New analysis from financial risk firm Red Flag Alert shows there’s over 510,000 companies in significant financial distress in the UK. The impact of coronavirus has seen the number of these struggling companies pass the half-million mark for the first time since records began in 2004, with the risk of failing companies leaving a trail of £24 billion in unpaid invoices between now and the end of next year.

Michael Chambers, partner and head of dispute resolution at Forbes Solicitors, looks at six ways that companies can recover money owed to them.

Many companies are concerned about debtors who owe them money and are seeking out County Court Judgments (CCJs) to help them recover debts. Although this is a viable solution, companies should first start by building a profile of their debtor. This will consider factors such as what assets they own, any major purchases they’ve made recently, if they’re liquidating assets and making any changes to their position of corporate ownership and / or directorship and state of residency.

This knowledge will prove key in determining the most effective option for a creditor to increase their chances of actually getting money in their banks. These options could include:

• Agreements

COVID-19 has had, and continues to have, a far-reaching impact. It’s negatively affecting many different businesses operating in a wide-range of sectors. Taking this into consideration, it might be advisable for a creditor to first seek a repayment agreement with the debtor. This could, depending on the wider financial circumstances, help the debtor avoid insolvency and a situation where debt recovery becomes much more difficult.

The agreement may make allowances for a debt to be repaid in instalments and could involve the debtor providing some form of security, usually a fixed asset. Or, an agreement may involve a guarantor acting as the security. Both of these measures make it less likely that a debtor will default on repayment plans. For this approach to be successful, the creditor must verify the agreement in writing and ensure the level of security holds an appropriate value versus the debt, accounting for both interest on repayments and any depreciation (or potential appreciation) of fixed assets.

• Bailiffs

If companies decide to call-in the bailiffs, they should forget any televised versions of how this will work. Bailiffs are an effective option, but they cannot just turn up to premises, immediately bash down doors and take assets as they see fit. In reality, bailiffs must follow processes to first encourage the repayment of debts before suitable assets are seized.

Bailiffs also have limited powers when it comes to residential properties and aren’t allowed to enter unless a debtor gives access. What does produce results is the number of visits the bailiffs make and the debt being increased accordingly with each visit. This can prompt debtors in into at least trying to resolve their financial obligations, rather than simply ignoring them.

• Charging Orders

A charging order can be granted by a High Court or County Court and will see the debt secured against the debtor’s business premises or home, as long as the debtor owns or pays a mortgage on the property.

This allows a restriction to be placed on the property, so if it is sold, the creditor would be notified and ultimately would agree to lift the restriction upon payment of their debt. The charging order does not present the creditor with the power to enforce the sale of the property.

• Winding Up Petition

Winding up petitions can be useful tools against debtors. The creditor will aim to recover their debt by pursuing the closure of the business and then reclaiming the debt from the liquidation of the company’s assets.

In some instances, the very notion of this action can prompt debtors to meet their financial obligations. Many professionals will be keen to avoid the reputational damage of being served a petition and the limitations that bankruptcy can place on other professional directorships.

• Third Party Debt Orders

This can prove an effective means of recovering money if the creditor believes the debtor has access to sufficient funds to pay what they owe. Obtaining the order requires an application to the county court and if successful, will see the debtor’s bank accounts frozen. The creditor then effectively by-passes the debtor and deals directly with the bank to recover the owed money.

Timing is key to the successful execution of a third party debt order. A court is unlikely to grant one if the debt is still within agreed credit terms and creditors need to also be mindful that the freezing of bank accounts only applies to money in the account at the time the order is granted. It would offer the creditor no support in recovering any money from the debtor’s future finances, should they go on to receive a cash injection in the forms of a due payment or other source of funding.

• Oral Examination Hearings

Should a creditor believe the debtor is being dishonest about their ability to pay owed monies, the oral examination hearing can prove an effective means of disclosing their true financial position. The debtor will be summoned to court, where they must disclose information about their finances. If they choose not to answer questions in court or provide false information, the debtor could find themselves in contempt of court and facing a financial penalty or imprisonment.

The information from the hearing can be used by the creditor to then determine the most effective means of recovering their money from the debtor.

The suitability of the different forms of debt recovery will all vary according to the situation creditors find themselves in. Focusing on the debtor and building a profile of their financial situation will prove key to finding the best means of actually receiving payments.