A guide to responding to your creditors
It’s in the best interests of the creditors to ensure your business remains financially viable and continues to operate as a going concern. However, if they believe you are likely to default on your payments imminently, there are several options they can explore to recover payment. In the early stages, it’s likely they will make several calls and demands for payments: this is the best time to engage with your creditors, explain your situation and provide an estimate of when you will be in a position to pay them.
If you ignore their requests, creditors can pose a significant threat to the ongoing trade of your business. Should you fail to come to an arrangement or even ignore their payment requests, your company could face a statutory demand, leaving you with 21 days to pay your outstanding debts. If you fail to do this, the creditor may then issue a winding up petition, signalling the start of the compulsory liquidation procedure.
It’s important to note, a creditor can request the winding up of a company if they are owed as little as £750.
What are your creditor’s rights?
Your creditors do have the right to recoup debts they are owed. If you cannot pay when due, they will likely take action to recover as much as possible. Your creditors can directly demand repayment, and may opt to pass your debt to a debt collection agency or third-party if they have not been successful at obtaining payment directly. If you have taken a loan and it is secured by a legal charge over a company asset or property, they could take possession of said asset or property. This can further affect cash flow if the company assets are integral to business trading.
Creditors also have the option to send written notices requesting payment for the debt, and subsequent interest. They can place further pressure with a statutory demand that, if ignored, can result in serious consequences for your company.
What if I dispute the debt?
You have 18 days after service of a statutory demand to dispute the debt. This must be done by way of a court application to set aside the statutory demand. This should not be done unless you have a genuine dispute. Doing this as an exercise to buy time will mean you are liable for the costs of the statutory demand hearing as well as the debt itself.
Are my creditors overstepping their boundaries?
While creditors may request repayment and all of the above, they are not legally entitled to harass you or your staff for their debts. Creditor harassment can take many forms and include:
- Threatening phone calls or in-person visits to your workplace
- Disclosing personal debt information to colleagues or other companies
- Misleading you as to the consequences of failing to pay
- Threatening to take you to court if they are not able
- Pressuring your company to make significantly larger payments than is necessary
- Aggressive means to contact the company director personally
If your trade creditors have demonstrated any of the above tactics, they could be in violation of UK law. Creditors that do violate the terms outlined in the Financial Conduct Authority (FCA) could face substantial penalties.
What if I am visited by a high court enforcement officer?
Failing to pay debts, or seek advice, could result in your company receiving a visit from high court enforcement officers (HCEO). A HCEO has been authorised by the High Court to recover debts and, as such, wields additional powers over and above that of a court bailiff or enforcement officer. The high court enforcement officers will visit your premises to make a list of company goods that may be seized. However, beforehand, they will provide you with an opportunity to pay your debts. You can find further details in our guide to enforcement officers, including information on what a HCEO may take from your business here.
What happens with a winding up petition?
A winding up petition is expensive for your trade creditors, and is seen as the very last resort. The procedure results in your company being wound up and handed over to the official receiver to take control of and sell the assets of the business. Their primary objective is to act in the best interest of your creditors, yet you can speak to a licensed insolvency practitioner to discuss the outcomes of compulsory liquidation. You will be required to assist the official receiver where possible, and they will also investigate your conduct and report any findings.
You can find more information on the compulsory liquidation procedure here.
What are my options?
To stand the best possible chance of recovering your business, you must act fast. Negotiating with your creditors at the earliest possible stage may protect your company from legal action.
Company voluntary arrangement (CVA)
A CVA provides your company with breathing space if you face severe financial difficulties. Recently, company voluntary arrangements have hit the headlines, with New Look opting for the process. A CVA suspends legal action and creditor pressure, with your creditors agreeing to receive a percentage of the amount they are owed in payment installments. However, not all company voluntary arrangements are accepted, and you can read more on this insolvency procedure here.
Administration is a favourable alternative to liquidation, giving you time to negotiate with creditors and arrange repayment. Legal action is also frozen due to the moratorium, with an administrator taking full control of the business and outlining a possible recovery plan. More information on this procedure can be found here.
Creditors voluntary liquidation
Should you decide that the business is not viable moving forward, this formal insolvency procedure will be carried out by a licensed insolvency practitioner, and refers to directors and shareholders opting to place the company into liquidation. By doing so, you avoid the threat of compulsory liquidation and limit personal liability. You can find more information on the procedure with our timeline for a CVL.
An informal arrangement is a non-insolvency agreement, appealing to many as they cost significantly less to put in place than the above procedures. However, it is not a legally binding agreement, which can mean it’s not always suitable for companies. Further details on informal arrangements can be found here.
In summary: communicate
The worst thing that you can do if you are facing creditor pressure is to bury your head in the sand. If you are concerned, or find yourself under increasing pressure from your creditors, you must communicate with them as early as possible, and not ignore their demands for payment. If you are facing pressure and not sure which is the best option for your business moving forward, you can speak to our licensed insolvency practitioners at Business Rescue Expert.