What Is A Charging Order? Insolvency Guidelines
Cash flow is key to the running of business operations, so unpaid customer invoices can create significant challenges… There are several ways to recover the debt and with that in mind, you may be wondering – what is a charging order and can it help?
According to a survey from Capital on Tap reported by On The Tools, businesses in the UK are due £7.4bn in overdue invoices.
Customers failing to pay their invoices is frustrating but beyond that, it can potentially damage your business’ financial stability. There are several ways to address this, one of which involves issuing a charging order.
And according to data from The Business Disputes Register, late invoice payments are the cause of one in five insolvencies.
By the same token, if your business buys a product or service and fails to pay an invoice, that could put the seller in a difficult position. Again, one legal mechanism a creditor can consider when in such a situation is a charging order.
In this blog, we’ll take a closer look at the debt recovery options, including charging orders.
Debt recovery options for unpaid invoices
Ultimately, there are several steps that any creditor should take before considering a charging order, which is a court-issued and therefore, very serious.
Starting from when a customer first misses an invoice payment deadline, these are options worth exploring before escalating the situation:
- Send reminders in writing: If the customer ignores these or promises to pay but again fails to do so…
- Try speaking to them: A call or face-to-face contact could help reach a resolution
- Consider commercial mediation: A third party tries to resolve the issue
- Commission a debt collection agency: Note that if your business owes money to the government, we recommend reading our guide on HMRC debt management and collection
- Issue a letter before action (LBA): This is a formal warning that court action is imminent if the customer does not pay by a stated date
- Apply for a county court judgement (CCJ): For more details, read our guide to find out: What is a CCJ?
If none of these processes are successful, creditors are entitled to consider enforcement measures, including charging orders. For more details, find out what bailiffs can take from a limited company in debt.
What is a charging order?
A charging order is a legal tool that allows a creditor to secure a debt against a debtor’s property.
Note that while, in general, property refers to real estate such as a house or commercial property, it can include other valuable assets, such as shares.
Put simply, a charging order ensures a creditor has a claim on the property, should the debt remain unresolved.
A court may issue a charging order following a CCJ against the debtor – this judgement would confirm the debt is valid and there is a legal right to enforce it. Following such an order, if the debtor does not pay what is owed, the creditor can apply to the court for a charging order to be put in place.
One can consider a mortgage to be somewhat similar, in terms of its legal mechanism, in that there is a legal charge placed on a person’s property.
When to consider a charging order
If a customer is not paying their invoice, pursuing a charging order may not be the first course of action.
Communication, informal negotiation… These are the first steps to make. Payment plans or other dispute resolution methods may, in fact, be feasible and satisfactory to all parties.
However, if these approaches fail and the debt remains unpaid, obtaining a CCJ and subsequently applying for a charging order may be the most appropriate next step.
By securing the debt against their property, creditors may increase their chances of eventually recovering the amount owed.
For instance, if the debtor decides to sell their property, the outstanding debt must be repaid before the proceeds are distributed.
The process of obtaining a charging order
To secure a charging order, a creditor must follow a structured legal process.
- This typically begins with obtaining a CCJ, which confirms the legitimacy of the debt and once it is in place, the creditor can apply to the court for a charging order.
- It involves filling in form N379 or N380 for a charging order against stocks and shares.
- If this is granted, the debt is temporarily secured against the debtor’s property while further proceedings take place.
- The debtor will be notified of the interim charging order and given an opportunity to object. If no valid objections are forthcoming, the court may then issue a final charging order, which officially registers the debt against the property.
- At this stage, the creditor has the option to enforce the order by requesting a sale of the property, although this step requires additional legal action and court approval.
Applying for and enforcing a charging order can be a time-consuming and costly process.
With this in mind, businesses should weigh the potential recovery of the debt against the expenses involved versus the possibility of other debt-reclamation options being effective.
Final thoughts: Late invoice payments and insolvencies
As mentioned earlier, there is a well-established link between late invoice payments and insolvencies.
There is a clear knock-on effect. A business that does not receive payment for its invoices on time may subsequently fall behind on paying its own bills.
We recommend that any business unable to pay its debts when they fall due makes contact with an experienced insolvency practitioner, without delay.
If there is a way for the insolvency practitioner to rescue the company, a company voluntary arrangement (CVA) could save the business. This procedure lets a company continue to trade while paying back its debts via a structured agreement, while improving cash flow in the meantime and easing creditor pressure.
Alternatively, if business recovery is not feasible, a creditors’ voluntary liquidation (CVL) is a much better option than a compulsory, forced one. In a CVL, to repay creditors as much as possible, the insolvency practitioner turns a business’ assets into cash.
With a team of highly qualified insolvency practitioners and chartered accountants, and a wealth of hands-on business experience, Hudson Weir understand the pressures of such a situation – and can help you try to chart a route out of it.
For more information on charging orders, or if your business is struggling to clear certain debts, please don’t hesitate to contact us.
