Increased bankruptcy thresholds – what it means for businesses recovering debt

6th February 2015

The government has announced an increase in the thresholds for making individuals bankrupt, which may make it more difficult for businesses to use bankruptcy to collect debt.

From 1 October 2015, creditors seeking a bankruptcy order against an individual will need to demonstrate that they are owed at least £5,000. This is an increase from the current £750 threshold. The government has explained the changes as simply catching up with the cost of living.

Martin de Ridder, head of the dispute and resolution team at Ansons Solicitors in Staffordshire, explains the various methods available to businesses when trying to recover a fairly modest trade debt from a company.

Court proceedings

Before starting court proceedings, you should:

  • remember that the court is obliged to deal with matters justly and at proportionate cost;
  • conduct a cost and benefit analysis before initiating proceedings. Make sure the cost of enforcement is factored into the calculations;
  • check that the other party is good for the money as there is no point in incurring the cost of litigation if your business is unable to enforce the judgment;
  • be cautious about starting proceedings if you do not intend to see them through. Your business will almost certainly be liable for the other party’s costs if it discontinues the claim;
  • be careful about threatening to start formal proceedings if you do not intend to do so; and

remember that recovery of costs will depend on:

  • who wins or loses;
  • a party’s conduct and compliance with court rules and orders. For example, a failure to comply with a pre-action protocol can have cost consequences even for the party that wins;
  • when the matter is concluded, whether before or after proceedings have been commenced;
  • the financial value of the claim and consequently the track the claim is allocated; and
  • how the claim is concluded, whether by agreement or at trial.

Insolvency proceedings

Your business may be able to recover a debt from a company by either serving a statutory demand or threatening compulsory liquidation (also known as winding-up) by the court.

One of our dispute resolution lawyers will be able to advise you on the best way of to go forward.

What is a statutory demand?

A statutory demand is a written notice in a prescribed form demanding payment of a debt owed by a company to one of its creditors. If the debtor does not pay within three weeks, this may constitute grounds for presenting a winding-up petition.

There are a number of advantages when choosing to serve a statutory demand:

  • preparing and serving a statutory demand is quick and inexpensive;
  • the process does not involve the court; and
  • if a creditor serves a statutory demand, they are not obliged to commence winding-up proceedings.

What is a winding-up petition?

The threat of starting winding-up proceedings can put considerable pressure on a company to pay an outstanding debt promptly and the basic procedure is relatively inexpensive. However, these proceedings should generally be regarded as a last resort.

The court requires a creditor to behave reasonably before starting winding-up proceedings and, in particular, to write to the company with details of the debt and demanding payment. It is also an abuse of process to issue a winding-up petition if a debt is genuinely disputed.

If a winding-up order is made, a liquidator will be appointed by the court to collect the assets of the company and distribute the value equally among the company’s creditors. The petitioning creditor does not get any priority in this process, unless they have security over any company asset or they are one of a small group of preferential creditors. They may receive only a small percentage of their claim, or sometimes nothing at all, at the end of the liquidation process.

Reaching a settlement

It almost always makes sense to consider informal methods of recovering a debt, for example through using negotiation or mediation, as they can provide the quickest and simplest solutions. The court will expect the parties to have explored ways of settling the claim before they issue proceedings and may penalise a party in costs if they fail to do so.

Your business should think about the disadvantages associated with litigation. For example:

  • litigation can be disproportionately expensive to the sums being argued about;
  • the outcome is uncertain;
  • the court is only able to offer a limited range of remedies; and
  • litigation often destroys any prospect of the parties resuming a commercial relationship.

It might be possible to recover the debt, or agree an alternative future course of action by opening a negotiation with the debtor. This can be done verbally or in writing, for example email.

You should also consider mediation, a flexible, voluntary and confidential form of dispute resolution in which a neutral third party helps parties to work towards a negotiated settlement of their dispute. The parties retain control of the decision whether or not to settle and on what terms.

The without prejudice rule

Parties usually negotiate on a ‘without prejudice’ basis. The without prejudice rule generally prevents statements made in a genuine attempt to settle an existing dispute from being used as evidence of admissions against the interest of the party that made them.

This rule means, if the negotiation or mediation fails and the business then issues court proceedings, any statements that the parties made in a genuine attempt to settle the dispute, whether in writing or orally, will not be put before the court in the proceedings.

Do nothing

You can always simply write off the sum that it is owed. Before taking this step, your business should consider the:

  • size of the debt;
  • likely cost of recovering the debt;
  • importance of the current relationship between the parties; and
  • likelihood of maintaining an ongoing commercial relationship between the parties.

For further information about the new bankruptcy threshold and what it means for your business, or any advice on debt collection, please contact Martin de Ridder in the dispute resolution team, on 01543 431186 or email Ansons Solicitors has offices in Cannock and Lichfield, Staffordshire.