Steven Bate highlights what construction businesses need to do in order to deal effectively with aggressive chasing of debts.
A well-known law lord once said that “…there must be a ‘cash flow” in the building trade. It is the very lifeblood of the Enterprise”*.
It is hard to disagree with this and in recent years we have seen an increasing number of businesses in the construction industry managing their financial position through the aggressive chasing of debts and payments.
This is now becoming a business critical issue and in my opinion, it is a trend that companies need to be aware of. A company needs to arm itself with the appropriate advice, tips and tricks, or the repercussions could be disastrous.
The first thing to remember is that if a firm receives a threat to wind it up, a statutory demand or a winding up petition, it shouldn’t delay as it could certainly be advantageous to instruct a solicitor to assess whether there is a genuine defence, set off or cross claim.
Statutory demand
A statutory demand can be issued to demand payment of a debt within 21 days if the sum owed is above £750. It is quick and inexpensive, is a formal looking document and does not involve the court. There is no obligation to commence winding up proceedings after it and it creates the presumption of insolvency if not properly dealt with. It can therefore usually be prepared cost effectively and usually has the desired effect of extracting payment. However, a paying party may call your bluff and ignore it, knowing that without more the company will not be wound up.
Winding up petition
A winding up petition is the first step towards liquidating a company and making it insolvent. It is the nuclear weapon in the creditors’ armoury.
An organisation does not need to serve a statutory demand before issuing a winding up petition, but it is usually worthwhile because it raises the stakes and creates a presumption of insolvency if not properly dealt with.
Winding up petitions come with a health warning, however: if successful the company will be wound up and will go out of business. The pay-out to an unsecured creditor from a company in liquidation will be a fraction of the debt so it may be an empty victory.
Also, when a winding up petition is presented the company’s banks and other financiers usually get to know about it and this may mean the company’s credit lines and bank accounts are temporarily frozen, affecting its ability to trade. If a creditor is seeking payment there could be no or little cash available to pay the debt.
Another problem is that creditors can “piggyback” on each other’s winding up petitions once one has been issued. Therefore, even though one petition is issued, even if you are repaid in full, another creditor may pursue the proceedings, causing the company to go into liquidation in any event.
A business may feel that this is not an issue if it has received payment, but there could be situations where there is more than one debt.
Another potential trap is that if a business receives payment after a winding up order is made, it could be required to repay the company.
Legal advice
If you are chasing a debt, you should take early advice from a solicitor to explore the options available. If you are thinking of presenting a statutory demand or a winding up petition, you should think very carefully before doing so and analyse whether in fact there is a genuine dispute against the debt sought.
If you receive a letter threatening a winding up petition, a statutory demand or a winding up petition itself, you should not delay and you should engage a solicitor who should be able to help create a strategy to minimise the damage that these issues will cause.
I have focused on statutory demands and winding up petitions because at Irwin Mitchell we are seeing them used more often where they are not justified, ie where there is genuine dispute over the debt. We have received an increasing number of instructions to pursue interim injunctions to restrain these threats and we perceive that this is increasing as people are trying to use these mechanisms in a more aggressive way to try to obtain payment of debts.
If you are faced with a threat of winding up proceedings, a statutory demand or similar, it is important that you also take professional advice to help manage the process. The risks are high and if you are unlucky, you might easily be bounced into insolvency. You certainly should not sit on these matters until a winding up petition is issued because this will mean that your banks are likely to close down your credit lines and banking facilities making it virtually impossible to trade.
Alternatively, if your business wants to use these mechanisms to chase a debt, ensure that you consult with a specialist legal adviser before doing so as the consequences of getting them wrong could be severe.
Steven Bate is a commercial litigation partner at national law firm Irwin Mitchell
* Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1973] 1 BLR 73, per Lord Denning
