Recovering a Debt or Judgment Debt
If you are owed a debt (including CCJ or Judgment Debt) by a company then it may be recovered by a Solicitor’s letter threatening winding-up and examining the affairs of the company or by serving a statutory demand. You should not simply embark on issuing a petition or demand without considering the matter carefully and taking advice.
Some points of caution in this regard are:
- Be wary of threatening to commence formal recovery proceedings if you do not intend to do so. The other party may call your bluff.
- Remember that it is an abuse of process to issue a winding-up petition where a debt is genuinely disputed.
A statutory demand is a written notice in a prescribed form demanding payment of a debt owing by a company to one of its creditors. If a statutory demand for a debt of more than £750 is served on a company and the company fails to pay the debt within three weeks, the company will be deemed to be unable to pay its debts (section 123(1)(a), Insolvency Act 1986). This will constitute a ground on which the court may order the company to be wound up.
In many cases it is advantageous for a creditor to serve a statutory demand on the company before presenting a winding-up petition, although it is not strictly necessary. However, some of the advantages of serving a statutory demand are:
- Preparing and serving a statutory demand is quick and inexpensive.
- The process does not involve the court.
- If a creditor serves a statutory demand, he is not obliged subsequently to commence winding up proceedings.
If the company does nothing within three weeks of service of a statutory demand, the creditor may rely on the company’s failure to comply with the demand as prima facie evidence that the company is unable to pay its debts and thus as a basis on which to seek to wind up the company.
Winding up is a statutory process by which an independent insolvency practitioner (or liquidator) gathers in and realises a company’s assets before distributing the proceeds to the company’s creditors and members in the prescribed order of priority. Once the liquidation is complete, the company will be dissolved.
The grounds on which a company may be wound up by the court are set out in section 122 of the Insolvency Act 1986. One such ground is that the company is unable to pay its debts as they fall due. This ground may be made out where:
- A debt owing and undisputed by the company had not been paid (section 123(1)(e) and Cornhill Insurance plc v Improvement Services Ltd  WLR 144).
- A creditor has served on the company a statutory demand for a sum exceeding £750 and the company has failed to pay the sum due within three weeks (section 123(1)(a)).
The threat or commencement of winding-up proceedings can put considerable pressure on a company to pay an outstanding debt promptly and the basic procedure is relatively inexpensive. Therefore, winding-up proceedings can be regarded as a method of debt enforcement. However, these proceedings should generally be regarded as a last resort. The court requires a creditor to behave reasonably before commencing winding-up proceedings and, in particular, to write to the company with details of the debt and demanding payment. Further, it is an abuse of process for a creditor to commence winding up proceedings on the basis of a debt which is genuinely disputed and there may be adverse costs consequences.
Our Winding-Up Experts are able to give specialist legal information and advice in this area of law. To contact one of our Solicitors or Barristers please click here or call 0845 8622 529.
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