Preventing legal action being taken by creditors
When could you face legal action?
If you fall behind on payments or fail to settle an invoice on time, you could end up being taken to court by your creditors or suppliers. Normally you’ll be given fair warning of any decision to take legal action, as this is just as costly and time consuming to instigate as it is to defend. So, in general, a legal solution will only be sought after various other measures have been taken to have a debt repaid or resolve any payment disputes.
The importance of preventing legal action by creditors
It’s vital that you do everything you can to avoid legal action being taken by creditors. Not only can this damage your credibility but you can end up facing hefty legal costs, spending more time defending a case than concentrating on your business and even being tipped over the edge into bankruptcy. You should try and achieve a compromise solution and flexible negotiation is the key. Always make sure you are fully aware of any standard procedures adopted by larger creditors such as banks, as these are often more difficult to avoid due to higher levels of bureaucracy.
Steps you can take to avoid legal action
Ensuring that you have an effective set of terms and conditions when purchasing goods, services or credit protects your interests can give you some breathing space at difficult times. These could state payment periods or agreed rates of late payment interest which may otherwise be much higher. Remember that, as a business, you are expected to negotiate your own terms with other businesses, as you will often not benefit from automatic consumer protections.
The sooner you begin negotiations the better. If you allow a situation to spiral out of control, you may find that it’s impossible to reach a deal with creditors and you could face the situation of being asked to pay up immediately or face legal steps being taken. You can try and agree to a compromise such as a new repayment structure or set an extension date for payment. If you can persuade your supplier or creditor that your financial problems are short-term this may well be enough to allow the business relationship to continue.
Debtor protection legislation
The above outline of steps that a creditor or debtor might take should be read subject to the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020. Where they apply to a particular debt, they provide a breathing space by temporarily prohibiting a creditor from taking any step to obtain payment from a debtor.
A variety of documents which may help with preventing legal action being taken by creditors can be downloaded from our Business Documents Folder.