The impact of debt on small businesses can be devastating. Unstable cash flow impedes your ability to meet your financial commitments, such as rent, rates, suppliers and staff. It’s crucial to address debts swiftly and decisively to mitigate their effects and ensure your business’s ongoing survival.
In this article, Ian Carson, Head of Dispute Resolution at Harper James explains the types of legal action a small business owner can take to recover debt.
Send a letter before action
Before you start court proceedings, your business dispute solicitor will send a formal legal letter, known as a ‘letter before action’, to the debtor. This letter, which must contain prescribed information — including the amount of the debt, how it arose, and how the debtor can pay it — serves as a final warning before legal action. The debtor then has a reasonable time to respond, usually said to be 14 days.
In cases where the debt isn’t disputed, and the debtor is simply stalling, a letter before action can often elicit a recovery without your needing to take any further legal action.
Serve a statutory demand
A statutory demand is a formal demand for payment of a debt within 21 days. If the debtor fails to pay within the time limit, you can use the failure to pay as grounds for presenting a bankruptcy petition against an individual or a winding-up petition against a company. You will rely on the statutory demand as evidence that the debtor cannot pay their debts, which is one of the bases on which the Court may declare a debtor insolvent.
Serving a statutory demand can be a powerful move since few things focus a debtor’s mind more than the threat of insolvency. But you must exercise caution when using the procedure. If there is any indication that the debtor disputes the amount, you should not serve a statutory demand. If you do, the debtor may apply to set it aside, which is likely to result in you having to pay their legal costs. If the debtor is a company, you can only use a statutory demand if they owe at least £750. For debtors who are individuals, the amount owed must be at least £5,000.
Commence insolvency proceedings
If the debtor is an individual, you can only issue a bankruptcy petition in two situations: Following an unpaid statutory demand, which serves as a formal demand for payment of a debt of at least £5,000 within 21 days, or when you have already obtained a judgment and the bailiff has been unable to recover the debt.
If the debtor is a company, you can present a winding-up petition if you can prove they cannot pay their debts. Sometimes, the court may accept the debtor’s failure to respond to a letter before action as proof of that fact. It is less risky to precede a winding-up petition with a statutory demand.
Insolvency proceedings are a powerful tool in your arsenal against non-payment of debt, and receipt of a winding up petition often encourages a debtor company to make paying you a priority. The procedure is not without risk. If the company is insolvent, you will receive no preferential treatment by virtue of being the petitioning creditor. Ultimately, there may be little or no money left to repay your debt after other secured creditors and the liquidation costs have been paid. As a result, you may find yourself out of pocket at the end of the day.
Issue a county court claim
If the debtor disputes the debt but refuses to engage in negotiations, you may have little choice but to issue court proceedings to recover the money. Before doing so, you should check the company’s financial health since there is little point in spending time and money on suing a debtor who cannot satisfy any judgment you obtain against them. The same applies before initiating insolvency proceedings.
Your judgment will order the debtor to pay the debt within a specified time, usually 14 days. If they fail to do so, you can take steps to enforce the judgment. Such measures might include sending bailiffs to collect payment, taking a charge over the debtor’s property, or taking payment out of the funds held in the debtor’s bank account.
By Ian Carson, Head Of Dispute Resolution At Harper James
