Can my creditors force me to repay my company’s debts?
If you are struggling to pay company debts and face increasing pressure and threats of legal action from your creditors, it is a sign that your business is insolvent. At this point, you should seek immediate advice from a business debt expert, as acting early will increase your chances of rescuing your business and reduce the risk of consequences for you personally.
You should also be aware of the action creditors can take against your company. At first, you’re likely to come under increasing pressure from your creditors. That can quickly escalate to legal action, such as a Decree or Diligence to recover the debt. Here, we look at the legal action your company’s creditors can take in Scotland and what you can do to resolve it.
How to deal with creditor pressure
In our experience, there are some relatively simple steps you can take to avoid constant pressure from your creditors. If you cannot pay what you owe on time, you should contact the creditor, explain your situation and tell them when you’ll be able to make the payment.
Most creditors will be understanding as long as they know you intend to settle the debt and keep them informed. You may even be able to make an arrangement to pay the debt in instalments, which will buy you more time and help to free up cash flow. It’s only usually when you start ignoring your creditors that they resort to legal action.
What legal action can my company’s creditors take?
Court writ or summons
If a creditor takes legal action against your company in Scotland, the first you’ll hear of it will be an initial court writ or summons. Whether you receive a writ or summons will depend on the value of the debt. It will state the details of the creditor, the amount you owe and the name of the court. You will be asked to respond by the date specified to inform the court of your intentions. You can:
- Pay the debt in full and there will be no further action
- Agree that the debt exists but ask for a time to pay direction to pay what you owe within a reasonable timescale
- Dispute the existence or amount of the debt and a court hearing will be set so both parties set out their case to the court
- Agree that the debt exists but do not ask for a time to pay direction and you will be issued with a Decree
- Ignore the writ or summons and you will be issued with a Decree
Decree
A Decree (the Scottish equivalent of a County Court Judgment in England and Wales) is a formal order from the court requesting that you pay the money you owe to the creditor. It is noted on your company’s credit file for six years from the judgment date and will make it more difficult to secure affordable credit.
If you respond to the initial court writ or summons by asking for more time to pay what you owe, you will receive a Decision with an order for time to pay or a Decree with a time to pay direction. As long as you make the agreed payments, your creditor will not be able to take further action to recover their money.
If you do not pay the debt, dispute it or request a time to pay direction or order, you could be issued with a Decree with a Charge for Payment. A Charge for Payment is a formal written request to repay the debt, usually within 14 days. If you still do not pay, the creditor can commence Diligence (enforcement action) against you.
Diligence
The enforcement of a debt following court action in Scotland is called Diligence. The most common forms of Diligence for company debts include:
- Arrestment - This process prevents creditors from disposing of assets without repaying their creditors. Company bank balances, moveable assets and debtor balances are all assets that can be subject to arrestment. For example, a creditor can serve an Arrestment Order on your bank and it will be required to ‘arrest’ a sum to the value of the debt and pay it over to the creditor.
- Attachment over goods - A sheriff officer from the court can visit your business premises on behalf of the creditor to make a list of your moveable goods. If you do not pay the Decree within 14 days, they can remove the goods and sell them at auction. The proceeds will be used to repay the creditor and cover the sheriff’s fees
- Attachment over money - Similar to a goods attachment, a sheriff officer can visit your business premises to seize assets to repay the creditor. In this case, they will be looking for cash. They have the power to open and shut lockable places, such as cash registers and safes, to find it. Money attachments are often used against cash-rich businesses like shops and restaurants.
Statutory Demand
Another route a creditor can take for debts over £750 is to issue your company with a Statutory Demand. It gives you 21 days to pay in full or negotiate a repayment agreement. A Statutory Demand provides a legal basis for proving your company is insolvent. If you do not challenge the demand or pay what you owe, the creditor can initiate further insolvency proceedings against you.
Winding Up Petition
If you do not settle the Statutory Demand or have it set aside, your creditor can issue a Winding Up Petition against your business. This is now very serious and you must act quickly to prevent your company from being wound up by the court.
The court will consider the petition, and if it’s satisfied that your company is insolvent and cannot pay its debts, it will make a First Order to serve and advertise the petition. That will make the petition public knowledge, at which point, your bank will usually freeze your company’s bank accounts.
The petition will then be served and you’ll have just eight days to pay the amount you owe in full, including the legal costs of the petitioning creditor, or lodge answers to challenge the petition. If you lodge answers, the court will set a hearing to determine whether to grant the Winding Up Petition. If you ignore the petition, the court will make a Winding Up Order and the company will be liquidated by the court.
How can I stop creditor legal action against my company?
If you do not dispute the debt, the simplest option is to pay what you owe or negotiate an informal repayment agreement with your creditor. If you have multiple creditors, a formal insolvency procedure called a Company Voluntary Arrangement (CVA) could be a better option.
Alternatively, if your creditors are unwilling to accept a payment plan, you could explore other options, such as Company Administration or Pre-Pack Administration. These are only likely to be suitable if the underlying business is viable.
If the company is no longer financially viable and has no prospect of a recovery, initiating a liquidation yourself via a Creditors’ Voluntary Liquidation (CVL) could be in everyone’s best interests. That will usually lead to a better outcome than waiting to be forced into Compulsory Liquidation by your creditors.
Need advice?
Are you being pursued by creditors for debts your company cannot pay? At Scotland Debt Solutions, we can help you understand your options and find the best route back to business as normal. Contact our business debt experts for a free, same-day consultation or arrange a meeting at one of our five offices throughout Scotland.
