Brendan Clarkson explains how creditors, particularly HMRC, can use a notice of enforcement to recover debts, and the actions debtors need to take in response.

A notice of enforcement (previously known as a distraint order notice) is a formal document that a creditor can issue to a debtor, giving warning that it is preparing to take action to recover money owed. The notice gives the creditor the power to take control of a debtor company’s goods and sell them at auction in payment, or part payment, of unpaid debts.

Notices of enforcement are particularly useful to HMRC. Unlike most other creditors (apart from landlords), HMRC can issue a notice of enforcement without having to obtain a court order. This is therefore a useful mechanism for recovering unpaid tax debts. However, other creditors can go down the notice of enforcement route, as long as they go through the court. The associated costs mean that this option is most likely to be used where debts are substantial.

What does a notice of enforcement achieve?

The notice will specify a period of time (seven days) in which the debtor must settle their debts, or reach agreement to do so. If the debtor does not settle within the seven days, the creditor’s next step is to seek a controlled goods agreement.

What is a controlled goods agreement (CGA)?

Previously known as a walking possession agreement, a CGA identifies the goods that could be taken to be sold in order to settle the debt. The agreement will include an estimate of the goods’ realisable values.

By signing a CGA, the debtor gains an extra seven days to pay their debts in full. Refusal to sign means that the creditor’s agent can arrange for the immediate removal of goods. The goods can also be seized at a later date if the debtor signs the CGA, but still fails to pay their debts in full in time.

The CGA is legally binding. Once a director of a debtor company has signed the agreement, it is illegal for them to remove any of the listed goods.

Can any goods be seized?

There are clear rules around what can and cannot be seized. Items that cannot be seized include:

• Hired/rented goods that do not wholly belong to the defaulter.
• Items where there is a possibility of causing damage, such as fixtures and fittings that cannot be removed without damaging the building.
• Fresh/consumable goods: perishable goods, livestock or growing crops.
• Loose change: money or cash on the premises.
• Safety equipment: such as a fire extinguisher.
• Tools of trade: such as tools, implements, motor vehicles and other items or equipment that are used in the business (where alternative assets are available).

It is important to note that protection for tools of trade is not guaranteed, even for necessary tools or equipment without which the debtor cannot carry on their business. An enforcement agent can potentially seize these if there are insufficient, or no other, distrainable goods.

What should you do if you receive a notice of enforcement?

First, make sure that you always respond to warning letters and threats of distraint – never ignore them. If you are concerned about your ability to settle the debts in question, seek the advice of a professional accountant or insolvency practitioner. They may be able to help you to negotiate with your creditor.

If you are visited by an enforcement agent, check who they are. If a tax bill is in dispute, you should contact the HMRC office that is demanding payment immediately. Also, check that the tax debt is not under appeal – if it is, you should ask the HMRC enforcement agent to leave, because your goods cannot be seized.

Remember that the safest way to avoid the risk of distraint is to pay your debts when they fall due. If your business is struggling to pay its creditors, seek professional advice. If you need more time to pay certain debts, it may be possible to put in place a rescue plan, such as a company voluntary arrangement.

Alternatively, a notice of liquidation or a notice of intention to appoint a liquidator can prevent goods from being removed under a CGA.

About the author

Brendan Clarkson is head of national creditor services at Moore Stephens LLP.