The ABC of IOU - Part Two
In the second of this two-part feature on practical steps to deal with your debts, Sara Partington of Hextalls LLP advises on how to get your niggling, uncontested debts paid.
With short-term credit costs rising, even large and seemingly reliable clients might drag their heels over payment. But the threat of prompt enforcement action can do much to ensure you get paid, even if they they’re genuinely struggling. To stop debtors passing any liquidity problem on to you, the law provides a number of tools.
Uncontested debts of £750 or more
Larger unpaid debts are best targeted with a combination of Statutory Demands and, if necessary, a bankruptcy (for individuals) or winding up (for companies) Petition in court. This procedure has upsides: the process is quick, and the mere threat will often generate payment. There are also downsides: while Demands are free, it’s not cheap to present a Petition; and once an Order is made, you will rank alongside all other debtors.
An unsatisfied (i.e. unpaid or undisputed) Statutory Demand is treated as proof that the debtor is insolvent. This is true even if the debtor is a huge plc and patently able to pay its debts. If it chooses not to, you’re entitled to apply to wind up a corporate debtor or seek the bankruptcy of an individual (including sole traders), because that’s the test under the Insolvency Act 1986 and it entitles presentation of a Petition by you as a creditor.
Whilst a Demand itself, correctly filled in and properly served, doesn’t entitle you to do anything more than present a Petition at court if the debt is unpaid after 21 days, the mere threat of insolvency represented by a Demand is itself often enough to convince the debtor that you mean business and will follow through if need be. It is therefore a very useful tool.
Note also that in fact, if there is absolutely no question that a debt is owed - for example if a corporate debtor accepts this in writing but then refuses to pay, a Demand is not strictly necessary as a precursor to a winding up Petition – though this is not true for bankruptcy where you will need to have served a Statutory Demand save in particular circumstances.
Petitions at Court
There is a precise, strict procedure to follow for a Petition to be presented and pursued. A court fee (£865 to wind up a company; £490 to bankrupt an individual) is paid. This sum is partially repayable if the Petition is withdrawn before the hearing - remember to include such costs when negotiating how much you'll accept to drop the Petition.
The Petition (with Affidavit in support) are served, advertised and verified, followed by what usually proves to be 10 seconds in Court six or so weeks later to ask a judge to make the Order, after which an Insolvency Practitioner (IP) is appointed to manage its affairs for the benefit of all creditors.
Bear in mind that the procedure has some twists and turns.