In Focus Collections
Business recovery: court claim or insolvency proceedings?
What is the best process route for your debt?
Vicky Biggs
Senior associate, Myerson
For most businesses, it is critical that the collection of outstanding debts is managed effi ciently to assist cash fl ow. Generally speaking, there are two ways to
try and collect business debts owed to your company: issuing a court claim or pursuing insolvency proceedings. In this blog, we explore the key factors
which need to be considered when deciding how to pursue a business debt.
Insolvency proceedings If another company owes your business money and the debt is not disputed, you may be able to commence insolvency proceedings. When considering a winding-up petition, the court must be satisfi ed that there is a debt that is due and payable. In addition, the debtor will need to have demonstrated an inability to pay the debt. From the point of view of a creditor, commencing winding-up proceedings should be regarded as a last resort and generally speaking, the winding-up procedure should not be used as a means of enforcing the debt when other processes, such as litigation through the courts or alternative dispute resolution (ADR) may be more appropriate. However, the refusal by an otherwise
solvent company to pay an undisputed debt does nonetheless entitle a creditor to present a winding-up petition. For this reason, the courts have
acknowledged that insolvency proceedings may be used in certain circumstances as a method of debt collection. The advantages to a creditor in commencing winding-up proceedings are:
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The threat or commencement of winding- up proceedings can put considerable pressure on the debtor to pay an outstanding debt promptly and, therefore, could result in the debt being recovered quickly. The winding-up procedure is relatively quick and inexpensive. It may be possible to obtain a winding-up order within six weeks of presenting a petition. If the court grants a winding-up order, the liquidator will take control of all the company’s assets from the directors. The liquidator will have wide-ranging powers to investigate the company’s aff airs and the directors’ conduct. The liquidator can bring proceedings in their own name and in the name of the company in order to maximise the assets available for distribution amongst the company’s creditors. The disadvantages to a creditor in com- mencing winding-up proceedings are: Issuing a winding-up petition is often seen as very aggressive and can have a negative impact on any ongoing business relationships. Serving a statutory demand as a pre-cur- sor to issuing a winding-up petition may not result in the debt being paid. Issuing a wind- ing-up petition can be costly and time-con- suming, particularly if the debtor seeks to frustrate and delay the process. The winding-up process is not appropriate if the debt is genuinely disputed or if the company has a genuine cross-claim or right of set-off . If the court is satisfi ed that this is the case, the winding-up petition will be dismissed, and the petitioning creditor will be required to pay the company’s costs in relation to the winding-up proceedings. If the
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Serving a statutory demand as a pre-cursor to issuing a winding-up petition may not result in the debt being paid. Issuing a winding-up petition can be costly and time- consuming, particularly if the debtor seeks to frustrate and delay the process
winding-up petition is dismissed, creditors would have to pursue a court claim in order to try and recover the outstanding debt. Commencing winding-up proceedings may trigger default under the company’s loan facilities which may lead to the company’s lenders taking control of the proceedings and remove any prospect of the petitioning creditor receiving an early payment. Winding-up is a class remedy. Once a winding-up petition has been presented to the court, any other creditor of the company may support the petition and seek a winding-up order even if the company pays the original petition debt and the original petitioner does not seek to pursue the petition. It is also important to remember that a
creditor who petitions for a company to be wound up must act in the interests of their class of creditor. The amount of the dividend paid to unsecured creditors will often be only a few
June 2022
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