With the new tax year just around the corner, now might be a good time to review outstanding debts and take steps to try and minimise or limit your exposure to them. This is particularly the case given the financial uncertainty in the market coupled with the ever-growing cost of living crisis, increasing costs right through the supply chain and also the consistent rise in registered company insolvencies since the pandemic.
The most recent government data shows that in December 2022 there were 1,964 company insolvencies: 32% higher than in the same month in the previous year, and a massive 76% higher than pre-pandemic numbers three years previously.
Taking steps to call in debts in a timely manner and limiting long-term exposure could prove vital in ensuring that the impact of any future insolvency is greatly reduced.
The process for recovering outstanding debts from companies and individuals is initially very similar, but then differs later in the process. We set out below a brief outline of the procedure to follow in relation to outstanding debt. This should not, however, replace the need to seek specialist advice.
The first port of call is often to send your debtor a gentle reminder that they have missed their repayments. Set a timeframe of around 7 days for payment to be made. If goodwill can be maintained at this stage, this approach can often help to preserve the business relationship for future opportunities.
If there is no response or payment from the debtor, a more formal request for payment could be sent. It can refer to escalation to formal proceedings or the fact that matters will be passed to your solicitors in the near future.
Disputed or undisputed debt?
If there is still no response or payment, you may be left with little option but to pursue matters more formally. Much depends on whether the debt has been previously disputed by the debtor in any way. If it has, and the dispute is genuine, then you would need to proceed on the basis that it is a disputed debt.
Disputed debts – court proceedings
For disputed debts, court proceedings would need to be initiated to seek a judgment in respect of the outstanding sum along with interest and legal costs. Prior to court proceedings, a formal letter of claim should be sent demanding payment and explaining the consequences to the debtor if payment is not made.
Seeking legal advice at this stage to ensure that a compliant letter of claim is sent to your debtor is important.
The aim of initiating court proceedings is to either secure a judgment at the end of the proceedings or to achieve a beneficial settlement prior to a trial. If a judgment is obtained, this might not necessarily result in payment from your debtor and you would then need to take steps to enforce the judgment. This can vary depending on the debtor’s circumstances and the extent of their assets.
Undisputed debts – statutory demand and insolvency proceedings
For undisputed debts, the approach you take will depend on whether your debt is due from a company or from an individual.
A statutory demand can be served on a company for debts which exceed £750. This is a formal demand for payment prior to winding-up proceedings and allows a debtor three weeks to make payment. If payment is not made then a company is deemed unable to pay its debts as they fall due – being one of the specific grounds on which a winding-up order may be made.
As an alternative, a non-statutory demand letter could be sent giving the company just three days to make payment – failing which a winding-up petition could then be presented.
Just because a statutory demand or a non-statutory demand letter has been issued to the debtor does not mean that a winding-up petition must then be presented at court. However, the threat of future winding-up proceedings can often be a useful tool to focus a company’s mind and prioritise their payment rota.
Where your debtor is an individual, the financial threshold which must be met before a statutory demand can be served on them is much higher at £5,000.
As with a company, an unsatisfied statutory demand leads to the assumption that the individual is unable to pay their debts as they fall due and this can be used as a precursor to presenting a bankruptcy petition. Again, a bankruptcy petition does not have to be presented following a statutory demand and, often, the influence of a statutory demand can lead to repayment or settlement proposals.
Where the debt is undisputed, this presents more options and opportunities to recover the debt either through court proceedings or with the threat of insolvency proceedings. However, where the amount owed is less than £750 in respect of companies or less than £5,000 in respect of individuals, your options are limited simply to being able to commence court proceedings.
Prompt action is essential when recovering debts, particularly where you are concerned that your debtor may have several creditors or a significant level of debt. Taking the time to review your outstanding debts and then following some of the steps set out above could ensure that you secure payment ahead of other creditors.
Each debt is bespoke and each debtor is different so seeking legal advice at an early stage can also be extremely beneficial.
If you have business debts which you are struggling to collect and would like to discuss your options then please get in touch. We would be happy to talk you through your options on a no-obligation basis.
James Stephenson – Legal Director
Anna Abell – Solicitor