If you are owed money by a company that is in clear financial difficulty, it can be hard to know what to do. Is your best bet to issue court proceedings in the hope that you can obtain judgment and enforce it if necessary, before the company collapses; or are you better off doing something else, like serving them with a statutory demand in the hope that if they want to avoid the risk of being forcibly closed down they have no choice but to settle what they owe within 21 days?
As David Ingram, head of our litigation team explains: ‘The answer will, unsurprisingly, depend on the circumstances. In view of this, my advice to businesses faced with a customer who appears unable to settle their debts is to always take legal advice on your position and options, particularly where the sums owed are significant.’
Increase in companies facing financial distress
According to a Red Flag report, published by corporate restructuring specialists Begbies Traynor in January 2022, there were over half a million UK businesses in financial distress in the last quarter of 2021; and now that Covid support measures have been withdrawn, this figure is expected to rise substantially in the coming months. This is of concern, as financial distress is often a precursor to a company’s collapse into insolvency – which is obviously bad news if you are owed money.
Rise in CCJs being obtained
According to further figures published by Begbies Traynor in April 2022, the number of creditors applying for and obtaining county court judgments (CCJs) against debtors has also increased by 157 per cent so far on last year – with 22,552 judgments obtained in the first four months of 2022 alone.
So, should you jump on the band wagon and get a CCJ in place for your debt?
Pros and cons of obtaining a judgment
The answer to this question is likely to be yes, where there is no dispute about whether the monies you claim are owed, are actually due; and also where you are as confident as you can be that you should be able to obtain judgment and enforce it before the company’s finances get any worse.
In addition, the instigation of court proceedings may be necessary where:
- the debt is getting close to six years’ old, as this is when the statutory limitation period (i.e. the deadline for recovering the debt) will usually expire;
- you want the court to make a declaration as to the company’s liability to pay the debt, e.g. in circumstances where the debt is disputed; or
- you want the court to confirm your ability to rely on a contractual provision relevant to the debt, such as a retention of title clause in respect of any goods you have supplied but which the debtor has failed to pay for.
In all other cases, you will need to think carefully about what you hope to achieve by obtaining a CCJ before you actually commit to issuing a claim – as the obvious risk is that if the company is in imminent danger of collapse, you could find yourself throwing good money after bad.
You also need to be aware that obtaining a CCJ will not usually improve your position if the company goes into liquidation, as you will still be classed as an unsecured creditor – although the liability of the company to pay the debt will of course be undeniable.
Other options
Depending on the severity of the financial difficulties that the company is facing, there may be other options for recovery that you can explore, and which may result in you receiving more of the money that you are owed in a shorter space of time. This may also improve your position if the worst happens, and the company is ultimately forced into insolvency.
These options may include:
- asking the company to commit to a repayment plan, which will see a proportion of the debt settled immediately and the balance paid by instalments – hopefully ensuring that you at least receive something, which is better than nothing if the worst occurs;
- asking the company to give you some form of security for the debt, which could be a piece of equipment or even a personal guarantee from one of the director’s; or
- issuing a statutory demand (where the debt is for at least £750, and fully admitted), in the hope that this forces the company to pay what is owed within 21 days – in default of which you will be able to petition the court to have them forcibly wound up.
How we can help
Deciding on the best strategy to adopt when dealing with a company in financial distress is a complex process, made all the more difficult by knowing that if you make the wrong call, it could be fatal to your prospects of recovering what is owed.
By seeking legal advice as soon as you become aware that payment of a debt may be an issue, you can ensure that you understand your options and that you take a course of action which is most likely to lead to the best possible outcome, given the circumstances.
To find out more, please contact David on 020 7845 7406.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.