Recent analysis by Begbies Traynor shows that more than half of UK businesses are carrying “toxic debt” that they might struggle to repay over the next 12 months. What if the company you are thinking of suing, or that is suing you, is one of them?

Would-be claimants need to think about the defendant’s ability to pay before issuing proceedings. Otherwise they might just be adding unpaid litigation costs to the monies owed to them. If the defendant company becomes insolvent, a judgment debt will not rank higher than any other unsecured debt owed by it. Think about what you know about the company – are there any warning signs that they might be facing financial challenges? You can check the insolvency register to see if the company has been made insolvent, and The Gazette to see if insolvency proceedings have been started against it. You can get some idea of a company’s financial health by looking at its latest accounts, but these might be out of date, or for new companies they may not have filed any accounts yet. Depending on the type of claim, the company may be insured against it. You can search at the Land Registry for a list of all properties owned by a company and see if there are any debts secured on them.  

If you decide not to sue because the risk of non-recovery is too great, remember that you might be able to sue later if the defendant looks in better shape financially - for most claims you have six years from the date of the breach of contract, or the date you suffered damage from a wrong they did you, to issue proceedings (although there might be a shorter contractual time limit). The downside is that the evidence for your claim will be less fresh and may be harder to gather together and so might affect your ability to present your case.

If you are a defendant to a court claim and you think the claimant company is struggling financially, then consider if you can show that there is reason to believe that it will be unable to pay your costs if ordered to do so. If so, you may be able to get security for costs, which is where the court orders a corporate claimant to pay into court an amount as security for the costs that it would have to pay you if you were successful in your defence. A successful security for costs application can often mean the end of the claim.