By guest author Sharon McDougall of Scotland Debt Solutions.

Creditors have a range of legal actions available to them if they have unsuccessfully attempted to recover their debts from a business. Reminder letters and warnings are typically sent initially but, if these are ignored and the debt remains unpaid, legal action may follow.

So, what is likely to be the first step in recovering their money through the courts and how serious can these actions be for a business?

County Court Summons

A County Court Summons is an official demand for payment of a debt and the business has 14 days in which to respond. They might pay the debt, negotiate a payment plan, or challenge the legitimacy of the claim. If the Summons is ignored or payment is not made, the court can issue a County Court Judgment (CCJ) against the business.

County Court Judgment

There is still time for the business to pay the debt or arrange a payment plan, even if a County Court Judgment (CCJ) has been made. The CCJ allows 30 days for the debtor to meet the court’s demands before it is registered with the credit reference agencies.

Once the CCJ is officially registered it remains on the business’s credit file for six years and can severely hinder its ability to obtain borrowing. Importantly, it also provides formal proof of insolvency if a creditor wants to forcibly close down the business.

Notice of Enforcement

A creditor can send a Notice of Enforcement when a County Court Judgment is not paid. This means that a bailiff visit will take place to the business premises with a view to seizing business assets to the value of the debt.

The business can still arrange a payment plan with the bailiff if they sign a Controlled Goods Agreement. This allows the bailiff to return and seize the goods if the business does not maintain the repayments.

Statutory Demand for Payment

Creditors can also send a statutory demand if a County Court Judgment is not paid. This is the precursor to one of the most serious types of legal action that can be taken against a business for non-payment of a debt.

If the business does not challenge the statutory demand within 18 days or pay the debt within 21 days, their creditor can present a winding-up petition to the court. This allows the business a further seven days to pay the debt.

Winding-up petition

Seven days after the winding-up petition is presented a notice is placed in the Gazette and the business’s financial situation becomes public knowledge. The bank then freezes the company’s accounts, effectively rendering the business inoperable without court approval for certain transactions.

If the court ultimately grants a winding up order against the business it will enter liquidation and be forced to close down. A further consideration for the company’s directors is the investigation that takes place into their conduct leading up to insolvency.

Financial instability and unpaid debt

The combination of carrying unpaid debt and long-term financial instability can prove fatal for some businesses given that their creditors have access to such effective debt recovery and enforcement measures.

When a business is financially unstable it risks serious legal actions from its creditors and can quickly be forced into liquidation in some cases, especially if a high-value debt is involved.

The risks of financial decline are severe for businesses, but they can protect themselves from financial decline by carefully monitoring their cash flow against cash needs and acting quickly to deal with any upcoming cash shortages.

Article written by Sharon McDougall of Scotland Debt Solutions, part of Begbies Traynor Group. Their team specialises in helping Scottish companies deal with debt, has extensive experience of Creditors’ Voluntary Liquidation, and can help establish whether CVL is the best option, or whether other choices are available.

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