Insolvency and Debt Collection
If a debtor does not make payment on demand and the debt is not disputed, they are technically deemed insolvent. If you are concerned that your debtor may have other creditors chasing payment from them, commencing Winding Up Proceedings against a company or Bankruptcy Proceedings against an individual means you could jump straight to the front of the queue for payment.
Instead of the usual process of issuing a County Court Claim, you can commence insolvency action by initially sending a Draft Winding Up Petition to a company or a Statutory Demand to an individual. On average 81% of cases are paid at this stage without further insolvency proceedings being issued.
As a result of changes from 1st October 2021, you can only start insolvency proceedings against a company if the debt is more than £10,000, does not relate to sums due under a commercial tenancy agreement and you have given the debtor a 21 day notice.
Draft Winding Up petitions are drafted by us and accompanied by a letter to the debtor requesting payment in accordance with the 21 day notice requirements. A warning is also included, stating that if payment is not forthcoming, the petition will be presented to Court. This almost always has the desired effect, as the debtor will of course want to avoid the cost, stress and inconvenience of going to Court.
When a full petition is issued, the Court will seal the petition and give a date for a Court hearing. The petition is then served upon the company. The petition can be advertised in the London Gazette 7 days after service and this will freeze the debtor’s bank account therefore, there is an incentive to make payment as quickly as possible.
Once the petition has been advertised, other creditors may wish to support the petition. Care is needed in any withdrawal after advertisement, as the Court will require an explanation.
In order to start insolvency proceedings against an individual, the debt must be worth more than £5,000 and it has to be undisputed.
The first step in the process is to issue a Statutory Demand. This sets out the basis of the debt and gives the debtor 21 days from service to pay. It must be served personally on the individual, and service proven.
If the debt is not paid (and no application is made by the debtor to set it aside) then the next step is to issue a bankruptcy petition to the Court. The Court will give a date for a hearing and the bankruptcy and the petition should also be served personally, and proof of service must be produced to the Court.
All formalities must be strictly complied with to be successful in obtaining an Order at the hearing of the Petition.
What if the debtor Company is wound up or an individual is made bankrupt?
If the debtor is made insolvent, the matter is passed to an Official Receiver and typically an Insolvency Practitioner is then appointed. If the debtor has assets, the Insolvency Practitioner will look to turn these assets into cash and then divide any funds between the debtor’s creditors.
Watch out for disputes!
It is important that the debt is not disputed, as any dispute will halt the process and you may have to pay the debtor’s costs. Furthermore, there can be significant costs involved in this process as there are not just court fees to pay but also a deposit must be paid to the official receiver. On the plus side, this is a very public process as winding up petitions are always advertised in the London Gazette, and the prospect of the potential negative publicity arising from this can incentivise the debtor to pay up as soon as they receive the statutory demand, or a draft petition with accompanying letter.
Since insolvency is often a complex process please take advice in advance to determine if a statutory demand or draft winding up petition could be the best way to proceed on any given case.