Bankruptcy and Winding-Up Proceedings
We often see terms such as insolvency, bankruptcy and liquidation used synonymously. Whilst these terms are related they mean different things.
Insolvency is used to describe both companies and individuals that are unable to pay their debts as and when they fall due. This is the definition of insolvency under s123 of the Insolvency Act 1986.
Bankruptcy is the process which relates to an individual. Where are individual is declared bankrupt by the Court and a bankruptcy order is issued by the Court, the Court has found that individual to be insolvent.
Winding up is the process which relates to companies. Where a company is wound up by the Court and a winding up order is issued by the Court, the Court has found that company to be insolvent.
Liquidation is the process by which an insolvent company’s assets are liquidated in order to pay its debts.
What are Insolvency Proceedings?
Insolvency proceedings are the processes by which an individual debtor is made bankrupt or a company is wound up.
For both individuals and companies the first stage of the process is a formal demand for payment. In the case of individuals this must be in the form of a statutory demand. For companies there is no specific requirement for the form that the demand must take, although this should be in writing.
Draft Winding-Up Petition
A draft winding up petition can serve as a formal demand for payment against a company. This can then be updated ahead of filing a full petition to wind up a company with the Court. This is often a very useful as it sets out details of the outstanding sums, together with any costs, late payment compensation and interest that may be due and sends a clear message to debtors that you unless payment or a satisfactory plan for payment is agreed that winding up proceedings will be commenced.
Draft winding up petitions typically elicit a rapid response from a debtor if they have previously not been communicative and often allows for matters to be resolved quite quickly without the need to incur the costs of filing a full petition with the Court.
Winding-Up Petition
A winding up petition when filed at Court is essentially a request to place a company into liquidation for the benefit of the creditors. This should only be pursued if the debt is not disputed and the creditor does not believe the debtor is able to pay the debt.
Winding up petitions are filed electronically with the Court through CE filing. Once the petition is issued by the Court the debtor must be served with the petition and notice of hearing and the hearing of the petition must be advertised in the London Gazette. The advertising of the petition is to allow other creditors of the debtor to support the petition if they wish to do so or simply to put them on notice of the proceedings.
If a company is wound up an official receiver or insolvency practitioner will liaise with the company’s director(s) and seek information about the assets of the company and start the liquidation process. Creditors will be invited to file a proof of debt. At the end of the process, after the official receiver or insolvency practitioner has deducted their costs, any residual balance will be distributed to the creditors.
Statutory Demands and Bankruptcy Proceedings
A statutory demand is a formal demand for payment. For companies the debt must be for £750 or more. For individuals the debt must be for £5,000 or more.
A statutory demand must be personally served upon the debtor. Once served, the debtor has 21 days to pay the outstanding sums or make satisfactory proposals for payment.
In the case of individuals only, the debtor will have up to 18 days to apply to set aside the statutory demand in the event that the sums claimed are disputed. This is not the case with companies. Companies will have to apply for an injunction to restrain a creditor from filing a winding up petition with the Court if the sums claimed are disputed. Although, typically debtors will request that the statutory demand be withdrawn in such circumstances and an undertaking not to file a winding up petition without a period of written notice.
If the debt is not paid (and no application is made by the debtor to set it aside or for an injunction) then the next step would be to file either a bankruptcy petition (for individuals) or a winding up petition (for companies) with the Court for issue.
Once the petition has been issued, the Court will issue a notice of hearing which would then need to be personally served with the petition upon the debtor or an officer of the debtor company. Proof of service must then be provided to the Court before the Court will grant a final order.
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