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Ally Tow
Ally Tow,
Court proceedings or insolvency proceedings
23 September 2013

A common dilemma for creditors is whether to pursue court proceedings or insolvency proceedings when endeavouring to collect an unpaid debt. In difficult economic times it is important to ensure that effective debt recovery is a priority for all businesses. In this article we set out some of the advantages of pursuing your debtors by way of insolvency proceedings rather than court proceedings.

Initially it is important to give consideration as to whether your debt is disputed and/or whether the sum owed is for £750 or more. If the debt is disputed on grounds that are considered substantial rather than merely fanciful and/or is for a sum less than £750 then insolvency proceedings cannot be issued and you will compelled to pursue court proceedings.

But what about in other cases? When do you favour insolvency proceedings? Broadly speaking this will depend on the level of the debt and the debtor’s financial position, whether perceived or otherwise. If you are of the view that the debtor may be in financial difficulties but it is not yet insolvent, then pursuing the insolvency route can be a very powerful and effective method of enforcement – after all you will be threatening the very existence of your debtor’s business.

If you are pursuing an individual then prior to the issue of insolvency proceedings it is necessary to serve a prescribed form of statutory demand personally upon the debtor giving them 21 days to pay the debt. However, such a requirement is not necessary upon a corporate debtor. At Boyes Turner, provided you can provide a fax number and/or email address we recommend the use of a 48 hour letter of demand. This can be a quick, effective and relatively inexpensive method of collecting your debt.

Of course, not every case is going to result in payment upon receipt of the statutory or letter of demand and, in some cases, the decision will have to be made to issue proceedings. Insolvency proceedings themselves are expensive with large court fees having to be paid just to issue the proceedings. It is for that reason that we recommend the process is only used for your more substantial debts, notwithstanding the £750 financial limit.

Insolvency proceedings are commenced by the issue of a petition and it is important to remember that once issued it can only be withdrawn with the court’s permission. Only one petition can be issued against a debtor at any one time and the rules therefore permit other creditors to file notices supporting (or indeed opposing) the petition. With permission from the court these creditors can pursue any petition issued by you even if you subsequently decide you do not want to pursue the petition.

With corporate debtors, any petition must be advertised (usually in the London Gazette) before the date fixed for the hearing of the petition (which is usually about three months after issue). However, to enable the debtor to have an opportunity to settle the petition debt the creditor is prevented from advertising the petition for a period of seven working days after the date of service of the petition on the debtor (“the hiatus period”). Whilst it may still be possible for other creditors to find out about the issue of the petition (for example by calling Companies Court) many debts are paid during the hiatus period. If so paid, providing there are no supporting creditors, the courts will usually grant permission to withdraw the petition upon the filing of a short written application.

As a consequence of pursuing insolvency proceedings, many debts are often paid within about 3 weeks of the date of receipt of your instructions by your lawyers (or about 5 weeks if a prescribed form of statutory demand is served). If, on the other hand, you were to issue court proceedings, a letter before action giving (usually) a minimum of 7 days notice of your intention to issue proceedings would need to be sent and it may be anything up to 6 weeks from the date of receipt of your instructions before we are in receipt of a default judgment. Once that judgment has been obtained it would still be necessary for further steps to be taken to enforce the judgment.

Whilst insolvency proceedings are, without doubt, expensive (and issuing them can be somewhat of a commercial gamble as they may just result in your debtor being wound-up or made bankrupt with no recovery whatsoever in respect of your debt), they remain an effective method of debt recovery. In those cases where the gamble pays off and you find that the debtor can in fact pay its debts as they fall due, insolvency proceedings are a quick and effective method of debt recovery. We would recommend that you give consideration to the use of insolvency proceedings for all your substantial debtors where such proceedings could be issued.

For more information about this case or to find out more about how the Dispute Resolution team can help you please contact Ally Tow on 0118 952 7206 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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