What options does your business have to recover debt owing to it?

A business owing and being owed money is not uncommon. However, the past few years have been extraordinarily difficult on businesses and individuals alike and, unfortunately, it doesn’t look like things are going to improve in the short-to-medium term. During a recession and/or a cost-of-living crisis, it is vitally important that your business has control over the debt that it owes and is owed to prevent any cashflow issues.

The purpose of this guide is to provide you and your business with information on the options available to help recover money that it is owed, so your business has cashflow to allow it to progress during tough times.

So what options does your business have to recover debt owing to it?

Reach out to the debtor
First and foremost, communication is key; you should always reach out and speak to the debtor in relation to any debt. As mentioned above, businesses and individuals alike are experiencing great financial and other difficulties at the moment, and it might be the case the debtor simply needs a little more time to repay the money it owes.

Entering into constructive discussions with the debtor might lead to, for example, a new payment plan being agreed without the need to incur substantial costs to recover the money.

However, for discussions to be constructive, the debtor needs to be co-operative and engage with the dialogue. Unfortunately, this doesn’t always happen, and further steps and action are required.

Contractual remedies and options
It is likely that the majority, if not all, of the debt owed by and owed to a business relates to some form of contract or agreement.

With this in mind, you should check the contract or agreement for any clauses relating to non-payment of the sums due under it and to see whether the document provides for any specific mechanisms for repayment. It is also prudent to check if there is a dispute resolution clause, as that may dictate the steps taken later down the line should the money remain outstanding.

If there are any specific mechanisms contained in the documents, these should be followed carefully. Should your business not comply with these specific mechanisms and their requirements, the debtor might be able to delay payment even longer and until the relevant terms are complied with.

Additionally, your business should consider whether the debtor provided any security for sums due under any contract or agreement, such as a charge over property or other assets. If this is the case and the debtor continues to withhold money, your business should consider engaging with its rights under the security and obtaining the money through those means.

The full scope of obtaining money under security is outside the scope of this guide, but Geldards LLP’s specialist Debt Recovery and Commercial Dispute Resolution teams would be more than happy to discuss this with you and your business further.

Statutory Demands
Serving a statutory demand is one of the most common steps taking by businesses trying to recover money that it is owed.

A statutory demand is a formal demand served by a creditor on a debtor company or individual warning them that the creditor intends to “present” a winding-up or bankruptcy petition at court if the outstanding debt is not paid within 21 days.

If the debtor fails to either pay the debt or challenge the statutory demand within a 21-day period, this will create a presumption that they are insolvency (on the basis that they cannot pay their debts). This presumption provides the grounds for the presentation of the winding-up or bankruptcy petition by the creditor.

For more information on statutory demands, including the possibility of a debtor applying to set aside a statutory demand, please see the firm’s dedicated guide to statutory demands which can be accessed HERE.

Winding up petitions
In the case of a business debt – whether it be a limited company, an LLP, or otherwise – should that business not pay the debt that it owes, you can consider issuing a winding up petition to have the company wound up. Should the company be wound up, this will signal the end of the company and its assets and business will enter the liquidation process and be dealt with by professional insolvency practitioners who will attempt to collate as much money as possible for the business’ creditors. It should also be noted that simply presenting a winding up petition at court can result in a business’ bank accounts being frozen.

As such, a winding up petition is a serious step and petitions are usually seen as the last resort and should only be explored if all other avenues of recovering the debt have been exhausted. However, it should be noted that due to the consequences of being wound up, the presenting of a winding up petition could result in businesses engaging with creditors to come to an amicable resolution.

Furthermore, it is unusual for a winding up petition to be the only method of debt recovery a party will use. These petitions are usually preceded by a statutory demand or a non-statutory formal demand for repayment.

In addition to potentially avoiding a winding up petition, as mentioned above, should a business not pay the debt following a statutory demand this will create a presumption that the business is insolvent and unable to pay its debts as they fall due, which in turn is evidence to support the winding up petition.

One of the main disadvantages of a winding up petition is that it does not guarantee that the debt owing will be repaid. Whether or not the debt will be repaid (in part or in full) is wholly dependent on the assets of the business and the ability on the insolvency practitioners to recoup as much money for the creditors as possible.

Additionally, a winding up petition can only be issued for debts of £750 or more – usually this will not be a difficult threshold to meet, especially if you are considering such options, but it is a threshold nonetheless.

Bankruptcy petitions
Whereas winding up petitions are a tool for creditors to go after business debtors, bankruptcy petitions are a tool to go after individual debtors. However, there are some key differences.

First, in a legal sense, it is not possible to wind up an individual. As such, the consequence of a bankruptcy petition is that the individual is declared bankrupt. This has wide-ranging consequences for an individual, including, but not limited to, their assets and estate being taken over by insolvency practitioners and distributed to recover monies for their creditors, and it prevents that person (whilst they remain declared bankrupt) from being a director of a company.

Secondly, the threshold to bring a bankruptcy petition is much higher, with the debt being £5,000 or more.

Nonetheless, there are also similarities between the petitions.

First, should an individual be made bankrupt, their estate and assets will be taken over by professional insolvency practitioners who will administer their estate to collate and recoup funds to distribute to the bankrupt’s creditors.

Secondly, a petition will usually be preceded by a formal demand (statutory or otherwise) for the repayment of the debt with the outcome of that demand feeding into the petition.

Thirdly, due to the consequences of being made bankrupt, presenting a petition can result in individuals engaging in discussions to come to an amicable resolution.

Finally, even if an individual is made bankrupt, it does not always result in the creditor being repaid its debt in full. It will all depend on the assets of the bankrupt and how much the trustees in bankruptcy can recover for the creditors. This is even more so the case than in situations relating to businesses.

Litigation
It might be the case that some of the above methods are inappropriate or would be ineffective in recovering the debt owed to your business. It might also be the case that the methods your business has tried, such as correspondence with the debtor, have not been fruitful. If this is the case, your business might have to issue litigation and take the debtor to court to recover the debt.

The most likely situations where litigation will be required will be if the debtor has a counterclaim against your business for money it is owed, or the debt is not for a liquidated sum.

However, as with any litigation before the courts, this could be time consuming and costly. As such, before your business considers issuing litigation, it should seek independent legal advice as to the benefits of such action, including the risks of paying the debtor’s costs should your business be unsuccessful in its pursuit.

Conclusion

In an ideal world, your business’ relationships with its debtors will run smoothly, money is paid when it is due or there is at least transparency and communication between parties when it is not, and your business does not need to take action to recover money that it is owed. However, this is an ideal situation and in practice problems will arise, sometimes regularly.

If your business does need to take action to recover money it is owed, don’t panic – as outlined in this guide, there are several options available for consideration.

Nonetheless, to avoid debt getting too high and cashflow drying up, always take legal advice as soon as a problem arises or looks like it might arise in the future. If you and your business need advice in relation to money that it is owed or it owes, do not hesitate to get in contact with Geldards LLP’s specialist Debt Recovery and Commercial Dispute Resolution Departments who can discuss the options open to you and your business.