Written ByKeith Steven
Managing Director
Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
What legal actions can creditors take? What can be done?
If you are facing creditor pressure on a frequent basis then this is a sign that your business is likely to be insolvent.
This is not a legal lesson nor is it comprehensive – rather it is intended to guide you through the maze of actions that a creditor can take against the business. There are some practical tips on what to do when these actions occur and so relieve the pressure.
The key in all situations is communication. Provided your creditors are kept fully involved and informed, most will go along with deals to achieve a satisfactory outcome. In our experience taking legal action is the action of an exasperated creditor (or one with a proper credit control procedure that is rigorously applied).
Meaning – A creditor has tried to recover their debt from your company but without success. You may have offered an informal deal but now their patience is wearing thin.
You may have tried to put payment off claiming the debt is invalid or issued a counterclaim. They have issued an action to commence recovering their money in the County Court.
You have time to pay the claim of the creditor. Try to offer a payment deal sensibly before the action will be heard in the court. Try to do a deal or pay the debt. If you cannot pay, look at Are we Insolvent? page. If you cannot pay the debt, the business could be insolvent.
You can dispute the claim if it can be proven the debt is not correct. Look, carefully, at the forms for detailed instructions on how to defend the claim.
Having pressed for payment the creditor has now got the court to agree that there is a valid claim for the money. You have 30 days from the date of the Judgment to pay in full plus any costs incurred. Otherwise the Judgment will be registered at the courts and with credit reference agencies.
Remember an outstanding Judgment is proof of a partnerships insolvency and allows a creditor to wind the partnership up as if it were a company.
If possible always try to pay the debt within 30 days of Judgment. This will ensure that the Judgment is “set aside” and will not be registered with credit reference agencies. If you cannot pay it then this of course further proves insolvency. If it is registered then getting credit in future becomes much more difficult.
If you are under real creditor pressure but are attempting to trade out, call the creditor or their solicitor. Often they will agree but they may use the non-payment to push for further action such as winding up.
You may be surprised at how long a time you can spread payment through this type of deal. Think about it, the creditor just wants to be paid, even at £50 per week this is better than bankruptcy or liquidation – because they will, inevitably, lose the whole amount in liquidation.
As the creditor has not been paid, a Notice of Enforcement can be sent to the debtor requesting payment. The debtor has seven days notice to pay back in full. If payment is not made, the Enforcement Agent will visit the debtor’s premises. If payment still is not made, control can be taken the goods.
What is important to note is that an enforcement officer (EA) can’t just turn up. They have to give 7 clear days notice (excluding Sundays and bank holidays). An instalment arrangement can be agreed with an EA but only after a visit (on 7 days notice) and a Controlled Goods Agreement written and signed. The essence of this procedure is that the debtor (you) are given written notification of all processes. In other words, once the creditor starts to enforce, the procedures must be followed. The whole procedure is started with service of a Notice of Enforcement. The EA’s authority is derived from a Writ of Control.
As always a deal can be struck with the creditor to repay over time. You have demonstrated an inability to pay the debt and are offering to settle in a period to be agreed. For small debts this is often acceptable to the creditor.
Meaning – Usually this action is taken after a creditor has obtained a Judgment. It is a formal demand for payment of an undisputed debt over £5000 . The debt must be paid within 21 days of the demand being issued.
Failure to pay a statutory demand can lead to a winding up petition being issued. In any event, the creditor has to pay to issue this document/action and it is now becoming much more serious.
Warning! This action means the creditor is serious about getting the debt paid. If you don’t pay the debt in the 21 days they can go to the final step of issuing a winding-up petition against the business or seek a bankruptcy petition against the individual partners.
If you cannot pay the debt, talk immediately to a turnaround practitioner, review the contents of this website and make a plan for survival – such as a CVA or Administration or urgent refinancing. Or if the business is simply not viable talk to an insolvency practitioner.
Meaning – A bailiff (for the County Court) or High Court Enforcement Officer (Enforcement Agent) has visited your premises and obtained entry after an Enforcement Notice has been issued. They can take control of the goods with a Controlled Goods Agreement. After prior notice (seven days), If, at the visit, neither payment is made nor a CGA signed then goods could be removed at that stage for sale or disposal.
The EA can only enter by the normal mode of entry, i.e. the door (but they cannot climb in windows). In commercial enforcement they can force entry on the first visit.
Once a debtor is served with a Notice of Enforcement it is essential that he has to hand, all documentation relative to goods on his premises, which are owned by third parties. The Ministry of Justice guidance states that third party goods should not be removed. However if the documentation is not to hand then they could be removed.
It may still be possible to make a deal with the bailiff or Enforcement Agent.
Meaning – A tool for landlords where rent or other payments are not made. If the landlord has agreed a payment deal and the company is not keeping to it the landlord has various powers.
The recovery process is called Commercial Rent Arrears Recovery (CRAR). The lease (either legal or equitable) must be in writing. It is the written document/paper that the landlord is relying on to enforce arrears. The minimum period of arrears before CRAR kicks in is seven days. This seven day minimum period must be the case at the time of the service of Notice and again at the time of the EA’s first visit. So if between the service of the Notice and the first visit the arrears are reduced to six days, CRAR does not apply. If there is no written lease, a judgement is now necessary.
If you cannot pay the debt, you need to point out that the goods belong to the bank or other secured creditor (if they do of course!?) You should really take professional turnaround or insolvency advice. The business is plainly insolvent and you could be breaking the law by continuing to trade. It is possible for a turnaround practitioner to help in these circumstances – BUT you have left it very late.
Proposing a CVA or entering administration is a solution, but having demonstrated the inability to deal with the cash flow problems are you sure the business is viable?
Meaning this is one of the most serious action that can be taken against the company. Clearly the business has breached any trust the creditor had, deals have failed, cheques bounced and generally the company have not kept their word.
If a creditor elects to wind the business it is serious in its intent to recover the money it is owed and / or to put the company out business. Remember, typically a WUP costs over £1200 to action.
Other than pay the debt very little. On payment the debt will have increased because of the costs of the plaintiff (creditor). If the action is clearly unfair or an abuse then you MUST take legal advice immediately.
If the petition is fair and indefensible, then in due course the petition hearing will be published. At this stage the bank will find out and they will FREEZE the partnerships bank account to prevent any misfeasance or sale of assets at undervalue or other illegal acts by the partners. Clearly, once advertised a fair petition will lead to a court appointed liquidator taking over.
Make very sure that all management actions have been carefully noted and the assets of the business have not been disposed of.
What is a CVA? | Company Voluntary Arrangements Explained
A CVA or Company Voluntary Arrangement is a legally binding agreement with creditors allowing a a business to pay back a proportion of its debts over time
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What Is A Winding Up Petition By HMRC or Other Creditor
Learn what a winding-up petition is, when it's used, and the legal process involved. Read our comprehensive guide written by licensed insolvency practitioners
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Notice of Intention To Appoint Administrators
A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.
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What Does Going Into Administration Mean?
Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners. The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. Company rescue as a going concern – this is usually a company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation. This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required. Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk. So communication with the secured lender is essential.
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What is Receivership?
Definition of Receivership Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation. The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Given the charge has to be almost 20 years old receiverships are now very rare with 2-3 only each year. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control. When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership. These questions and answers will give more detailed background to the Administrative Receivership technique. If you have any further general or specific questions email us or complete the contact form. Q: How does it happen? A: Receivership can happen very quickly once the bank loses faith in the directors. The best policy is to work with the bank and produce a survival plan having taken professional and expert advice. Q: But the bank can't just appoint a receiver can they? A: Yes - read the terms of the debenture closely - you will be surprised how little power you have to prevent it. In truth the bank will generally have exhausted all possible avenues to help to try to preserve the business. If the directors are manifestly not up to the job or will not listen, will not take professional advice, they will lose patience quickly. Q: Can we stop them? A: Not normally. However if you talk to an experienced turnaround practitioner they can often persuade the bank that their involvement will lead to a review of viability followed by a professional recovery plan and the bank will usually give time for this to happen (within strict financial constraints) Q: How can we avoid receivership? A: Follow the guidance on this site. Discuss the problems with your key people. What caused them and how you can get round them. Build a plan for survival. Discuss this clearly with the bank. If in doubt about the correct route speak to a turnaround practitioner or a quality insolvency practitioner who lists rescue and recovery as a specialty. Be warned most are still looking for liquidations and receiverships (undertakers)If the bank wants to put investigating accountants in; wait until you have a built workable plan and then sell this HARD - to the investigating accountant.Above all demonstrate a professional and determined approach to saving a viable business - procrastinate at your peril - the bank will not wait for that silver lining. Q: I have heard that receivership is a rescue procedure - please explain? A: Many insolvency practitioners describe selling the business or its assets to a third party out of receivership as a rescue technique. Although some part of the activity may remain I cannot understand how the loss of almost all creditors' monies, jobs and all shareholders' funds, followed by the liquidation of the company, can be described as a rescue! Q: What happens if the receiver does not get the banks money back in full? A: He/she may rely upon the banks other securities. Obviously if the directors, shareholders or even a third party has signed a personal guarantee to pay money to the bank in the event of a failure to recover its loans, then the receiver pursues this as if it were an asset of the company. The receiver may also look at the possibility of legal actions against the officers of the company or debtors or creditors to recover funds Q: What happens to my personal guarantees in receivership? A: Unless the receiver recovers all loans due the bank after his/her fees (and any payments due to preferential creditors) then your PG will crystallise. In other words the receiver may seek to recover money from you. Q: What happens to the employees? A: This is a complex question that cannot be answered without a great deal of information. If the business is sold in a reasonable time then their employment rights can be continued with the new owners (under TUPE). If the receiver makes them redundant straight away they can claim for payments from the government (subject to a maximum amount). Again this is a complex question - email us if you want more detail.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.
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