Insolvency proceedings - are you winding me up?

The answer could be 'yes' suggests Neil Jinks, but only if it's done properly!

This article was originally published in the IRVV Insight Magazine, July 2016, pp. 24-25.
It is an ideal read for those within Local Authorities 

The Courts say insolvency proceedings should not be used as a debt recovery tool but as winding up is the most popular solution for the recovery of business (non-domestic) rates, what other recovery or enforcement options might be applied?

Download article as PDF »

Insolvency Proceedings
Winding up proceedings against limited companies or bankruptcy proceedings against individuals and sole traders are the options most often utilised for the recovery of business rates. Throughout my career, which now spans nearly 30 years, I have always been told that insolvency proceedings should not be used as a debt recovery tool although in practice that is what often happens as the risk of ignoring the threat of such action can have seriously adverse consequences for the debtor.

The threat of insolvency proceedings will persuade some debtors to pay up or encourage others to confirm why they have not paid or to provide details of any dispute. Making idle threats of insolvency proceedings should be avoided in case the debtor calls your bluff.

If a debt is genuinely disputed, it would be an abuse of the process of the Court to issue a winding-up petition against a company, or a bankruptcy petition against an individual. The potential downside of insolvency is that even if an order is made, you may receive only a small proportion of your debt back, or even nothing at all, although the funds realised in each case (if any) will of course vary.

Combine that with the view of many that insolvency proceedings can be seen as a somewhat draconian course of action coupled with balancing the need to recover such debts with the views of your elected members who can be a tough nut to crack when you’re trying to crack another nut, i.e. take the most effective course of action to secure payment.

Legal debt recovery professionals like myself will always tell you that “Cash is king” in business. In debt recovery, I also believe that “Communication is king” because, more often than not, debtors will bury their heads in the sand to avoid having to face up to their outstanding debts. Some try to prioritise their creditors and may pay their trade suppliers first, to, for example, keep the stock coming in, as well as the cash, rather than treating debts such as their taxes as a priority as you might expect them to do.

I am old enough to remember a time when some debts were treated as a priority under the law. I am not old enough to remember debtor prisons but I know some of you like your committal options too! Continuing with one of the themes from my last article, surely one size does not fit all and obviously there are thresholds for issuing insolvency proceedings, which means that the option may not always be open to you in any event. Bankruptcy is now only an option for debts over £5,000, so it’s worth checking to see if you are owed any other sums, which could be included, if the principal debt is less than this amount. Winding up proceedings however can be issued where the debt is in excess of £750.

The changing landscape for bankruptcy, bearing in mind the current landscape, recent changes and proposed changes, certainly raises the question of whether bankruptcy is still a useful tool. I believe it certainly is but only when applied in the right circumstances. As we come out of a recession and with the credit crunch, we have seen falling numbers, with low interest rates and the increase in the petition limit that I mentioned earlier. But is it really that bad? You could say that through a combination of the property market improving, creating more liquidity (more equity) and the increase in the petition limit has created a natural correction of the market.

I am sure it is debatable whether the increase is a good or a bad thing for creditors but it does make bankruptcy a more proportionate remedy, which should encourage creditors to explore other recovery and enforcement options and to only use it as a last resort, which should help them to avoid any criticism.

So to summarise, yes, bankruptcy is still a useful tool but only when targeted at the right debtors otherwise it could become costly, time consuming and disproportionate. Creditors and their professional advisers need to engage more with the debtors and take control.

One final and very important point on the subject of insolvency proceedings is to verify that the charging structure and any litigation funding proposed by your supplier is legal and compliant as I hear of many examples of illegal or non-compliant arrangements being in place, which could result in you being put into a very difficult position if the Courts decide not to award your costs or regulators decide that such arrangements are irregular or inappropriate and take action against you.

Alarms bells do ring in my head every time I hear someone offering to do something for free as there’s usually a hidden price to pay, which might be more than monetary and could even cost you your job and reputation.

High Court enforcement
There is legislation to cover the use of High Court Enforcement for the recovery of business rates. To enforce through the High Court, a County Court Judgment needs to be obtained. I believe the legislation governing such cases and the obtaining of a court order are contained in The Non Domestic Rating (Collection and Enforcement) (Local Lists) Regulations 1989, which provide the procedure for recovery of unpaid NNDR. They focus on the obtaining of a Liability Order in the Magistrates Court. However, under Regulation 20, Recovery in a court of competent jurisdiction it states:

'Recovery in court of competent jurisdiction
20.—(1) A sum which has become payable to a charging authority under Part II, which has not been paid, and in respect of which a liability order has not been made may (as an alternative to recovery under a liability order) be recovered in a court of competent jurisdiction.
(2) A liability order may not be made in respect of any amount in relation to which proceedings have been instituted under paragraph (1) above.'

This means that if you have already obtained a Liability Order then you can only take the enforcement actions in the regulations.'

However, if before issuing a reminder you decide that instead of issuing a summons in the Magistrates Court, you are going to issue a County Court claim, then you can at this stage make that decision to use the County Court as a court of competent jurisdiction and in your reminder advise that this is the course of action you are going to take if payment is not made. Please be aware that the Court fees in the County Court for the issue of a claim may be greater than those payable for the issue of a summons and obtaining a Liability Order, although the County Court fees and Solicitor’s fixed costs are recoverable from the debtor. 

Pre/post enforcement collections
I would repeat what I said in my last article: Where all else fails, engagement with the debtor through collections activity via a third party such as a specialist debt recovery solicitor will often result in them facing up to their liability and doing something about it at last by either making payment in full or agreeing to pay by instalments in order to avoid further enforcement action. Utilising a third party often makes all the difference because it shows the debtor you are serious and mean business!

Creditor services
Working with insolvency solicitors or insolvency practitioners who offer a free creditor support service will help you to deal with your insolvent debt generally. Using an independent law firm and an independent insolvency practitioner will ensure there is no conflict of interest. This will enable them to provide you with an independent and objective assessment of all cases, to lodge claims and ensure Proofs of Debt are submitted to protect your interests and ensure you receive any dividends declared.

Avoidance schemes
Solicitors will also be well placed to advise you on dealing with avoidance schemes and devising strategies to counter such challenges both cost effectively and robustly. However, that’s another subject in itself, so I will leave that for another time!

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Neil Jinks


I am a Director within the recoveries team at DWF. I have over 25 years of experience working in law firms, the credit industry and High Court enforcement sector, managing and developing debt recovery operations and client relationships.