that is quick, inexpensive and does not involve the court. It can pressure a company into paying off a debt at the threat of liquidation.

Should the debt not be paid, the statutory demand demonstrates that the Company is unable to pay its debts, satisfying one of the grounds on which it may be wound up. It is then more likely that the Court will make a winding up order against the debtor which starts the process of compulsory liquidation.

There are however, risks associated with commencing winding up proceedings. It can be regarded as an abuse of process if the debt is disputed. If disputed, the debtor company may also attempt to stop the process by way of an injunction. Injunctions are very expensive to both commence and defend. Therefore, if there is some degree of knowledge that the debt is disputed, it would not be advisable to commence with insolvency proceedings considering the risks associated with an injunction.

Like court proceedings therefore, insolvency proceedings are perhaps best for threatening and placing pressure on a debtor to make payment of the debt to you. However, should you have security on your debt or you are confident that the debtor company has plenty of assets with little to no other creditors, insolvency proceedings can be an effective means of recovering a debt.

3. Settlement

Settlement often works hand in hand with court/insolvency proceedings; the parties meet together to come to a resolution that both can be satisfied with. Settlement can be a cheaper and less expensive means of resolving a debt, but compromise is often necessary, especially where the debt is disputed.

The benefit of settlement is that it can result in some, if not a large, proportion of the debt owed being paid, with parties perhaps agreeing a payment plan to regularise payments. One of the other benefits of undertaking settlement negotiations outside of formal proceedings is that they usually remain confidential. This can assist parties in achieving resolutions without business relationships becoming damaged as a result of the matter being heard in Court proceedings, which are available publicly.

The payment plan can also be drafted into a formal Settlement Agreement, which is something that Birkett Long can assist in drafting. The Settlement Agreement can help ensure:

• Certainty of terms;
• Certainty of intentions (as the parties will be signing the Settlement Agreement);
• Termination provisions (the parties’ respective obligations and liabilities, should a breach arise);
• Enforceability clauses;
• Interest provisions;
• Confidentiality provisions;
• Binding on successor clause (if necessary depending on the facts).

Conclusion

There are many different avenues you can take to attempt to recover a bad debt from a struggling business. We have seen all too many types of debts in all types of situations and would be very happy to advise you further as to your legal position and most importantly, whether it would be financially viable to proceed with a claim in court and/or insolvency proceedings.

Whether it be the threat of legal proceedings with the view of reaching a settlement with the debtor or proceeding with the claim itself, we have experience in all different stages of the dispute that will assist you in recovering the amount owed from a struggling business.