Is your company under pressure from a creditor? When your company doesn’t pay its debts in full and on time, creditors can start to place pressure on your company, ranging from constant reminder notices to serious legal pressure.
Creditor pressure can begin relatively lightly, with occasional phone calls to your company, before evolving into statutory demands and a winding up petition – an extremely serious development that could result in your company’s liquidation.
Because creditor pressure can develop quickly and place your business at risk of being liquidated, you need to act quickly when you sense that your creditors are beginning to take action against your business to recover their debts.
Several solutions are available for companies under pressure from creditors. These range from loans and financing options such as invoice factoring to solutions such as entering into administration or proposing a Company Voluntary Arrangement.
Since every company’s finances and relationships with creditors are different, there is no all-purpose solution to creditor pressure. However, the solutions below may be able to help your business relieve creditor pressure and continue trading.
Are you concerned about creditors putting legal pressure on your company? Read on to learn about the rights your creditors have to pursue your company, the rights your company has to respond, and the options that are available for your company.
Quick facts about creditor pressure
- Creditors understandably want to ensure they’re paid, and can quickly place pressure on your company when they believe that default is imminent.
- Creditor pressure can begin relatively lightly, with letters to your company and frequent phone calls, before evolving into a significant threat to your company’s solvency and ability to continue trading.
- It’s important to respond to creditor pressure as early as possible, since the options available to your company decrease as creditors start to place more legal pressure on the business.
- Creditors can contact your company to request payment or send a statutory demand, but there are limits on the amount of contact they can have with your company in order to recover debts.
- As company director, you need to follow your directors legal duties under the Insolvency Act 1986 if creditor pressure, such as a statutory demand, causes your company to become insolvent.
Is your company under pressure from its creditors?
When your company fails to pay its creditors on time, it rarely takes long for them to jump into action. Creditors can be extremely persistent in chasing down debts, often using a variety of means to recover cash from your company.
Creditor pressure is when your company’s creditors start taking aggressive action to recover debts. This pressure can range from hiring a debt collection agency to using a statutory demand to place legal pressure on your company to pay its debts.
This pressure can have serious implications for your company. If a creditors sends a statutory demand to your company for a debt you can’t afford to pay, your company is likely insolvent and will need to take immediate action.
Creditor pressure can begin relatively suddenly as the result of a significant change to your company’s circumstances. A large customer defaulting or a chance in your company’s cash flow can trigger unexpected and persistent pressure from creditors.
Although creditors are allowed to take legal action to recover debts, there are limits on how aggressively a creditor can pursue your company. Facing creditor pressure is a stressful prospect, especially for the director of a distressed company.
Your company has several ways to end creditor pressure. It can use an insolvency solution such as a CVA or administration to shield itself from legal action, or raise cash using a solution such as invoice factoring or a loan.
Since every company is different, there’s no “best way” to end creditor pressure for every business. Speaking to an insolvency practitioner will help you understand the options available for your company to relieve the pressure it’s facing.
Understanding the rights your company’s creditors have
When your company owes money to its creditors, they have a right to collect their debts. If your company can’t afford to pay its creditors, they also have the right to take action to ensure they can recover as much cash as possible.
Creditors can legally work with debt collection agencies in order to recover debts from your company. They can also legally sell debts to other companies, often for a certain percentage of the debt’s total value.
When your company’s debt is sold to another company or assigned to a collections agency, it does not become less legitimate. Your company still owes money and can face significant pressure from the company assigned to collect the creditor’s debt.
If your company has secured debts, its creditors may be able to seize assets that are attached to the loan as collateral if the debt isn’t paid. If these assets are essential to your company’s operations, their seizure can have serious effects on cash flow.
Unsecured creditors can place pressure on your company by delivering a statutory demand. This is a formal demand for payment of a debt that, if ignored, can allow a creditor to initiate a winding up petition against your company.
Understanding the rights your creditors don’t have
Although your creditors have the right to reasonably contact your company as part of the process of recovering debts, there are limits on what they can do to pressure your company into paying.
Creditors that go beyond their rights may be harassing you or your company’s staff, possibly in violation of UK law. In some cases, creditors – or third-party collections companies – can face charges of harassment or professional misconduct.
By law, creditors are not allowed to harass you or your company’s staff in order to recover a debt. Harassment can take the form of frequent or threatening calls and communications or in-person visits to your company’s physical locations.
Creditors also can’t mislead you or your company’s staff as to the consequences of failing to pay a debt. There are other restrictions on creditors disclosing information about your debts to colleagues and other companies.
If you believe that your creditors are stepping beyond their rights and have started to harass you or your company’s staff, seek expert advice. Creditors that violate the FCA guidelines can face fines and penalties to their FCA authorisation.
Has your company received a statutory demand?
If your company ignores communications from its creditors and fails to pay its debts on time, it may receive a statutory demand. Receiving a statutory demand indicates that a creditor is serious about pursuing court action against your company.
When your company receives a statutory demand, it has 21 days to pay its debts to a creditor. Failing to pay the debts or work out an arrangement with a creditor within 21 days could result in a winding up petition being filed against your company.
Receiving a statutory demand is a significant development in creditor pressure as it signals that the creditor is serious about pursing your company. A creditor can, with relatively modest expenses, subsequently take your company to court.
If your company receives a statutory demand for a debt that it can afford to pay, it’s advisable to pay the debt. If you cannot afford to pay a debt after receiving a demand from a creditor, your company may be insolvent.
Has your company received a winding up petition?
Ignoring a statutory demand from a creditor or failing to negotiate an arrangement within 21 days of receipt gives a creditor the ability to petition the court to wind up, or liquidate, your company.
A winding up petition is the most serious legal tool a creditor has at their disposal to recover cash from your company. Receipt of a winding up petition limits the options available to your company to relieve the pressure it faces from creditors.
In order to file for a winding up petition, your company needs to owe a creditor at least £750. The creditor also needs to prove your company is incapable of paying the debt, either via a statutory demand or a county court judgment.
If a winding up petition is filed against your company, you need to act immediately in response. Shortly after a winding up petition is filed, your company could face a range of serious issues, including the closure of its bank accounts.
What options are available to relieve creditor pressure?
The earlier you act to relieve creditor pressure, the more options your company has to raise cash, protect itself from legal action and start recovering.
If your company can continue trading profitably after solving its current issues with creditors, the following options are available:
Company Voluntary Arrangement
A Company Voluntary Arrangement is an agreement between your company and its creditors that allows your company to pay its debts off over a time period typically between two and five years.
In a CVA, some of your company’s debt may be written off. Creditors will receive a percentage of the amount they are owed in a monthly payment for the duration of the CVA period.
CVAs are a great option for viable companies that have the potential to pay off debt over time. In order to enter into a CVA, your company will need to show its creditors that it can generate sufficient cash flow to make monthly payments on its debt.
When your company enters into a CVA, it’s protected against legal action such as a winding up petition by its creditors. This makes a CVA a good solution to creditor pressure for companies that can recover over the long term.
Administration is a procedure for insolvent companies that involves handing over control of the company to a third party, known as an administrator, appointed by the company’s directors or, in some cases, by its creditors.
During administration, the company’s administrator will work to ensure creditors’ interests are prioritised while attempting to help the company recover and achieve a return to profitable trading.
Like a CVA, administration protects a company from legal action by its creditors. A company that enters into administration can’t be wound up by a winding up order in the same way that an insolvent and unprotected company could.
Administration can often end in the resumption of trading after a company raises cash to pay creditors by selling assets. In some cases, the administrator may enter the company into a CVA with its creditors to allow for continued trading.
In other cases, administration could lead to a company’s assets being liquidated in order to pay its creditors. Administration is a powerful option for companies that are concerned about the effects of creditor pressure on their business.
Loans and Financing
If your company is short on cash due to a major customer defaulting or a serious expense that wasn’t planned for ahead of time, one of the most effective ways to bring creditor pressure to a stop is by raising cash using a loan.
Many lenders understand the needs of distressed companies and can provide an inexpensive source of short-term credit that allows your business to pay its short-term financial obligations without difficulty.
As with a CVA or administration, borrowing money to ease cash flow issues is only an option for profitable, viable businesses. Your business will need to show lenders it has the potential to recover in order to access credit.
In addition to loans, there are other financing options available for companies that are under pressure from creditors. These include asset-based financing and invoice factoring, both of which can improve short-term cash flow and solvency.
Creditors Voluntary Liquidation
If your company is unviable, meaning its business model no longer works or it can’t realistically recover from its current cash flow issues and creditor pressure, one of the easiest ways to bring the company to an end is through liquidation.
A creditors voluntary liquidation, also known as a CVL, is a voluntary liquidation procedure that closes your company, ends its active trading life and results in its assets being sold to create liquidity and pay creditors.
If there are no better options available for creditors, entering into a CVL is often the best way to raise funds and ensure that creditors receive at least some of the money they are owed by your business.
The alternative to a CVL is compulsory liquidation, which is often the end result of creditor pressure. Compulsory liquidation is a much less safe prospect for you as a company director, as there is a significant risk of wrongful trading charges.
Get expert financial help
Are your company’s creditors starting to put the pressure on? When a creditor or several creditors start putting serious pressure on your company, insolvency and the threat of a winding up petition are often only weeks away.
Your options for protecting your company against compulsory liquidation, raising cash to pay creditors and preventing charges of wrongful trading decrease as time passes, so it’s essential that you act quickly when you face creditor pressure.
There are numerous options available to save your company and ensure creditors are paid, from a CVA to invoice factoring. We can help you learn more about what your company can do to respond to serious legal pressure from its creditors.
Contact us to speak to an insolvency expert and learn more about the options that are available to respond when creditors place pressure on your company. We can provide help and assistance to protect your company from legal action.