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A letter of claim (also known as a "letter before action" or a "letter before claim") is normally the first step in the formal business debt recovery process.
It is a notice sent out by the creditor's solicitor to let the debtor know that the creditor is planning to take legal action against them to try and recover the unpaid debt.
If you get no response after sending the debtor a letter of claim, there are further options available to recover the business debt due to you, as set out below.
Issuing Court proceedings
If the letter of claim is ignored or the debtor does not provide any proper arguments as to why the debt is not owed, one option available to you is to issue Court proceedings to recover the debt.
Such claims are normally brought in accordance with the Civil Procedure Rules, which govern the conduct of litigation in England and Wales.
It can be the case that issuing Court proceedings prompts payment of the debt unless there are genuine reasons as to why the debt is not owing, in which case the debtor may respond to the Court proceedings by filing a Defence or Counterclaim.
Issuing Court proceedings is a formal process that requires a Claim Form and Particulars of Claim to be drafted and filed with the Court.
A Court fee is payable when the Court proceedings are sent to the Court for issuing, and the amount payable depends on the value of the claim.
Your business debt recovery solicitor will be able to advise you on the amount payable.
Once the Court has issued the Court proceedings, the Court will usually serve the Court proceedings on the debtor.
Alternatively, the Court may ask the creditor's solicitor to serve the Court proceedings.
There are particular rules (contained in the Civil Procedure Rules mentioned above) which must be followed regarding serving the Court proceedings.
Following service of the Court proceedings, the debtor normally has 14 days to respond to the Court proceedings.
If the debtor does not respond to the Court proceedings in time, then the creditor can apply to the Court for Default Judgment.
Once Default Judgment has been obtained, steps can be taken to enforce the Judgment.
If your debtor responds to the Court proceedings then depending on how the debtor responds, your debt recovery solicitor will be able to advise on next steps.
Issuing winding-up proceedings
As an alternative to issuing Court proceedings, you may be able to apply to the Court to close or "wind up" the debtor company if it cannot pay its debts.
This is also known as compulsory liquidation.
You can commence winding-up proceedings to try and recover the debt as long as the business debt is:
1. Owed by another company (for example, a limited company);
2. For more than £750; and
3. Not disputed.
The first step in insolvency proceedings is normally to serve a statutory demand on the debtor.
A prescribed form is used to draft the statutory demand, and generally speaking, the statutory demand must provide details of the creditor, the debtor and the debt owed.
The statutory demand gives the debtor 21 days to pay the debt and contains a warning that if the debt is still not paid, winding-up proceedings may be commenced.
It is always best to instruct an experienced debt recovery solicitor to draft and serve the statutory demand to ensure the correct process is followed.
Although serving a statutory demand on the debtor is not mandatory, failing to respond to it can serve as compelling evidence of the debtor's inability to repay the debt.
In such cases, if the debtor continues to disregard the statutory demand and winding-up proceedings are initiated, the Court may use this lack of response as a basis to issue a winding-up order.
To bring winding-up proceedings, several documents must be prepared and filed with the Court and served on the debtor so that the Court can decide at a winding-up hearing whether a winding-up order should be made.
It is always best to instruct an experienced debt recovery solicitor to deal with winding-up proceedings, as the process can be very complicated.
Winding-up petition
Your application to the Court is known as a "winding-up petition".
If your application to the Court is successful, then:
- The debtor's assets are sold;
- Any legal disputes are settled;
- Any monies owed to the debtor are collected in; and
- Funds are paid to you and any other creditors, although you may not get all or any of the money you are owed depending on the debtor's financial position.
From the point of view of a creditor, commencing winding-up proceedings should be regarded as a last resort, and generally speaking, the winding-up procedure should not be used as a means of enforcing the debt when other processes, such as issuing Court proceedings or alternative dispute resolution (ADR) may be more appropriate.
However, the refusal by an otherwise solvent company to pay an undisputed debt entitles a creditor to present a winding-up petition.
For this reason, the courts have acknowledged that insolvency proceedings may be used in certain circumstances as a method of debt collection.
For more details about the key factors which need to be considered when deciding how to pursue a business debt, please check out our previous blog.