7th July 2021
Corporate debt recovery: a guide for small businesses
Good credit control is vital for small businesses and can sometimes make the difference between success and failure for an organisation where good cash flow is important. Understanding your rights and how best to recover debts will help you control late payments and keep them to a minimum.
Late and unpaid debts can be disruptive to a business, meaning time spent chasing debtors and keeping records of attempts to obtain payment. At its worst, unpaid debt can cause a business to fail.
Getting on top of late payments straight away is key to controlling them and keeping the level of debt manageable and as low as possible.
Recovering a commercial debt
As soon as a debt becomes overdue, you should commence your debt recovery process. This will generally start with reminder letters advising the debtor of the amount owed, the terms and the fact that the sum is overdue and for how long it has been outstanding.
If the debt is still not settled, it is advisable to move to more formal recovery proceedings sooner rather than later. This will help the debtor understand that you are not likely to simply forget to chase the debt and demonstrate that you are organised and efficient when it comes to collecting what is owed.
If you ask us to act for you, we can write to the debtor on your behalf requesting payment and advising them of the liabilities they may face if they fail to pay.
We find that quite often, this results in payment. Once a debtor realises that solicitors are involved, they understand that the situation has to be dealt with and that formal legal proceedings are likely to follow.
Statutory demand Winding-up proceedings
If the debt is for more than £750, then you can apply for the debtor company to be wound up. You must be able to show that the debtor’s company cannot pay you and the amount of the debt must be clear and proven and not disputed.
What is the process of winding up proceedings?
The procedure is generally to issue a statutory demand first, notifying the debtor that you are considering further action. There is a chance that they will respond to this so that winding-up can be avoided. There are restrictions on winding up proceedings pursuant to Corporate Insolvency and Governance Act 2020 which are currently in place until 30 September 2020.
Letter of Claim
An alternative to winding up proceedings if the debt remains outstanding after an initial solicitor’s letter is to draw up a formal Letter of Claim. This sets a deadline for payment and advises the debtor that court action will be commenced if payment is not made.
We will set out the amount owed, to include any interest to which you are entitled.
It may be that the debtor is willing to enter into discussions about repayment at this stage and we will negotiate on your behalf to try and come to an agreement about how the debt can be repaid if for example, the debtor is unable to pay the whole sum at once.
If the debtor does not respond, we can make a legal claim at court on your behalf. This will include a claim for interest as well as your legal costs and expenses.
The debtor will then have two weeks in which to respond. They may admit that the money is owed and offer a way of repaying this, or alternatively, they may file a defence. If they raise a defence, they have a further two weeks to provide details of this.
If they do not respond, we can ask the court to pass judgment in your favour.
If a defence is raised, we will go through this with you point by point so that we can put a robust case on your behalf at a hearing.
Once you have a judgment in your favour, you must give the debtor an opportunity to pay within a minimum of 14 days. You should also ensure that they have been served with a copy of the judgment and that it has not been appealed.
It is also advisable to try and ascertain what assets the debtor has before you spend money on enforcement. If the debtor is broke, then you may end up out of pocket.
Once you have been through these steps, there are a number of options for recovering the money you are owed.
A county court judgment can be used to ask the court for a charging order. This allows you to secure the debt over the debtor’s assets. Once the debt has been secured, you stand a better chance of recovering the money, even if the debtor becomes insolvent.
Alternatively, you can ask the court bailiffs or high court enforcement officers to recover the debt. They will obtain a Writ of Control and either collect money from the debtor or enter their premises to seize goods. Goods will usually be sold at auction to raise the money needed.
A debt will be either secured or unsecured. An unsecured debt is not attached to any particular assets and, should the debtor become insolvent, you will be low in priority on the list of creditors to be paid. This means there is a substantial risk you will not recover your money in an insolvency situation.
A secured debt ranks higher on the list of priority creditors. If you have a county court judgment in your favour, you may be able to apply to the court for a charging order. This secures the debt against the debtor’s assets, meaning you would be paid in priority to all unsecured creditors in the event of insolvency.
Time limits for claiming payment of a debt
Where a debt is unsecured, you have six years from the date of the debt to start a claim. For a secured debt, you have twelve years.
After this time, you will need the permission of the court to start proceedings to recover the money you are owed.
Get in touch with us
At Lincoln & Rowe, we understand the importance of helping our clients keep their businesses running smoothly. We have extensive experience in dealing with clients across a range of sectors.
We were named as the ‘Commercial Disputes Specialists of the Year’ in the Corporate Livewire Innovation & Excellent Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. Partner, Dipesh Dosani, was named Commercial Litigation Lawyer of the Year in 2019 and 2020 in the ACQ5 Law Awards.
If you would like to talk to one of our expert legal team about a contract dispute, call us on 020 3968 6030, email us at firstname.lastname@example.org or fill in our contact form and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.