Wednesday, June 19, 2024

Defending my business against legal action from creditors

If your business is on the receiving end of serious creditor pressure, the next step is likely to be legal action to force your business into making debt repayments. The severity of legal action can gradually increase over time if you no longer have the necessary funds to fulfil liabilities. The best way to protect your business is to fight the threat face-on by raising finance to repay your debts or to seek a company rescue or closure solution.

What action can a creditor take against my business?

A creditor will need to demonstrate that every possible avenue to recoup funds has been taken before issuing a winding up petition against your business to force it into liquidation. Here are some of the ways a creditor can launch legal action against your company to recover outstanding funds:  

Statutory Demand – A statutory demand is the first step which is a formal demand requesting payment, failure to fulfil the statutory demand could result in serious legal action. The statutory demand should be fulfilled in 21 days by either making the payment or entering into a payment agreement with the creditor(s).

County Court Judgment (CCJ) – A County Court Judgment is a form of legal action taken against a business, calling for the urgent repayment of debts. Failure to settle the debt within one month could leave a permanent mark, adversely affecting your credit rating as the CCJ will remain on your record for six years.

Winding up petition – If a statutory demand or County Court Judgment is ignored, a creditor can issue a winding up petition, which if granted by the court could lead to the forced closure of your insolvent business. This action can only be taken if the debtor owes £750 or more.

How can you dispute a winding up petition?

Object – If you have reasonable grounds to object the winding up petition, you should do this early to avoid advertisement in the Gazette which could draw other creditors to your door. The London Gazette publishes legal notices concerning insolvency action involving UK businesses.

Make repayment – If you have the funds to repay creditors, you should make repayment to prevent the court from issuing a winding up order. If the court date is set and you have repaid the debt, you must still attend court and show formal evidence illustrating settlement of the debt.

Negotiate payment plan – You can avoid company liquidation and the winding up petition can be withdrawn if you enter negotiations with the creditor and arrive at an agreement to repay the debt.

Seek formal insolvency procedure – If your business requires professional support to get your finances in order, seek urgent advice from a licensed insolvency practitioner to explore the business rescue or closure options available to your business. Taking a route as such could protect your business against legal action from creditors and the looming threat of forced closure.

What route can I take to rescue my business from debt?

Time to Pay Arrangement – A Time to Pay Arrangement (TTP) is a formal agreement with HMRC to restructure your tax liabilities into affordable instalments. A TTP is more likely to be accepted if you propose realistic repayments which are feasible. By spreading your tax payments following an agreement with HMRC, you can allocate any funds to repay your creditors.

Traditional or Commercial Finance – By borrowing funds to repay creditors, you can clear your debtor book, inject your business with cash and invest in your services, stimulating the growth of your business. Traditional finance consists of calling for investment from family and friends or turning to the bank for a business loan. Commercial finance is essentially asset-based finance to fuel working capital and increase cash flow. There are many variations of commercial finance which can be used to stimulate company development.

Company Voluntary Arrangement – Halting legal action from creditors, a Company Voluntary Arrangement is an insolvency procedure used to renegotiate payment terms with creditors to reduce the burden of repayment and to generate returns for creditors.  If your ailing business shows signs of viability and has the potential to generate profits, a CVA is an ideal way to keep creditors at bay and help rescue the business.

Company Administration – If you are experiencing creditor pressure and there is an indication that legal action will be launched against your business, an administration order could protect your business from company liquidation. This is a suitable route for an insolvent business with asset value, as by realising assets to generate funds to repay creditors, the business can avoid liquidation.

The route you take will be ultimately determined by the financial health of your business and the expected rate of survival. Facing the problem later than necessary could lead to the forced liquidation of your company, closing the door to any possible actions of defence. If you act early, you may be able to arrive at an agreement with creditors or seek the necessary support for your business.

Sam Allcock
Sam Allcock
Sam heads up Cheshire-based PR Fire, an online platform that has already helped over 10,000 businesses to grab widespread media coverage on their news at an extremely accessible price point.

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