How to Recover a Debt from a Company
When a company fails to pay their invoices on time it can be incredibly frustrating. Not only does it interrupt cash flow, pursuing the debt can eat up valuable time and resources.
Once a business’s own credit control procedures are exhausted, there are a range of options to pursue debts and all begin with instructing a legal specialist to conduct the negotiations and potential legal action.
Fortunately, most debts can be settled amicably without the need for protracted legal proceedings, and there are even times when a single letter before action from a solicitor prompts repayment. However, debt recovery cases can become complex, usually where high-value debts are involved and/or legal proceedings become heavily contested.
Here, we set out some of the main options a business or individual has to recover a debt from a company, including:
- Pre-action negotiations
- Making a county court money claim
- Enforcement options, such as obtaining Charging Orders or instructing bailiffs
- Options where a company is insolvent – winding up proceedings
For a more comprehensive breakdown of the general commercial litigation process, we have produced An Introduction to Litigation which explains each step in the process in detail.
Alternatively, find more information about our bespoke high-value debt recovery services here.
As with most types of legal claim, the first step to effective debt recovery is attempting to resolve the matter amicably out of court. In fact, it is the expectation of the courts that the parties will take steps to settle the matter between themselves. The Pre-Action Conduct and Protocols Practice Direction clearly sets out the steps it expects parties to take before commencing particular types of civil claim. This includes:
- Exchanging sufficient information and understanding each other’s position
- Agreeing the best way forward
- Trying to settle issues (if not the whole claim) without commencing proceedings
- Considering forms of Alternative Dispute Resolution such as mediation
- Taking steps to reduce the costs of resolving the dispute
For debt claims against a limited company, there is no specific Pre-Action Protocol to follow. The Pre-Action Protocol for Debt Claims only applies in relation to businesses (including sole traders) recovering debts from individuals (including sole traders).
Instead, the creditor business should rely on the Practice Direction to guide pre-action negotiations. Depending on the type of debt claim involved, there may be other laws and regulations which impact the debt recovery process.
For the sake of keeping a dispute civil and even preserving valuable business relationships wherever possible, entering into informal negotiations is beneficial. Such negotiations typically come in the form of ‘without prejudice’ correspondence which allows the parties to negotiate openly without admitting or waiving any claims or rights.
Letter before action
The formal pre-cursor to starting legal proceedings is issuing a letter before action with precise details of the claim, including:
- The basis on which the claim is made
- A summary of the facts
- What the claimant wants from the defendant
- How the debt has been calculated, including details of interest
- Key documents
The debtor must be given a ‘reasonable time’ to respond to the letter of claim – 14 days in most straightforward cases and no longer than three months in complex cases. The debtor should either:
- Confirm whether they accept the claim
- Provide reasons if they do not accept the claim together with an explanation as to which parts of the claim are disputed
- Whether they intend to make a counterclaim along with details of the claim
- Key documents (if necessary)
At all times, the claimant creditor should be wary of limitation. The typical timeframe a creditor has to pursue an unsecured debt is six years from the date of breach or the last time the debtor acknowledged the debt. Debts which fall outside the relevant limitation period are referred to as statute-barred. It may be possible to pursue a debt outside limitation but only with the permission of the court.
If limitation is approaching, it is worth seeking advice on whether it is necessary to take any steps to secure a creditor’s right to pursue a debt even if there is no intention to commence legal action at this stage.
Secured debts, such as mortgages, have a longer timeframe of 12 years in which a creditor may commence legal proceedings.
Alternative Dispute Resolution
As noted, it is expected that claimant creditors will take necessary steps to settle debts out of court wherever possible. If standard negotiations are not yielding results, the parties may have more success using formal methods of Alternative Dispute Resolution (ADR), such as:
- Mediation – the process of negotiating a settlement with the assistance of a qualified civil mediator whose role is to facilitate discussions and defuse conflict wherever possible.
- Arbitration – the process by which a qualified arbitrator hears the evidence and makes a decision for the parties which may or may not be legally binding depending on the parties’ prior agreement.
Making a county court money claim
Should out-of-court settlement discussions be unsuccessful or the debtor does not engage, the creditor may consider commencing county court money claim proceedings.
The simple act of applying for a County Court Judgment (CCJ) can be a strong motivator for even the most evasive of debtors. However, it is important for the creditor to weigh up the cost-effectiveness of pursuing the debt versus alternative options such as accepting a lower offer from the debtor.
The county court claim process depends on the circumstances of the case. For example, if the debtor simply does not respond to the claim, the claimant creditor may apply for judgment in default and proceed with enforcement action.
Alternatively, the debtor may respond:
- Admitting the entirety of the debt, in which case the court will make judgment in the claimant’s favour.
- Admitting part of the debt.
- Defending the debt in part or whole.
- Filing a counterclaim based on similar facts.
Our Litigation Guide has an in-depth explanation of the civil claims process, including what happens if the defendant defends the claim and files a counterclaim.
Once the claimant creditor has obtained a CCJ, there are a range of enforcement options available, including:
- Instructing county court bailiffs or transferring the judgment up to the High Court for enforcement by High Court Enforcement Officers – bailiffs can be bestowed powers to enter property to recover money and seize or control goods to cover the debt.
- Obtaining a Charging Order against the debtor’s home or business premises. This will give the creditor a secured priority debt and increases the likelihood that the debt will be repaid should the debtor sell their property or go insolvent.
- Applying for an Order for Sale to force the sale of the debtor’s property over which the creditor has a secured charge, such as a Charging Order.
- Obtaining a Third Party Debt Order to freeze the debtor’s assets and give the creditor an opportunity to recover directly from their bank accounts.
Insolvency and winding up proceedings
Where a company debtor cannot repay their debts, a potential option is to make them insolvent, i.e. to wind up the business and distribute the assets among the company’s creditors.
The basic steps to winding up a company are:
- Checking for notices or records of Winding Up Petitions to ensure insolvency proceedings have not already been commenced.
- Issuing a Statutory Demand to demand repayment of the debt within a certain timeframe.
- Issuing a Winding Up Petition to start the formal court process of making a company insolvent.
- Dealing with defended winding up proceedings – this is only necessary if the company objects to the Statutory Demand or Winding Up Petition.
- Obtaining the Winding Up Order – if the Petition is successful, the court will issue a Winding Up Order that forces the company into compulsory liquidation.
- Submitting Proof of Debt to the Liquidator to lodge the creditor’s claim for repayment of the debt.
Covid-19 and Winding Up proceedings
Until 30 June 2021, temporary legislation is in place to prevent the use of Statutory Demands and Winding Up Petitions against companies, unless the creditor can show that:
- Coronavirus has not had a financial impact on the debtor; or
- The debtor would be unable to pay its debts irrespective of the coronavirus.
Speak to our specialist insolvency solicitors in London
Here we have outlined the basic options an individual or business has for recovering a commercial debt from a limited company. However, it is always essential to seek specialist legal advice about the options available in the unique circumstances of the case to give the creditor the best possible chance of recovering their money.
For bespoke high value debt recovery advice, contact Saunders Law today for a free, no obligation initial discussion of how we may be able to help.