When your debtor doesn’t pay, what can you do?

When trying to recover a fairly modest trade debt from a company a business does have a number of different options to consider….. (Take a look at this case study)

(Please also take a look at this article for the new pre-action protocol for debt claims)

Court Proceedings

There are a number of points the business should consider before starting court proceedings:

  • Have you got the correct details for your customer? Check your paperwork
  • Conduct a cost/benefit analysis before initiating proceedings. 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 in incurring the cost of litigation if the business in unable to enforce the judgment
  • 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 the business does not intend to do so
  • Recovery of costs will depend on:
    • who wins or loses
    • a party’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 matter is concluded (whether before or after proceedings have been commenced)
    • the financial value of the claim and consequently the ‘track’ the claim is allocated ( see Disputed Claims) and
    • how the claim is concluded (whether by agreement or at trial)

Insolvency Proceedings

The 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

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 constitute grounds for presenting a petition for winding up (this is purely for Limited Companies). (See Enforcement)

There are a number of advantages of serving a Statutory Demand:

  • preparing and serving a Statutory Demand can be done quickly
  • the process of Issuing a Statutory Demand does not involve the court
  • if you serve a Statutory Demand, you are not obliged subsequently to commence winding-up proceedings
  • Impact on the debtor can be significant, they will know that the next step you can take is either a Winding Up or Bankruptcy Petition

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. However, these proceedings should generally be regarded as a last resort and the following issues should be considered prior to starting proceedings:-

  • The court requires a creditor to behave reasonably before starting Winding-Up Proceedings and, in particular, 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. The petitioning creditor does not get any priority in this process (unless they have security over any company asset or they are one of a small group of preferential creditors). They may receive only a small percentage of their claim, or perhaps 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 (for example, using negotiation or mediation) as they can provide the quickest and simplest solutions. The court will expect the parties 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.  (Alternative Dispute Resolution).


It might be possible to recover the debt, or agree an alternative future course of action by opening a negotiation with the debtor. This can be done verbally or in writing (for example, by e-mail).


Mediation is a flexible, voluntary and confidential form of dispute resolution in which a neutral third party helps parties to work towards a negotiated settlement of their dispute. The parties retain control of the decision whether or not to settle and on what terms.

If time spent considering the pro’s and con’s is stopping you running your business – why not…

Leave your Debts in our Capable Hands

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