How can creditors enforce company debts in Scotland?
If your company has outstanding debts and bills that it’s struggling to pay, you’ll probably start to wonder what measures those parties you owe money to (your creditors) can take to pursue and enforce repayment.
There are some differences in the legal action creditors can take against a company in Scotland. As a company director, understanding those measures, how to respond and the potential consequences can help you make informed decisions and protect your business.
I’m being chased by creditors – what can I do?
Pursuing an unpaid debt through the courts is the last thing most creditors want to do. They will usually give you as many opportunities as possible to make the payment. It’s only when you fail to engage, or all other attempts to recover the money fail, that they will typically consider legal action.
If you have a payment you cannot make, the best approach is to contact the creditor immediately to explain your position. It may be possible to negotiate an informal payment plan with creditors, such as suppliers, landlords and even some lenders, that allows you to spread the repayments over an extended period.
The same is often true of tax debts. If you have VAT, PAYE or Corporation Tax arrears, it’s often possible to negotiate an HMRC Time to Pay Arrangement. That gives you a typical period of three to 12 months to clear your outstanding liabilities via instalments.
The legal action creditors can take against companies in Scotland
If you are unable to make a payment plan with your creditors and you cannot pay what you owe in full, your creditors may decide to take legal action. Here’s how that could play out.
A court writ or summons
If you owe a creditor money, their first step will often be to serve you with a court writ or summons. The route the creditor will take depends on the value of the debt.
For claims up to £5,000
If you owe a creditor up to £5,000, they can use the Simple Procedure, which is usually raised in the Sheriff Court. This process is designed to be faster, cheaper and more accessible, with creditors able to represent themselves without requiring a solicitor.
The creditor must complete a claim form, including details of the debt and supporting documentation such as invoices. They then lodge the claim at court and serve a copy on your business.
You will be given a deadline to:
- Admit and settle the claim
- Admit the claim and ask the court for more time to pay
- Dispute the claim
If you ignore the claim, the creditor can ask the court for a decision, and the court may grant a Decree without a further hearing. If you decide to dispute the claim, you could be given a date for another hearing or referred to Alternative Dispute Resolution. Alternatively, the court can dismiss the claim or make an order without a hearing.
For claims over £5,000
Creditors must use the Ordinary Actions process for debts over £5,000. It is a more formal process raised in the Sheriff Court, although some claims could move to the Court of Session. The creditor will prepare an initial writ that you must respond to by admitting the claim and making a payment offer or disputing the claim.
If you fail to respond by the deadline, the creditor can apply for a Decree in Absence, and the court will issue a judgment in the creditor’s favour without a hearing. If you dispute the claim, the case will proceed to the full Ordinary Actions procedure, which may involve written pleadings, exchange of evidence and a hearing before the Sheriff.
A Decree
If the creditor proves the existence of the debt and you do not pay what you owe in full, the court can issue a Decree. A Decree is a formal order requiring you to pay what you owe. It is the equivalent of a County Court Judgment (CCJ) in England and Wales.
There are two types of Decree you can receive:
- Decree with a Time to Pay Direction – When the court grants a Decree, you can apply for a Time to Pay Direction, which, if the creditor accepts your payment plan, allows you to pay the debt in instalments rather than a lump sum. That prevents enforcement action by sheriff officers as long as you make the agreed payments.
- Decree with a Charge for Payment – A Charge for Payment is a formal demand served after a Decree is granted. It gives you 14 days to pay the debt in full. If you do not pay what you owe, the creditor can commence enforcement action.
Both types of Decree usually remain on your credit file for six years from the date they are issued. If you subsequently pay the Decree, it will be marked as satisfied on your credit file, which can improve how lenders view your file. However, it is still visible for the full six years.
Diligence
If you have an unpaid Decree, a creditor can take enforcement action against you. That is known as Diligence in Scotland. They have a range of procedures they can use to recover the debt, including:
- Arrestment – This involves effectively freezing the company’s bank account, debtor balances and other financial assets until you pay the debt.
- Attachment over goods – A sheriff officer can attend the company’s premises to seize company assets, such as equipment, stock and vehicles, that they can auction to recover the debt.
- Attachment over money – Rather than goods, if your business is cash-rich, such as a shop or restaurant, a sheriff officer can visit your premises and seize cash to repay the debt. They even have the power to open lockable places, including safes and cash registers.
- Inhibition – If the company owns land or property, a creditor may apply for an inhibition order to prevent the company from selling or remortgaging the property until you pay what you owe.
These enforcement powers can have a significant impact on your company’s ability to operate, and crucial assets and cash can be at risk. That underlines the importance of avoiding a Decree whenever possible.
Statutory Demand
Rather than issuing a court writ or summons, some creditors take a different route by serving the company with a Statutory Demand. A Statutory Demand is a formal demand for the payment of a debt of £750 or more.
The creditor serves the demand at your company’s registered address or main place of business. You then have 21 days to:
- Pay what you owe in full
- Negotiate a repayment arrangement
- Apply to challenge or set aside the demand
If you ignore the demand or do not pay what you owe, the creditor can issue a Winding Up Petition against the company, which can lead to its liquidation.
Winding Up Petition
If you do not pay a debt after receiving a Statutory Demand or Decree, a creditor can apply to wind up the company. It can do that by filing a Winding Up Petition with the court. The court will set a hearing date, and the petition will be served on the company at its registered office by sheriff officers.
You have just eight days from the date the petition is served to respond and pay the debt or negotiate payment terms with the creditor. You can also challenge the petition on the grounds that you have already paid the debt, genuinely dispute it or already have a repayment arrangement in place.
If you do not pay or challenge the petition, the court will decide whether to grant a Winding Up Order. If it does, the court will appoint a licensed Insolvency Practitioner to close the company via Compulsory Liquidation.
Although it’s not as formal as a CVA and does not provide the legal protection, a professionally managed restructuring plan can ease cash-flow pressure, bring creditors onside and help the company recover.
- Company Administration
If the company is under serious legal threat from a landlord or other creditors, such as HMRC, putting it into Administration may be the best option. You must appoint a licensed Insolvency Practitioner to act as the administrator. They will work to put a recovery plan in place, and the company will be protected from legal action.
Another option is a pre-pack sale. That allows you to sell the business and its assets immediately upon entering Administration. As the business owner, you may even be able to buy the assets yourself. That could enable you to continue trading under a new company structure, but without the old business’s debts.
What are your options if you cannot pay?
If your company has debts it cannot pay when they become due, it is technically insolvent. When your company is insolvent, you should contact a licensed Insolvency Practitioner immediately. They will assess its financial position, explain your options and discuss the steps you can take to meet your legal duties as a director and reduce the risk of penalties.
Company Voluntary Arrangement (CVA)
If the company is insolvent but its underlying business model is viable and you believe it could be profitable in the future, a Company Voluntary Arrangement (CVA) could be an option. A CVA is a legally binding payment plan that allows you to continue trading while repaying your creditors over a typical period of three to five years.
Company Administration
If you are under significant creditor pressure or a creditor is taking steps to recover a debt, Administration could be a better option. It provides immediate legal protection to prevent creditors from starting or continuing legal action against the company. That gives the administrator (an Insolvency Practitioner) time to put a recovery plan in place.
Creditors’ Voluntary Liquidation (CVL)
If your company cannot pay its debts and has no realistic prospect of making a recovery, liquidating it voluntarily via Creditors’ Voluntary Liquidation (CVL) is the legally responsible way to close it.
A CVL allows directors to deal with creditors properly while reducing the risks associated with Compulsory Liquidation. An Insolvency Practitioner will take control of the company, sell its assets and repay the creditors as far as possible. Any debts the company cannot pay will usually be written off, and you may also be eligible for director’s redundancy pay.
Are you struggling to pay company debts?
If creditors are threatening to take action against your company, it’s in your best interests to act fast. Whether you need quick advice, immediate protection or a formal liquidation, we will explain your options and guide you through the most appropriate solution. Get in touch for a free, same-day consultation or arrange a meeting at one of our offices in Scotland.
