How to get civil judgments and other debts enforced when seeking repayment of a debt from a company.

Statutory demands

When the debtor is a limited liability company, the most common form of debt-collection procedure is the “statutory demand” – issued under section 289 of the Companies Act 1993, which sets out the amount owing and what it is for. It also provides that the debtor company has 15 working days from the date of service of the demand to either pay the debt or satisfy it in some other way.

If this time elapses after the service of the statutory demand and the debt is not paid, the creditor is then entitled to issue liquidation proceedings in the High Court. However, all the creditor has to do to prevent being put into liquidation is to raise a dispute. Therefore, it is important that liquidation proceedings are only issued if there is absolutely no dispute.

Liquidation proceedings

The most severe act of debt enforcement that any creditor can bring against a person is bankruptcy and the equivalent for a company is liquidation proceedings. This allows all the assets owned by the company to be liquidated or converted into money. The liquidator’s costs get deducted from the proceeds first, then secured creditors are paid out, followed by unsecured creditors if there is any money left over.

The distribution between unsecured creditors is generally done on a pro-rata basis. This means that each unsecured creditor will be paid according to the percentage of the total unsecured debt that creditor is owed. In other words, if a creditor makes up 10% of the total unsecured debt, they will receive 10% of the pool available to unsecured creditors. Usually, unsecured creditors are left with nothing or very little.

Creditors compromises

As the prospects of receiving payment in liquidation are often slim, there can be an advantage to creditors who choose not to liquidate a company but instead enter a “scheme of arrangement” or compromise to increase the likelihood of receiving payment.

The procedures for entering a compromise are set out in part 14 of the Companies Act 1993. They include cancelling or reducing a debt, varying the rights of creditors and altering a company’s constitution in a way that increases or affects the likelihood of the company being able to pay a debt. The specified people who are entitled to propose a compromise between a company and its creditors are called proponents, and they must carry out the following tasks:

1. Make a list of all known creditors who might be affected by the compromise specifying the amount owing to each creditor and the number of votes that each creditor is entitled to cast.

2. Give notice of a meeting to consider the compromise to all known affected creditors, the company, any receiver or liquidator and the Registrar of Companies.

3. Provide all people to whom a notice of the meeting must be given with a copy of the list of creditors and a statement containing information such as details of the proponent and how to contact them, the terms of the compromise and consequences for creditors if it is approved, an explanation that the proposed compromise will be binding and details of the procedure for varying the compromise after its approval.

4. Hold a meeting of creditors to consider a vote on the compromise.

5. Give notice of the result of voting to all creditors.

Creditors’ meetings

If a compromise is approved by creditors, then it is binding on the company and on all creditors to whom notice of the proposal was given. A compromise may be approved and adopted by a majority of 50% in number and 75% in value of the creditors voting on the proposal.

Dissatisfied creditors

Unless an aggrieved creditor applies to the court within 10 working days of receiving notice of the result of the meeting, no further action is necessary. Examples of the grounds upon which a dissatisfied creditor can apply to the court for an order not to be bound by the compromise include: insufficient notice of the meeting, insufficient information was given prior to the meeting, there was some irregularity in obtaining approval of the compromise or that the compromise was unfair to the creditor or class of creditors to which that creditor belongs.

Either before or after a company is placed in liquidation, an application can be made by the company for an order that the compromise continues in effect so that it binds the liquidator of the company. My final word of advice when preparing a compromise proposal is to insert a provision to this effect to ensure that the compromise continues to be effective following liquidation.