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Getting your insolvency instruction off to the right start

06 October 2016

Our debt recovery experts provide guidance on whether insolvency proceedings against a debtor are suitable and six top points to flag to your legal representative.

While it still holds true that insolvency should not be used as a debt collection tool, in our experience it remains one of the most effective ways of recovering funds quickly from a debtor who is solvent but unwilling to pay their debts.

In debt recovery generally and in insolvency in particular, time is of the essence. Your legal representative will be happy to investigate the position and report back once they have considered your papers, however, if you take a little time at the outset to consider the questions below, you should avoid some of the usual email “tennis” that inevitably follows an instruction and be able to act quicker. At the very least you will be better equipped to discuss the particular nuances of your case with your legal representative.

1. Is the debt a liquidated debt?

This is important because a statutory demand, as a necessary prelude to bankruptcy proceedings can only be served in respect of a liquidated debt. A liquidated debt is a debt for a specific amount which has been fully and finally ascertained. Other than a Judgment, the most obvious example of a liquidated debt is an unpaid invoice for goods sold and delivered. If your claim is for damages for breach of contract, then those damages cannot form the basis of a statutory demand unless they can be ascertained by reference to a contractual liquidated damages clause. Conversely, a winding-up petition may be based on an unliquidated debt (such as a claim for damages) but a short-form demand (as opposed to a formal statutory demand) may be appropriate in such circumstances as a prelude to a winding-up petition.

2. Is the debt payable immediately?

If you intend to petition for a debtor’s bankruptcy owing to the existence of a debt of £5,000.00 or more which is payable immediately, you need to be certain that the debt is actually due and payable. Similarly, if you are owed £750.00 or more by a company and you intend to petition for its liquidation because it is unable to pay its debts as they fall due, then you will need evidence. Unless your terms and conditions provide that all invoices, regardless of age, will fall due in the event of late payment, then you can only rely on those invoices where your customer is outside of their credit terms. This may seem obvious but, from time-to–time, I am still instructed to petition for unpaid invoices that are not overdue.

3. What is your entitlement to interest?

Do your terms provide a contractual remedy for late payment? If there is no provision or the remedy is not “substantial” then you may be able to rely on the late payment legislation to demand compensation and interest on the unpaid debt at 8% above the Bank of England base rate. Your legal representative will be able to advise you if you are unsure.

4. Is the debt secured?

In a statutory demand on an individual (but not on a corporate entity) it is necessary to state whether you hold security for the debt. If, for example, you have already obtained a charging order then you will need to provide details of the security and its value at the date of your demand. You will also need to ensure that you are prepared to forego your security for the benefit of all the debtor’s creditors in the event a bankruptcy order is made. Alternatively, you will need to accept that your petition cannot be made in respect of the secured part of the debt.

5. Are you ready to incur costs which may benefit other creditors?

Insolvency proceedings are a “class-action” for the benefit of all creditors. Just because a bankruptcy or winding-up order is made on the back of your petition, it does not follow that you will be at the front of the queue when it comes to realisations in the debtor’s estate. While your petitioning costs may be paid as a priority, when it comes to your debt you will rank equally alongside the debtor’s other unsecured creditors. In short, you should not expect to benefit from the insolvency to the detriment of another unsecured creditor.

6. Are you prepared to play a long game?

If a debtor is unable to settle a petition debt then the Court will make a bankruptcy or winding-up order. The point at which the order is made against the debtor is often the start of a lengthy process and you should not expect instant results. The Trustee’s administration of an insolvent estate is a complex process and although your legal representative will keep you informed of developments as they occur, it will often be several months from the date of the order before there are any substantial developments.

Author: Duraid Al-Musaied