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The tactical use of insolvency proceedings to recover a business debt from a company

The default response of most businesses owed money by a company is to follow their standard debt recovery procedure, which typically involves chasing payment by letter and then issuing court proceedings to obtain an enforceable judgment.

Few will consider the alternative option of taking steps to have the company declared insolvent if the debt is not settled promptly, even though this could result in them getting paid in as little as 21 days.

For some businesses it will arguably be the draconian nature of insolvency action that will put them off going down this route.  For others it will simply be a lack of understanding about when such a course of action may be appropriate.

It is this second bar to the use of insolvency proceedings as a debt recovery aid that Lisa Waghorn, commercial debt recovery solicitor with Morlings in Kent, seeks to address in this article.

‘The tactical use of insolvency proceedings for debt recovery purposes may be advisable in a range of circumstances’, explains Lisa, ‘including in one off transactions where there is no ongoing relationship to preserve and you are confident that the money owed can be raised.’ 

‘Insolvency action may also be appropriate where you know the company’s coffers are empty and therefore your only chance of recovery is if the directors can be forced to make a personal contribution to company funds as part of an insolvency order.’

‘This could be the case where there is evidence to suggest that the directors have known for some time that the company is effectively bankrupt and yet have elected to carry on trading despite the harm this will inevitably cause to creditors’ interests, including yours.’

Qualifying criteria

In order to instigate insolvency proceedings against a company you must be owed at least £750 and the debt must not be disputed.  Advice should be sought to ensure this criteria is met to avoid the risk of your attempt at forcing insolvency being resisted and you becoming liable for payment of the debtor’s costs of opposition. 

Overview of the insolvency process

The first step in the insolvency process is to serve a statutory demand on the company’s directors giving them 21 days to settle the debt. 

The second step – assuming the statutory demand is not effective – is to issue a winding up petition officially seeking the company’s closure for non-payment of a debt above the insolvency threshold.

The third step is to attend a hearing at which the petition is considered and if all goes to plan a winding up order is made appointing an official receiver to collect in the company’s assets and use them to settle the company’s debts.

Potency of a statutory demand

Sometimes the service of a statutory demand alone will be all it takes to encourage payment to be made.  This is particularly likely where there is no good reason for payment being withheld and the company has credit agreements in place entitling the lender to withdraw credit facilities and insist on repayment of all outstanding sums where a statutory demand is served and goes unsatisfied.  

Imagine the impact a statutory demand could have on a company reliant on an overdraft or whose assets are heavily mortgaged.

Leverage of a winding up petition

The lodging of a petition for a winding up order can also act as a strong incentive for settlement as it marks the start of a small window of time within which the insolvency process can effectively be halted.  It is also the point at which details of the proceedings must be advertised which really ramps up the pressure on the directors to effect payment if possible and if not to make acceptable proposals for some sort of compromise arrangement.

Where the company is in serious financial difficulty it may be that the issuing of the petition forces the directors to seek professional advice and results in a company voluntary arrangement being mooted.  If so this should be considered carefully to see if it would result in a better outcome than you might otherwise expect to receive.

Even if the matter goes all the way to a hearing and a winding up order is made it is important to remember that you may still find yourself in a better position than you might otherwise have been in had you gone down the conventional debt recovery route.  This is particularly likely where action against the directors looks likely and they have deep pockets to help plug any shortfall in the difference between what the company owes and the amount likely to be raised from an asset sale.  

Conclusion

Insolvency proceedings may not be an obvious route to debt recovery or even an available option in every case.  However, where the criteria for seeking an insolvency order are satisfied the possibility of such action should always be considered and discussed with your lawyer to see if it might provide a more direct and ultimately fruitful route to helping you recover what you are owed.

If your business has debts which are providing difficult to get paid, please contact Morlings dispute resolution department on 01622 673081 or email us at advice@morlings.com to find out how we can help.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

For further information please call to speak to one of our experts on 01622 673081