Insolvency proceedings can be used as a means of enforcement. Once a creditor (i.e. the person or company to whom money is owing) has attempted to enforce a judgment and that judgment remains unsatisfied, it is evidence that the debtor (i.e. the person or company that owes money) is unable to pay their debts.
A creditor who finds that they have to use insolvency proceedings after they have used litigation unsuccessfully is probably a creditor who made inadequate enquiries before commencing the claim in the first place. They will often find themselves in the position of having sued a person, who was not worth suing, and the litigation was probably a waste of their time and money. The time to decide on whether or not to commence insolvency proceedings is before litigation, not afterwards.
In the case of undisputed debts, a creditor has a choice. They can serve a statutory demand and follow it up by insolvency proceedings. Alternatively, they can send a letter before action and follow it up with court proceedings followed by an application for summary judgment, and then take the usual steps to enforce that judgment if payment is still not forthcoming.
In the case of an undisputed debt there are 2 stages:
- The service of a statutory demand on a debtor; and
- If payment is not made, the issue of a bankruptcy or winding up petition.
The advantages of the insolvency route
Many debtors are not particularly worried about the prospect of being sued. Court proceedings take time and cost the creditor money. Although the creditor may get an order for costs, this will not cover all their legal costs, so they will never recover the full amount of the debt because they will have to use part of it to pay their unrecovered costs. The debtor will also have to pay interest on the debt from the time proceedings were issued, but they may regard this as an acceptable price to avoid paying the debt for a few more months. There may also be scope for negotiating a reduction in the debt during the proceedings.
Most importantly, the majority of litigation is not public. It is unlikely to become public knowledge that the debtor is being sued, and anyone who does learn of this may not be unduly worried by that knowledge, given that most businesses are involved in litigation at some time or other.
However, insolvency proceedings are public knowledge. Petitions are advertised, and credit reference agencies take note of such advertisements and pass the information on to their customers. This will affect the debtor’s ability to obtain credit in future and this will damage their business, possibly irreparably.
For many debtors, it is no surprise that the threat of insolvency proceedings is far more potent than the threat of litigation and is more likely to result in an immediate payment.
The disadvantages of insolvency proceedings
A statutory demand is fine if it produces payment. The problem arises if the debtor still does not pay. The creditor then has to decide whether to take the matter further by issuing insolvency proceedings. If they do issue a petition, they will have to advertise it. This will result in all the other creditors joining in to pursue their claims, and it may then become impossible for the creditor who initiated the proceedings to recover all of their debt. Indeed, if they are an unsecured creditor and are not a preferential creditor, they may end up with little or nothing.
Disputed Statutory Demand
In personal insolvency cases, the debtor can apply to set aside the statutory demand.
There is no formal procedure for setting aside a statutory demand served on a company. However, given the devastating effect which a winding up petition can have on a company’s business reputation, and the right of a company to protect its legitimate business interests, the courts will grant an injunction to restrain the presentation of an unjustified winding-up petition.
The grounds for seeking an injunction to restrain a winding-up petition will usually be that the debt is disputed and that the statutory demand was therefore an abuse of process.
If you are served with a statutory demand then it is important that you act fast. You only have 18 days from receipt of the statutory demand in which to apply to set aside the statutory demand or to seek to restrain the presentation of a winding up petition. If you receive a statutory demand at any point, we will discuss any work required and provide you with advice about the legal costs associated with defending your position.
If the statutory demand is set aside, or if an injunction restraining the petition is granted, the creditor will almost certainly be ordered to pay the debtor’s costs.
If you are faced with any type of insolvency claim please contact our team on 01226 210 000, if you would like to discuss the ways in which we may be able to assist you or your organisation.