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29 October 2015

Unpaid debt: Insolvency proceedings

Article relates to Unpaid debt: statutory demand or claim form?

An alternative to issuing a claim is to go down the insolvency route. The starting point with insolvency proceedings is that they are not intended to be used for debt recovery (however, the threat of insolvency proceedings may be enough to persuade some debtors to settle their debts).

The type of insolvency proceedings that may be suitable will depend on whether the debtor is an individual or a company. In either case the debt must not be genuinely disputed. The 'end game' would be to obtain a bankruptcy order against the debtor (if debtor is an individual), or a winding up order (if debtor is a company).


Bankruptcy is a court procedure which begins with the issue of a bankruptcy petition. A creditor of an individual has the right to issue a bankruptcy petition which is then presented at court.

Typically a petition is issued if the debtor appears to be unable to pay their debts as they fall due.

Although ultimately a question of fact, a court will presume that a debtor cannot pay his debts if the debtor fails to satisfy a statutory demand served on him by the creditor. A statutory demand is a written notice in a prescribed form demanding payment of a debt within 21 days. It is not necessary to serve a statutory demand before presenting a bankruptcy petition if the debt arose under a judgment or court order, and execution has been unsuccessful.

An individual debtor who disputes the debt set out in a statutory demand can apply to the court to have the demand 'set aside'. Such an application will be granted where the court suspects the debt is genuinely disputed.

Assuming 21 days have passed since the service of the statutory demand and the debtor has failed to pay the sum demanded and has not applied to the court to have the demand set aside, the creditor may then present a bankruptcy petition at court. The court will then decide at a hearing whether to make a bankruptcy order.

A bankruptcy order will result in an individual becoming bankrupt. The debts of the bankrupt estate will then vest in a Trustee in Bankruptcy whose primary function is to realise the value of the assets within the debtor's bankrupt estate and to distribute the asset realisations to satisfy, as far as possible, the debtor's bankruptcy debts.

Winding up a company

Winding up is a court procedure which begins with the issue of a winding-up petition. A creditor of a company has the right to issue a winding up petition which is then presented at court. The court will decide at a hearing, whether to make a winding up order.

There are various grounds on which a company may be wound up, including that the company is unable to pay its debts. Serving a statutory demand, which a company then fails to comply with, provides one way of establishing a company's inability to pay its debts. There is no procedure for a company to apply to set aside a statutory demand served on it, however the equivalent remedy available would be for the debtor company to apply to court for an injunction to restrain the presentation of a petition.

If a winding up order is made by the court, various consequences will occur automatically such as the Official Receiver becoming the liquidator of the company. Each of the company's creditors will be invited to submit a proof of debt to the liquidator. To the extent that the liquidator accepts its proof, each creditor is entitled to a dividend at the end of the liquidation process.

Positives of insolvency route:

Preparing and serving a statutory demand is relatively cheap and quick and does not involve the court (assuming you don't run into dispute).

Having served a statutory demand, there is no obligation to subsequently commence winding up or bankruptcy proceedings - the insolvency route is therefore often merely chosen as a threat to elicit a quick payment from the debtor.

Negatives of insolvency route:

Most importantly, it will not give you a private remedy to enforce, in the same way that obtaining a judgment would. Just because you issued the petition, you will rank alongside other unsecured creditors (and below any secured creditors), once an order is made.

If a bankruptcy or winding up order is made you may receive only a small proportion of your debt, or possibly nothing at all; you may not even get back your costs of the insolvency process. The amount you receive will depend on the assets of the debtor and the number and type of other creditors.

The insolvency process should not be used where the debt is genuinely disputed as the court will consider this to be an abuse of process. An individual debtor could apply to the court to set aside your statutory demand and you could be ordered to pay costs. Similarly, a debtor company could seek an injunction restraining the issue of a petition and you could be ordered to pay costs.

In liquidation or bankruptcy, there is likely to be a substantial delay before a dividend is paid to unsecured creditors.

The Insolvency route may not be used where your debt is less than £750 for companies, or £5,000 for individuals.

Option 1: Unpaid debt: issuing a claim

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