In our last blog regarding debt recovery, we discussed the options available to a person who is owed a debt using the Court’s enforcement procedures.
The alternative to enforcement using the Court’s procedure is to apply to make the Defendant or debtor (person who owes the debt) insolvent. The use of the insolvency is effective as understandably the prospect of being made bankrupt or wound up can be extremely daunting for any individual or company.
You as a creditor (the person owed a debt) can seek to make an individual bankrupt or a company wound up by either obtaining a judgment in the civil courts and then applying to the Insolvency Court, or simply by issuing a statutory demand onto a debtor directly.
The Statutory Demand
The purpose of a statutory demand is to enforce an undisputed and unpaid debt onto a debtor.
The objective of this process is to prove to the Court that the debtor is financially unable to pay their debts and therefore should be declared bankrupt.
A statutory demand can be served on an individual if they owe a debt exceeding £5000 or a company if the debt exceeds £750. The debt must not be more than 6 years old, and the debtor must not be subject to an existing bankruptcy order at the time the statutory demand is served, otherwise it will be invalid, and the Creditor may have to pay adverse costs.
The process of declaring a person bankrupt or a company wound up by way of statutory demand and a subsequent petition is as follows:
The creditor issues and serves a statutory demand which confirms various details about the debt such as the sum outstanding and the rate at which interest is accruing on that sum;
The debtor has 21 days to pay the debt or apply to set aside the demand;
If the debtor pays the sum outstanding the statutory demand will be satisfied, and the creditor cannot proceed with the bankruptcy petition;
If the statutory demand is not satisfied or set aside by the debtor within 21 days, the creditor has the ability to present a bankruptcy or winding up petition to the Insolvency Court once 3 weeks has elapsed since the demand was served (and no later than 4 months since the demand was served);
If the Insolvency Court is satisfied that the statutory demand was properly served and the debtor is unable to pay the debt outstanding, the debtor will be adjudged bankrupt or wound up.
The benefits of this process in comparison with issuing Court proceeding is that if successful, it is less expensive and take less time that seeking a judgment from a civil Court.
The Creditor should however be minded that the purpose of this process is primarily to make the debtor bankrupt/wound up, and not for repayment of the debt owed. The debt will only be paid if the debtor has funds to pay and they want to avoid being made bankrupt/wound up.
The risk of this process is that a creditor could be subject to an adverse costs order and therefore liable to pay the costs of the debtor if the debtor is successful in setting aside a statutory demand.
A statutory demand can be set aside on the basis that the debt has been paid, or it is disputed to be owed, or the statutory demand is defective/invalidly served. Any application to set the demand aside must be made by the debtor within 18 days from the date the demand is served. However, a debtor will not be precluded from raising an argument as to the viability of the debt at a hearing if they choose not to set it aside at first instance. In addition, the Court also has the ability to set aside the statutory demand.
Once a debtor is adjudged bankrupt or wound up, their assets (subject to certain exceptions) will be assigned to the trustee appointed in bankruptcy, and the debts owed will be paid off via the statutory order of priority, if the estate has funds to pay.
Therefore, in summary, the insolvency route comprises enforcement of an unpaid civil judgment in the Insolvency Court, or by way of issuance of a statutory demand and subsequent bankruptcy or winding up petition. Due to the potential of adverse costs against a creditor under either of the above routes, we recommend that you should seek the advice of a Solicitor before attempting to enforce a debt or seeking to make a person/company insolvent. A solicitor should first determine the financial viability of the debtor and if they have means to pay the debt owed.
Call us on 020 251 9900 to discuss your options.
