Business Debt Management Bankruptcy / Insolvency

· Background
· Factors Relevant To Decision
· Overview Of Procedure

As a debt recovery tool, insolvency is usually only worth considering if it is likely to lead to payment before a final order is made. In a successful case you would expect the full debt and all your costs to be paid.

Background

Under the Insolvency Act 1986 an insolvent individual or a company which is unable to pay its debts as and when they arise are vulnerable to insolvency proceedings being taken against them by a creditor who is owed more than the statutory minimum sum (currently £750).

In simple terms, once a bankruptcy or winding-up order is made, the assets of the individual, partnership or company are taken over and distributed, first to preferential and secured creditors and then to unsecured creditors proportionately to the debt owed.

The petitioner is in no better position than any other unsecured creditor and frequently there are insufficient funds available at the end of the process to discharge the full debt. As a result, careful thought is required before deciding to follow this route. Back to menu.

Factors Relevant To Decision

The creditor will first take into account the debtor's ability to pay. The chief objective is to use the procedure to impose sufficient pressure on the debtor to put this debt to the top of the list. If they are actually unable to pay, this objective will not be achieved. Sometimes however, it is only by starting along the insolvency route that a creditor will actually find out the debtor's true financial position. The creditor should therefore regard the process as being inherently risky, though often producing spectacular results.

The size of the debt will also be a major factor. Obviously it needs to exceed the statutory minimum. In addition, the cost of the procedure and the risk of non-recovery of those costs should the debtor prove to be insolvent will usually mean that this remedy is one of last resort.

The insolvency remedy may well be appropriate in cases of great urgency. If the debtor suddenly falls way behind terms or if you become aware that other creditors are taking action against them, or if they tell you that they are having cash flow problems, you may turn to insolvency as a way of getting ahead of the queue.

The insolvency courts do not like being used for debt recovery purposes. They put up with it if the claim is not disputed. However, if the debt is disputed the court will dismiss the petition (leaving the creditor to pursue their action through the normal courts), often ordering the creditor to pay the debtor's costs, even if the creditor had been unaware of the dispute at the outset. This tends to add insult to injury. Back to menu.

Overview Of Procedure

In an action against an individual or partnership the process must begin by statutory demand. This is a form in which the claim is set out. Interest can usually be claimed. It warns them that bankruptcy proceedings may be commenced after 21 days. The statutory demand is served by hand. The costs of preparing and serving the demand are usually not claimable. Often the matter is settled at this stage.

It is not necessary to serve a company with a statutory demand before commencing proceedings. Often the time spent waiting for the 21 days to expire could wreck your prospects of a successful recovery. However there are times when it might be useful, and we will advise you appropriately.

If the claim is disputed, you should expect to receive a warning letter threatening to make an application to the court to set aside the statutory demand or for an injunction preventing a petition from being issued. This letter should be taken seriously since it signals that you may soon be vulnerable to an order for costs being made against you.

The next stage is to issue the petition (bankruptcy or winding-up petition) in the court. A court fee and a substantial deposit are payable at this stage. The deposit is intended to cover the costs of the trustee in bankruptcy or liquidator in carrying out their duties. Generally it will be repaid if the matter settles before a final order. The court returns the petition to us for service. It is endorsed with the hearing date. The petition will be served by hand.

In an action against a company the next significant step is the advertisement of the petition in the London Gazette. This is generally catastrophic for the company since its bankers will become aware of the petition and will freeze the account and call for the payment of directors' guarantees. Other creditors may also become aware of the petition and serve notice of support. Once this happens the prospect of being paid will have disappeared. As a result the advertising of the petition is generally left as late as possible, usually the week before the petition is due to be heard.

After service of the petition you may expect to enter into fairly active negotiations with the debtor - or you may even be offered payment. It is important not to just take a cheque. A draft will be ideal. This is to minimise your risk that the payment will be set aside later for being a preference.

Sometimes you will be offered a payment plan. You need to be wary about this. It is not usually possible to postpone a bankruptcy or winding up hearing more than once to permit a payment plan to take place.

If no payment is forthcoming you will have to decide whether to go the expense of completing the process - advertising the petition (if against a company) or attending the hearing to seek an order. If the debtor has not made any offer, the chances are they are insolvent. Your gamble may have not paid off and further expenditure may be a waste of money. We will advise you whether your interests are best served by pressing ahead or by pulling out. Back to menu.

Why not call for a quote on 01273 403935 or e-mail details to: jastbury@astburys-law.co.uk