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Increase in Bankruptcy Level

Author: Laura Marchington

Historically, the service of a Statutory Demand has been the precursor to commencing insolvency proceedings, whether it was bankruptcy proceedings against an individual or a Winding up Petition against a corporate director.

Typically, Statutory Demands are used by creditors as a persuasive tactic against debtors in order to recover monies owed. This is usually an effective strategy as the threat of being served with the Statutory Demand in itself can be alarming, particularly to the individual debtor. Prior to 1 October 2015, the minimum sum was £750.

As from 1 October 2015, the minimum debt in respect of which a Bankruptcy Petition can be presented has increased to £5,000. The previous bankruptcy limit of £750 had been in place since the modern insolvency legislation was implemented in 1986, and an increase has generally been considered overdue for some time. Inflation has led to the figure being so low in real terms that unscrupulous creditors have used Statutory Demands to threaten bankruptcy over low value debts, with no real intention to follow up with a Bankruptcy Petition.

The theory behind the changes takes in to account the fact that disproportionate costs and fees can be incurred in a “small” bankruptcy when compared to the size of the debt itself. The government has taken a view that proportionality is also an issue. A person’s bankruptcy may have a significant impact on an individual as compared to the value of a low debt itself. 

As stated above, the Courts’ bankruptcy jurisdiction is often used by creditors to put pressure on debtors to pay. However, the Courts’ position is that this is an abuse of process and it may be that the increase is partially intended to put a stop to this practice. In any event, it raises the question of whether there is an alternative that is fit for purpose.

Where a creditor seeks to collect a debt of less than £5,000 (even though it is not the subject of any dispute and with a realistic prospect of success), a creditor will have only one practical option where a debtor will not pay; obtaining Judgment via the Small Claims Court, and enforcing the same. 

What effect will this have?

Small consumer-orientated business creditors will no doubt be the worst affected and an increase in bad debt write-offs is widely anticipated. For many, Statutory Demands have been a quick, cheap and effective method of debt recovery and this will doubtless continue for debts over £5,000.

Creditors should be aware that the change only applies to Statutory Demands served in relation to bankruptcy proceedings against individual debtors, and not to Winding up Petitions taken against corporate debtors.

If you have any questions in relation to debt collection, Statutory Demands or Bankruptcy Petitions please contact Laura Marchington on 01306 502273 or l.marchington@downslaw.co.uk.

 

 

 

Posted on 06/10/2015 by Pam Bowring

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