Insolvency proceedings can be started against:
- a company by presenting a winding up petition;
- an individual by presenting a bankruptcy petition; and/or
- a firm by presenting a winding up petition against the firm and/or bankruptcy petitions against the partners.
Using a Letter
It is possible to serve a statutory demand on a company before presenting a winding up petition, but this is generally unnecessary however, it may be used tactically. It is often more effective to send a seven-day letter demanding payment together with enclosing a draft winding-up petition to show that you are serious. This will also enable the debtor to pay the debt within 7 days and if payment is forthcoming you are not put to any further cost in instigating insolvency proceedings.
Statutory Demands and Petitions
A statutory demand must always be served on the debtor before a bankruptcy petition is presented
If payment is not made, a petition can be presented. Once a petition has been presented, the debtor’s ability to pay the debt will be affected as once the bank is informed of the petition they are likely to freeze the debtor’s bank accounts.
It is important to use insolvency proceedings only where you are sure no defence will be raised. They can be particularly appropriate where you have recorded promises of payment in writing or oral promises, or where there has been no real response from the debtor. If there is any dispute (genuine or the Court considers there to be a real possibility of a defence or dispute), the Court will dismiss the petition and you may have to pay the debtor’s costs.
It is important to remember that you may not be in complete control of an insolvency process, especially once a winding up petition has been advertised as other creditors may support the petition and take it over.