debt recovery and insolvency
This note is not intended to be a definitive guide to the law. For further information contact David Vaughan-Birch.
There are a variety of measures that can be taken to reduce exposure to bad debts, and to ensure collection is more effective. The first is to check the terms and conditions that your business uses to ensure they are modern and comprehensive. They might include provisions for interest, time for payment, and retention of title clauses. Secondly an effective credit control procedure should be introduced, to take advantage of them. Finally, there are a number of methods of debt collection, which can be tailored to suit the particular case. These may include using the Court system, and more details on the types of Court and enforcement methods are to be found in our note on the subject.
The threat of insolvency can be a rapid and cost-effective means of debt collection. When a bankruptcy or winding up order is made, it is published in the London Gazette and soon comes to the notice of banks and other lenders which may make obtaining credit or loans very difficult. However, insolvency itself is not, strictly speaking, a means of debt collection. It is intended to bring the liabilities of a Debtor (personal, partnership or corporate) together so that they can be administered together by a trustee, and to satisfy the demands of the creditors as far as possible from the Debtor’s assets. Once a bankruptcy or winding up order is made, the debts are crystallised and cannot be enforced further against the Debtor (unless they are secured as secured debts are enforced against the security by the Creditor). The assets are collected and distributed according to a statutory scheme that ranks creditors according to their types. Ordinary unsecured creditors are paid a dividend from the remaining assets, proportionate to the amount owed.
bankruptcy (personal insolvency)
A statutory demand can be served if the amount due exceeds £750. It must be served personally on the Debtor, unless unsuccessful attempts have been made and the Court grants an order for "substituted service" by post or by leaving the demand at the Debtor’s last-known address. If the Debtor disputes the amount claimed it is possible to apply to the Court to set the demand aside. The Court may grant the application if it is satisfied the Debtor has grounds to dispute the debt (for example the goods supplied by the Creditor are faulty), or there is a set-off or counter-claim, or “for any other substantial reason”. The Court may order the Creditor to pay the costs of the application if it finds the statutory demand should not have been served.
The Debtor must apply to set aside the demand within 18 days of service of the statutory demand; after 21 days of service the Creditor can issue a bankruptcy petition. The Court charges a fee, and there is also a deposit payable (which is returnable in the event that a bankruptcy order is not made). The Court will set a date for the hearing of the petition, and the petition must again be served personally (unless the Court orders substituted service).
The Court will make a bankruptcy order if it is satisfied the debt is due and unpaid, and the Official Receiver is then informed. The Official Receiver interviews the bankrupt, with a view to determining the extent of his assets and liabilities. Depending on the outcome of his enquiries he may choose to appoint a Trustee in Bankruptcy to deal with the bankrupt’s Estate (the Trustee’s fees are paid by the Estate, after the costs of the bankruptcy application).
winding up (corporate insolvency)
The procedure for corporate insolvency is similar to bankruptcy, but the statutory demand can be served by post on the registered office of the Debtor company. As with personal insolvency the assets of the company are distributed according to the rank of the creditors and the amount claimed, but a liquidator appointed by the Department of Trade and Industry undertakes the distribution of the assets .