When a business is owed money for goods and services supplied in good faith, it can be very frustrating. Not only can it impact upon the cash flow of the business, but it can take up valuable time and energy in chasing the debt. The stress of which can also have a negative affect your health and wellbeing also. Even a series of small debts can quickly accumulate into a much bigger problem. Thankfully, there are ways in which you can successfully pursue and reclaim these debts.
Limited companies are a very popular business structure for small to medium enterprises (SMEs). One of the biggest attractions for the directors of those companies is that their debt liability is limited to the shareholding they have in the business (ie if they own a 25% share, they are only responsible for 25% of the debt). One exception to this, however, does impact upon the debt recovery process. This stems from the Companies Act 2006 which states that directors can be liable for more debt if they have breached their fiduciary duties. Moving money out of a company to avoid paying a debt, could be one example of this.
Amicable settlement of debt
As with most potential legal disputes, it is always better to attempt to resolve the issue amicably and out-of-court in the first instance. Any informal attempts at arbitration will reflect favourably on you if the case does eventually go to court. It is always a less stressful and costly approach to avoid the litigation route if you can.
So, you could try sending email reminders and making telephone calls to retrieve the debt. Ensure you keep a diary to log the time, nature and outcome of these attempts. If this doesn't work, you should then approach a specialist debt recovery solicitor to discuss your next move.
Formal attempts to settle the debt
A formal debt recovery process is effectively a three-stage process:
- Letter before action: this is not just another attempt to chase the debt. It is a formal letter spelling out the current situation with as much detail as possible and informing the debtor that legal proceedings will now be forthcoming. This is best issued by a solicitor to have maximum impact. It is often the case that this formal letter prompts the debtor company to pay up.
- Research: in the event that the letter before action does not trigger payment, you then need to research the debtor business to assess their capability of meeting the debt or any judgement you obtain. Using the Companies House register, you can find information on any insolvency proceedings, any legal charges against them and basic accounts information.
- Legal action: your next step is to take legal action. There are two ways you can do this: via County Court proceedings or a Statutory Demand (also known as a Winding-Up Petition).
County Court proceedings
Once County Court proceedings have been formally issued on the debtor company, they have 14 days to respond and acknowledge them. If the directors of the debtor company fail to respond within those 14 days, you are awarded the judgement which is equal to the debt owed plus interest.
An alternative course of events is that the debtor responds to acknowledge the debt owed but disputes the amount. In a court hearing the judge would then decide the correct amount based on evidence from both parties. The debtor may dispute that any debt is owed at all. In this event the case would go to court and based on the evidence presented, you would win or lose. If you win you are awarded the judgement as before, but if you lose you will receive nothing, and the case is over.
Winning the judgement from a court is a great result, but it is not the end of the matter. You still need to recover the debt and, in some respects, this is still the hardest part. The following scenarios could occur:
- Once served with the County Court judgement the debtor voluntarily pays up.
- If the debtor does not pay, a High Court Writ of Control can be issued by High Court Enforcement Officers. They will work on your behalf to recover the debt. They work on a results-only cost basis and have greater powers than a County Court Bailiff.
- Charging Order - This is a type of mortgage which can be served on the property of the debtor business, and you would get the money equal to your judgement if/when the property is sold or re-mortgaged.
- Third party debt order – Here an order is served on a debtor's bank account, and effectively orders the bank to pay the money from the debtor's bank to you.
This is the alternative to court proceedings. It is an order that is effective for 21 days. The debtor can dispute it, but if the debt is not paid the business could face liquidation. For this reason, a statutory demand must be taken seriously by the debtor.
It is always recommended you act upon specialist advice from a debt recovery solicitor. Certain circumstances relating to the debt, the debtor or their capability of paying, will dictate the right course of action and the likelihood of success. But it is important you follow the correct process to stand the best chance of recovering your money.
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