Recovering a Trade Debt

Andrew Oranjuik

Andrew Oranjuik

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Phone 01952 566919

There are many options available if you need to recover a fairly modest trade debt from a company – but there are advantages and disadvantages. Here we look at the pros and cons:

Court proceedings

There are a number of things to consider before you start court proceedings:

  • Remember the court is required to deal with matters justly and at proportionate cost.
  • Begin with a cost/benefit analysis and make sure the cost of enforcement is factored into the calculations.
  • Check that the other party is good for the money – there is no point running up expensive costs if the business in unable to pay up.
  • Be cautious about starting proceedings if the business does not intend to see them through. The business will almost certainly be liable for the other party’s costs if it discontinues the claim.
  • Be careful about threatening to start formal proceedings if you don’t really intend to go ahead.
  • Recovery of costs will depend on:
    • who wins or loses;
    • each side’s conduct and compliance with court rules and orders (for example, a failure to comply with a pre-action protocol can have cost consequences even for the party that wins);
    • when the case is concluded (whether before or after proceedings have begun);
    • the financial value of the claim;
    • how the claim is decided (by agreement or at trial).

Insolvency proceedings

Your business may be able to recover a debt from a company by either:

  • Serving a statutory demand.
  • Threatening compulsory liquidation (also known as winding-up) by the court.

What is a statutory demand?

  • A statutory demand is a written notice in a prescribed form demanding payment of a debt owed by a company to one of its creditors. If the debtor doesn’t pay within three weeks, this may be grounds for presenting a petition for winding up.

What are the advantages of a statutory demand?

  • It’s quick and inexpensive;
  • The process does not involve the court;
  • If a creditor serves a statutory demand, they are not obliged to begin winding-up proceedings.

What is a winding-up petition?

  • The threat of starting winding-up proceedings can put considerable pressure on a company to pay an outstanding debt promptly and the basic procedure is relatively inexpensive. But these proceedings should generally be regarded as a last resort.
  • The court requires a creditor to behave reasonably before starting winding-up proceedings and, to write to the company with details of the debt and demanding payment.
  • It is an abuse of process to issue a winding-up petition if a debt is genuinely disputed.
  • If a winding-up order is made, a liquidator will be appointed by the court to collect the assets of the company and distribute the value equally among the company’s creditors. Your business does not get any priority in this process (unless you have security over any company asset or are one of a small group of preferential creditors). You may receive only a small percentage of your claim, or even nothing at all, at the end of the liquidation process.

Reaching a settlement

It almost always makes sense to consider informal methods of recovering a debt, such as negotiation or mediation, as they provide the quickest and simplest solutions. The court will expect both sides to have explored ways of settling the claim before they issue proceedings and may penalise a party in costs if they fail to do so.

What are the disadvantages of court proceedings?

  • Litigation can be disproportionately expensive to the sums being argued over.
  • The outcome is uncertain.
  • The court is only able to offer a limited range of remedies.
  • Litigation often destroys any prospect of the parties working together in the future.

What is the “without prejudice” rule?

Parties usually negotiate on a “without prejudice” basis. This generally prevents statements made in a genuine attempt to settle an existing dispute from later being used as evidence.

So if negotiation or mediation fails and the business then issues court proceedings, any statements that the parties made during attempts to settle the dispute (whether in writing or orally) will not be put before the court in the proceedings.

Doing nothing

You could always simply choose to write off the sum that it is owed. But before taking this step, consider the size of the debt; the possible costs involved; the importance of the working relationship; and the likelihood of maintaining an ongoing commercial relationship.