The cost of debt recovery through the courts has sky-rocketed over recent years, with debts of £200,000 now setting you back an eye-watering £10,000 in court fees alone. This has caused creditors to apply an alternative debt recovery method – petitioning to wind up company debtors, or to bankruptcy individual debtors.
How does it work?
The creditor begins by making a demand against the debtor. If this is either ignored or challenged, the creditor files a winding up or bankruptcy petition with the court. If the debt remains unpaid, the debtor is either wound up or made bankrupt as appropriate. A third-party liquidator or trustee is subsequently appointed to the debtor’s assets, which are then distributed among all creditors. The creditor that made the application has their costs of the process paid as a priority, but they get no priority in relation to payment of the money that is owed to them..
Why does it work?
On the face of it, the fact a creditor has to share the assets of the debtor with other creditors seems to make insolvency proceedings unattractive. In reality, the value of debt recovery is often the threat of action rather than the action itself. Most debtors have money to pay debts, but have other priorities when it comes to spending it. Those that really have no money are not going to pay whatever is done. The difference with insolvency proceedings is that the threat carries greater weight than the threat of court proceedings. Insolvency proceedings have serious consequences, and a faster timetable that cannot be ignored for long. Even debtors that are in serious financial difficulty may end up scraping together some money in order to survive.
Should I use it?
First, you have to bear in mind that insolvency proceedings are only appropriate where there is an undisputed debt. If the debtor denies that they owe any money, court proceedings will still be necessary so the court can decide. Traditionally, compared to court proceedings, insolvency proceedings used to be the expensive option. For smaller debts, court proceedings are still likely to be the best choice. However, for significant debts, using the insolvency process may end up being cheaper as well as more effective.