Improving cash flow when credit is hard to get

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27 May 2009

Given that more companies are waiting longer for their invoices to be settled, it is not surprising that those firms owed money are looking to the courts to speed up the payment process. What is surprising is the aggression of such proceedings. More and more aggrieved creditors want to use the nuclear option – threatening to force the winding up of a debtor company – but you shouldn't abuse that procedure.

Tim Pope, senior associate in our litigation team, says companies can issue a statutory demand against individuals or companies that owe them money if three conditions are met: that they are owed more than £750; the debt is not disputed; and the creditor believes the company cannot afford to pay.

The demand can be followed up 21 days later with a bankruptcy petition for an individual or a winding up petition for a company. The UK Insolvency Helpline, a network of lawyers and accountants specialising in insolvency issues, says that in 99% of cases the debtor pays up before a bankruptcy petition is ever issued.

Creditors can issue a statutory demand without going through the normal procedure of issuing reminders after the invoice was due to be settled, demanding payment through a 14-day notice letter and, if payment is still not made, pursuing the matter through the county courts, whereby interest, legal and court fees can be added to the money already owed.

No Guarantees

However, Pope warns that this could be self-defeating for the creditor:

Just because a company that is owed money takes the initiative to force the debtor into liquidation, it does not mean it will be the first in line to receive funds. Nor does it mean that the creditor will recover its funds in full, or that its legal fees will be paid. The move could result in the debtor company closing down without anyone being paid.

Pope also warns that companies that are owed money should not automatically issue a statutory demand instead of trying the usual methods of chasing payment first.

Creditors should always act in good faith and should make an attempt to have their invoices settled by sending out reminder letters and 14-day letters first. It is not really in the ‘spirit of the law’ to seek liquidation as a first resort and courts may look down on this.”

The costs of bringing the action can also put creditors under strain, says Pope. “Court costs can vary widely and, if barristers are involved in the process, the action can be very expensive.”

This text first appeared in an article in Financial Director. The full article looks at options available when suppliers are facing difficulties.

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