Pursuing undisputed debt claims

You have to present a bankruptcy petition to a court if you want to bankrupt someone because they owe you more than £750

But presenting a petition can be complex. Most people engage solicitors for the claim

You can apply to the court to ‘wind up’ a company if it can’t pay its debts of more than £750

This type of court application to the court is called a ‘winding-up petition’. If successful, the company will be put into liquidation, with its assets used to pay off its creditors

But there are often 2 sides to a story

Disputed claims need litigation through the courts or mediation

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Applying pressure for clients in debt recovery:

  • sending letters before action
  • issuing and serving statutory demands
  • issuing and serving court proceedings
  • enforcement of judgments
  • winding up petitions against limited companies
  • bankruptcy petitions against individuals.

But remember: one side’s uncontested debt may be the other side’s disputed claim.

Go to our Litigation topic page for when liability is in dispute

Statutory demands

One of the more straightforward and cost-effective options open to an unpaid creditor can be to issue a statutory demand. This is a formal ‘last chance’ demand for payment of a debt, giving the debtor 21 days in which to either settle the debt or come to some arrangement for its payment such as granting security (though legal advice should be taken in these circumstances to ensure that any such security given is enforceable against other creditors). The debtor may be able to take action to set aside the statutory demand or to prevent the creditor from proceeding with a winding-up order.

The formal nature of the statutory demand may itself be sufficient to make debtors concerned for their business reputation pay up or take serious steps to negotiate the debt. However, if such steps are not forthcoming, provided the debt is worth at least £750 and is not more than 6 years old, once the 21 day period has expired the creditor may be entitled to commence insolvency proceedings against the debtor.

There is a prescribed form in which the statutory demand must be issued and this varies according to the nature of the debt. There are also rules concerning service. It is wise to seek legal advice on the correct form and method of service and on serving more evasive debt dodgers.

Summary judgments

If a debt is undisputed or there is no real prospect of the debtor sensibly disputing it, an application for summary judgment might be considered. This is a relatively quick solution which could allow judgment to be obtained against the debtor in a matter of weeks rather than months. There would be no need for a representative from the creditor to attend court as oral evidence is not considered. Any judgment obtained could then be enforced against the assets of the debtor in the usual way (including potentially through the commencement of formal insolvency proceedings). Fixed costs may also be recoverable.

Retention of title claims (‘Romalpa clauses’)

A retention of title clause is a provision in a contract for the sale of goods which provides that title, or legal ownership of the goods, does not pass to the buyer until they have been paid for in full. Where the clause is legally effective this allows the unpaid seller to go in and repossess the goods even where the buyer has subsequently become insolvent and other creditors are competing for the proceeds of that buyer’s assets. Where such a clause is in place then this is an option worth considering for an unpaid creditor who could recover and then resell the goods at a profit. Although conceptually simple however, retention of title clauses are not always legally effective. Expert advice should be sought on the viability of enforcing such a clause. If a creditor suspects that insolvency proceedings against the debtor are imminent, the prudent course is always to move as quickly as possible.

Late Payment: Commercial Debts (Interest) Act

The United Kingdom has implemented late payment legislation designed to encourage prompt payment of commercial debts. In all contracts between businesses and public authorities made after 7 August 2002 (and in some contracts made since 1 November 1998), in which both parties were acting in the course of business, and which meet the requirements of the Act, there is an automatic right to interest where the debt is unpaid. In short, if a creditor is unpaid on a relevant business contract, interest at 8% over the Bank of England base rate starts to accrue on the debt from the day after the final day for payment. If no day has been specified for payment that interest will start to accrue after 30 days. This is by virtue of the Late Payment of Commercial Debts (Interest) Act 1998 which applies in default of any express contractual term in the contract or other statutory provision allowing for interest. It is not necessary for the contract to refer expressly to the Act, though it is possible for parties to agree to an alternative method of compensation. The interest can be pursued in its own right as a separate debt.

Winding up petitions

“It is a matter for the discretion of the judge whether a winding up order should be made on a disputed debt, and it is also a matter of discretion whether he decides the substantive question of debt or no debt.” – Brinds Ltd v Offshore Oil NL [1986]

“….If a petitioner’s debt is bona fide disputed on substantial grounds, the normal practice is for the court to dismiss the petition and leave the creditor first to establish his claim in an action. The main reason for this practice is the danger of abuse of the winding-up procedure. A party to a dispute should not be allowed to use the threat of a winding-up petition as a means of forcing the company to pay a bona fide disputed debt. This is a result of practice rather than law and there is no doubt that the court retains a discretion to make a winding-up order even though there is a dispute: see, for example, [Brinds]. But the board does not find it necessary to examine the limits of the discretion because they consider that there is no substantial dispute.” – Parmalat Capital Finance Ltd v Food Holdings Ltd [2008]

Fixed charge review: options: recommendations: next steps