If your company is falling foul of missing payments and failing to fulfil financial commitments, outstanding creditors may act against your business to recover debts. The severity of the action will depend on how long your company has been in arrears and if the behaviour is recurring. This is often the case if your business is struggling from serious cash flow issues, restricting your ability to make debt repayments.
If company cash flow is dwindling, this is an early warning sign that your business is running out of cash. If you fail to act and ignore this red flag, the financial health of your business is likely to deteriorate. Cash flow refers to the money available in the business to spend on maintaining business operations, from utility bills, stock replenishment and staff wages. If your stream of income is interrupted, this is likely to have a direct impact on your cash flow and the money available in the business. If this is a temporary issue, you may be able to keep your business afloat by seeking a cash injection, however, if this is a long-term problem, your business may risk becoming insolvent.
A creditor can take a combination of informal and formal, legal action against your business to demand payment, here are some of the methods which can be used to recoup money:
A creditor will be able to make a Statutory Demand for payment if you owe £750 or more, instructing for the debt to be settled within 21 days. This route is often used to quickly recover debts as it excludes court involvement. Failure to take heed of the Statutory Demand could result in formal action to be taken, forcing your business into compulsory liquidation through a Winding Up Petition.
If you dispute the Statutory Demand and believe that it should be cancelled, also known as ‘setting aside’, you must have a legitimate reason to enter the legal process with the court. Valid reasons which may result in the Statutory Demand to be questioned include:
- Debt in question is less than £750
- You are actively contributing towards a mutually agreed payment plan
- Creditor owes you money or holds security equal to the debt
If your challenge request is accepted by the court and you succeed, the payment deadline will be cancelled, and the creditor will be liable for court costs.
County Court Judgement (CCJ)
If all attempts to recover the debt have failed, a creditor may apply for a County Court Judgment which is essentially a court order which formally requests for payment to be made within 30 days. This process will begin with a County Court Summons, for which you will have 14 days to respond. If you fail to reply within the 14 days or request an additional 14 days to gather funds or arrive at an agreement, a CCJ will be granted by the court by default.
Failing to make the repayment within the 30-day window will result in serious ramifications as this will be recorded on your credit record for six years, adversely impacting your ability to borrow funds in the future. If you can make a repayment, this can be done so in a lump sum or instalments.
Winding Up Petition (WUP)
A Winding Up Petition is typically the most extreme step a creditor can take against your business, as if successful, your company could be shut down. A Winding Up Petition is a formal request made to the court, typically by a creditor, to liquidate your company as it has evidently run out of cash and is therefore contingently insolvent. This route is costly for creditors; therefore, it is only used to call for the repayment of large amounts of cash. Once the Winding Up Petition has been submitted, you will have seven days to act before the information enters the public domain and a Winding Up Order is granted, kicking off the liquidation process for your business.
If you are on the receiving end of a Statutory Demand or Winding Up Petition, seek urgent advice from a licensed insolvency practitioner before the situation escalates and your company is pushed into liquidation. If your business is struggling to recover cash for debt repayments due to a dip in consumer demand, poor credit control measures or because cash flow has dried up, company restructuring may help overcome these pressures and return your company to a position of health.