What Is Insolvency?

If your Debtor does not have enough assets to cover their debts or fails to make a payment when required and the debt is not disputed, then they are deemed insolvent. Once this happens, several courses of action are available, including Winding Up Proceedings or Bankruptcy.

An insolvent company will go into Administration, Receivership or Liquidation if Winding Up Proceedings are successful, whilst an individual will become Bankrupt. In this instance, the process starts with the issuing of a Statutory Demand.

Although these steps are deemed to be quite aggressive at this stage, the consequences or outcomes are so serious for the Debtor that payment is often made promptly.

If your Debtor is a company

Insolvency proceedings can commence against a company if the debt is more than £10,000 and it is undisputed.

Your draft Winding Up Petition will be written by us and accompanied by a letter to the Debtor requesting payment within a certain time period – usually seven days. This letter will also include a clear warning that if payment is not forthcoming, the petition will be presented to Court. This almost always has the desired effect, and very rarely will go to court.

A Winding Up Petition can be started if payment of the draft petition is not forthcoming.

The Court will seal the petition and give a date for a Court hearing before serving it upon the company. It will be advertised in the London Gazette seven days after service and this will freeze the Debtor’s bank account. This is often to incentive needed to promote immediate action and payment of the debt.

If your Debtor is an individual

If the debt owed to you is worth more than £5,000 and is undisputed, you can start insolvency proceedings against an individual.

Firstly, Debt-Claims Solicitors will issue a Statutory Demand. This sets out the basis of the debt and gives the Debtor 21 days from service to pay. It must be served personally on the individual, and service proven.

If the debt is not paid (and no application is made by the Debtor to set it aside) then the next step is to issue a bankruptcy petition to the Court, which must also be served in person with proof sought. A date for a hearing will be issued by the Court.

Once the debtor is either wound up or adjudged bankrupt, what happens to my claim?

Once the Winding-up or bankruptcy processes are finalised, an Insolvency Practitioner will be appointed. The Debtor will provide full disclosure of their assets, liabilities, income and outgoings, and the Insolvency Practitioner will make arrangements for all debts to be paid if funds are available.

How do they decide which debt is paid first?

You will receive a letter asking you to confirm that you are awaiting payment of a debt. You will need to complete a Proof of Debt Form and provide evidence of the debt.

If you have security over some of the bankrupt assets, your debt will most likely be paid from the sale of those assets. If not, the Insolvency Practitioner will decide on an order for payment.

In many cases there will be insufficient monies to clear all secured creditors in full and you will be considered an ‘unsecure creditor’, and this often includes the creditor who presented the bankruptcy petition.

Generally speaking, creditors are paid on a pro-rata basis, in accordance with the size of their debt against the whole amount available to pay unsecured creditors. This generally results in them receiving a payment representing so many pence in the pound.

Insolvency action can be quite complex and costly if the right procedure is not followed. Debt-Claims Solicitors are here to provide you with tailor-made advice based on your individual claim.