Where to begin
When a company falls into debt, it can cause many problems, including increasing demands from the creditors to repay what is owed. This not only places a considerable amount of stress on the directors, but it can also result in action being taken that has a much greater detrimental effect on the business. For example, if the pressure gets too onerous, it can be tempting to satisfy those demands and repay what is owed, negatively affecting the company’s cash flow and causing more significant issues. As such, it is essential to ensure you form a plan to repay the debts in a way that will not cause a larger problem.
How can creditors pressure you?
You may find that different creditors use different methods to try to force you into repaying debts, or will even use a combination if one doesn’t work. These include:
- Sending debt collectors to your company premises
- Repeated contact via all means (phone, post, email) to remind you of your responsibility to repay. These can become increasingly more threatening with their demands
- Sending legal letters from solicitors or issuing CCJs (County Court Judgements) or Statutory Demands
Your rights as a Limited Company or Limited Liability Partnership
If you owe money to companies or individuals, they do have a right to request that you repay them within the terms of your agreement made. However, these requests must not become any form of harassment and must always be lawful requests. The creditors can ONLY demand what they owe, and no more and they are not legally entitled to force their way onto your property. Any debts to them can only be recovered from the business, so they have no right to request repayment from your personal assets – your status as a limited company protects this. This will only be compromised if you have put personal guarantees in place, so ensure this has not happened on loans or other financial agreements.
If at any point you feel the law is being broken, you should contact the police immediately.
The rights of the creditors
Your creditors do have the right to send legitimate reminders about the debts owed to them, which can be received by phone, email, post, or a combination.
If assets have been used as collateral to secure the company’s debt, the creditors have a right to seize them and apply for a CCJ before hiring bailiffs.
If you have secured any debts with a personal guarantee, you have effectively bypassed the company’s limited liability status. This means that if your company is not honouring its debts, the creditor may be able to exercise the personal guarantee and lay claims to your personal finances. This will depend on the terms of the agreement you have in place.
What can’t a creditor do?
As discussed, creditors are legally entitled to remind you of the repayments you are obliged to make under the terms of your agreement. However, this is not allowed to become any sort of harassing behaviour with repeated contact via multiple channels in an aggressive way. They are not allowed to threaten legal force which isn’t within their rights, and they are not allowed to call you at home or contact you via private social media accounts.
What to do if your creditor applies too much pressure?
If you believe your creditor has started to apply too much pressure, you feel they are becoming threatening and harassing, then you can take steps to put a stop to it. To ensure you can do this in an orderly fashion, keep records of how you have been contacted, when and by whom in the business, thereby creating a full picture of the level of contact you have been receiving. Also, keep all correspondence where possible and make notes of phone conversations.
Speak to the creditor
To address it in the first instance, it is advisable to speak with the creditor themselves about this behaviour. It is much better to talk with them directly rather than ignore the problem, as this could allow you to negotiate and make arrangements for repayment that suit you both. Always make notes of who you speak with and when, and take the discussion as high up the business as possible.
If possible and dependent on the creditor, you could set up a payment plan, whether formal or informal. If you can repay even a small amount of the debt, it would be best to offer this as soon as possible. Equally, if you have a set date when you know you will be able to repay in full, it is advisable to tell the creditor this in the hope that they will accept these terms. Wherever possible, it is advisable to attempt negotiations to ensure that the creditor will be repaid in full as soon as possible. They might not accept your terms straightaway, but agreements can often be come to, which is always better than ignoring the issue.
If your creditor is HMRC, there is an arrangement you can enter into with them known as a TTP or Time to Pay Arrangement. This will give you an extended period in which you can repay the debt, such as within 6 to 12 months. You’ll have to apply for this arrangement direct with HMRC, and they can cancel this at any point as it is an informal agreement.
Speak to the authorities
If you have tried to speak with the creditors and the harassment you are receiving continues, it is always advisable to contact the police and have them deal with it. Requests for repayment should not become overtly threatening or invasive, so they will be able to help in the event of it reaching a criminal level. The police will also be able to assist with bailiffs who are acting outside of their rights, such as refusing to leave or coming to your home if you are not personally liable for company debts.
If you have received a CCJ which you feel has been unfairly issued, you can also contact the courts and have it set aside.
If you believe your creditor is acting incorrectly, whether it be illegal or otherwise, you can raise it with the Financial Conduct Authority (the FCA). There are strict rules in place regarding debt collection, and they may be able to revoke the creditor’s authorisation once they investigate. It won’t be particular to your case but more of a general assessment of their behaviour.
As a last resort, if the creditor still refuses to act appropriately, it might be wise to contact any professional bodies they are a part of to see if they are breaching a code of practice laid out by them.
What to do if you cannot repay your creditors?
In some cases, you will be able to come to suitable terms of repayment with the creditor. After all, their primary objective is to have the monies owed repaid to them as soon as possible. However, if you find your company is in a position that it will never be able to repay the debts or the creditor is unwilling (or unable to wait) for the repayment there are other routes to take.
If you have a viable core business that has simply entered a difficult trading or cash flow period, dependent on the business model, you may be able to source additional finance to alleviate the problems. The options will include asset finance, commercial finance or invoice finance. The lenders will need to see the viability of the business so will need information to prove this. But if you are successful, this could alleviate the pressure from the creditors, allowing you to regain control of your company’s financial position. However, if CCJs have already been issued and bailiffs employed, this is no longer an option. This alternative is best pursued before creditors have been waiting for their money as it is unlikely they will agree to wait even longer, especially given there are no guarantees re-financing will be successful.
When debts of a business become too much to manage with no way out of it, the chances are your business will become insolvent and other options open up. You could enter an agreement known as a Company Voluntary Arrangement (a CVA), and this will enable your business to repay what it can over a period, such as five years. Throughout this period, the Directors will maintain control of the company, which can be better for all involved. A CVA will need to be arranged by an insolvency practitioner (IP).
If the debts are so crippling that the business must close, a Creditors’ Voluntary Liquidation (a CVL) can be applied for. This will legally and formally close the business and will subsequently end the creditor pressure. This voluntary process allows the company to maintain control over the closure, which is preferable to having the creditors issue a winding-up petition forcing it into compulsory liquidation. This process will also necessitate using an IP to ensure it is completed accurately and without issue for the directors.
If you find yourself under pressure from creditors or fear that the pressure will soon occur, it is vital to seek advice from experts in this area to decide the best course of action. Acting sooner rather than later is always advisable as it avoids problems escalating. At 1st Business Rescue, we can help with creditor agreements, re-negotiating, sourcing alternative funding or executing insolvency options. So, get in touch and we’ll be happy to help.