Commercial debts - high value
When dealing with a debt, as with any dispute, you need to know what roads are open and how to avoid or minimise risk and costs – that is our expertise.
- We combine our legal and accountancy knowledge to ascertain the most effective and cost-effective route of enforcing a debt payment with minimum hassle.
- We advise creditors on the most appropriate method of obtaining payment and the advantages, disadvantages and risks associated with each method.
- There are a number of weapons available to bring a disputed or undisputed debt to a satisfactory conclusion.
There are various means of dealing with high value commercial debts. We have set out some ideas together with important defences from a debtor’s perspective.
Our track record
Recent instructions include acting for:
- A national materials supplier on claiming unpaid invoices from contractors on the brink of insolvency.
- A leading supplier of IT and software solutions on claiming the payment of disputed debts with interest.
- A regional property development company on resisting claims for alleged unpaid and disputed debts resulting in the dismissal of the claimant’s claims.
- A UK electronics manufacturer on the payment of its invoices from customers on fixed credit using an application for summary judgment.Undisputed debts
With an undisputed debt, the debtor has admitted liability for the debt; this may be evidenced through correspondence or course of dealing.
Corporate debtor’s insolvency
Where a debt is undisputed, a winding up petition can be presented with no previous steps needed. The threat of this alone is often sufficient to persuade a reluctant debtor to pay. Alternatively, a creditor may serve a statutory demand which is a preparatory step to a winding up petition. The Insolvency Rules 1986 set out the form that a statutory demand must take. The statutory demand must be served at the debtor company’s registered office. The demand is usually personally served by the creditor’s solicitors.
The statutory demand gives the debtor three weeks to pay the debt. This excludes the day of service. The creditor cannot petition for the debtor company’s insolvency until the time period has lapsed. Once the debtor company has failed to make payment within the time period, the creditor can petition for the debtor company to be wound-up on the grounds that it is unable to pay its debts.
Defending corporate insolvency
A corporate debtor can apply for an injunction to prevent the creditor from petitioning for the company’s winding-up. This application must be made within the three weeks following service of the statutory demand. The ground for making the injunction application is usually that the debt is disputed and thus a winding up petition would be an abuse of process, because it shoud lonely be used for undisputed debts. Injunctions can also be granted on the grounds that the statutory demand was not properly served, or that it contained drafting errors. With this in mind, expert advice is required from both parties’ perspectives to ensure compliance with legal formalities.
Individual debtor’s insolvency
The Insolvency Rules 1986 give three prescribed forms for personal insolvency. It has been confirmed by case law that the use of the wrong form will not itself be a ground for the debtor to challenge validity of the statutory demand. The minimum amount of the debt is the same for individual insolvency as corporate insolvency.
The rules regarding service of a statutory demand for personal insolvency differ from those for corporate insolvency. Tracing an individual can prove to be costly and time consuming. The rules recognise that it is easier for an individual debtor to avoid a statutory demand. The rules therefore state that the creditor need only prove that all necessary steps have been taken to bring the statutory demand to the attention of the debtor. This may include substituted service on a relative of the individual debtor.
The time period of three weeks remains applicable in individual insolvency. However, the Insolvency Act 1986 allows the creditor to present a petition for bankruptcy in less than three weeks if the creditor can prove that there is a serious risk that the value of the debtor’s assets is about to significantly diminish. If the individual debtor fails to pay the statutory demand, the creditor can present a bankruptcy petition to the court.
Defending individual insolvency
On service of the statutory demand, the debtor has eighteen days in which to apply to set aside the statutory demand as opposed to issuing an application for an injunction. A mere letter to the court does not suffice; the prescribed form must be used together with a supporting witness statement.
The application to set aside will succeed if the court is satisfied that there are substantial grounds for the debtor to dispute the debt, or if the debtor has a good right to counterclaim or set-off. In addition, the debtor can state that the petitioning creditor has security for the debt and as such the demand should be set aside.
Advantages and disadvantages of insolvency
Insolvency proceedings are public knowledge. Winding-up petitions are immediately searchable at the court and must be advertised before the hearing. Banks and credit reference agencies take note. This will affect any debtor’s ability to obtain credit in the future and will damage their business, often irreparably (because the bank’s immediate reaction will usually be to freeze the bank account). Insolvency proceedings also give the court power to stay any other proceedings against a debtor. Statutory demands will often cause a debtor to pay up.
After a statutory demand has been served, and if a debtor does not pay, the creditor may pursue bankruptcy or winding-up. However if a bankruptcy or liquidation ensues, the petitioning creditor will share with all the other creditors in the assets of the debtor. An unsecured creditor may receive little or nothing at all. Legal advice is crucial, we can investigate the debtor’s means to ascertain other creditors of the debtor, either secured or unsecured.
With a disputed debt, the debtor challenges the creditor’s claim to the right to enforce the debt. It is important for a creditor to discuss the case at the outset with a solicitor who can advise on the documents to be preserved. Should an application to the court be necessary, disclosure will be inevitable and a creditor has a duty to preserve and produce documents relating to the disputed debt to support liability and ultimately, quantum.
Mediation is a key tool in dispute resolution, particularly for claims relating to disputed debts. Mediation can take place at any time during the resolution process, before any court proceedings are issued or during those court proceedings.
Mediation is consensual and parties are not obliged to mediate. However, following recent civil litigation reforms, mediation should always be considered prior to initiating court proceedings. Notably, a court will consider whether mediation had been considered when dealing with costs at the end of trial. The court may impose penalties on a party who unreasonably refused an offer to mediate before or during proceedings.
From a commercial perspective, there a number of advantages to mediation:
- Communication problems can be overcome, the mediator is a neutral third party
- Business relationships can be preserved or enhanced by mediation, serving a statutory demand will do neither
- Mediation is confidential
- The process is flexible and can be tailored to meet parties’ needs
- Mediation can provide a speedier resolution than court proceedings.
We are well experienced in the mediation process and can assist both debtors and creditors in preparation for mediation.
Court application and summary judgment
Many apparently affluent debtors turn out to be in financial trouble when their creditors finally catch up with them. It is important for a creditor to bear this in mind when considering bringing a court application. The debtor may not be able to meet a financial judgment. Our accountancy expertise gives us an advantage. We can interpret a debtor’s financial statements to ascertain potential cash flow problems and available assets for future post-judgment charging orders. We can also initiate enquiries into a debtor’s means which go beyond the published accounts.
A court application may trigger a debtor’s payment. We advise creditors to make an application to the court together with an application for summary judgment where the creditor’s claim to the disputed debt is sufficiently strong. Debtors should be cautious of summary judgment applications. A creditor’s costs can escalate and debtors can be faced with a creditor’s legal bill in conjunction with the disputed debt.
Using a court application, a creditor can claim for interest on the disputed debt from the alleged date of payment up until the date of judgment.
Court application and freezing injunction
In appropriate cases, a creditor can use a freezing injunction to preserve the debtor’s assets pending a court judgment. If the creditor obtains such an injunction, the creditor can also obtain an order for the disclosure of the debtor’s assets. An advantage of this is that the creditor has an idea of the debtor’s financial means at a very early stage of proceedings.
The creditor must prove to the court that there is a real risk of the debtor’s assets being dissipated. Evidence is crucial and we can advise on the appropriate documents to succeed on an application for a freezing injunction. The courts have set a particularly high burden for creditors to prove.
The debtor will have to produce evidence about their assets or risk being in contempt of court. From a debtor’s perspective, this is highly detrimental as the court will often order that the debtor cannot take its assets below a particular level. With this in mind, freezing injunctions often trigger a debtor’s payment of the disputed debt as the administrative costs of complying with a freezing injunction are notoriously high.
Defending a disputed debt
There a number of tactics available to a defendant upon receipt of a claim for a disputed debt. The defendant may feel that the creditor has their own financial difficulties. If so, the defendant may in some circumsatnces be able to apply for an interim security for costs order which will require the creditor to place a sum of money into court to pay for the debtor’s legal costs should the creditor fail to succeed at trial.
The debtor should consider whether the creditor has mitigated its loss from the date of alleged debt repayment, if it was under a duty to do so (although this often not the case with debt claims). The creditor may have been contributory negligent before or after the debt became due, in which case a debtor may claim a reduction in the debt due. If the parties have a contract, whether oral or written, the debtor should seek to ensure that any limitation period has been complied with. Moreover, a debtor should discuss the terms of the contract with a solicitor to determine whether there is scope for a counterclaim against the creditor for their own breach.
Get in touch with us for advice on any aspect of a high value commercial debt, whether disputed or undisputed. This is a complicated area, as is apparent above, and legal advice is recommended, particularly as there are different options available to creditors with inherent timescales for compliance.