It would be wonderful if, upon receiving a request for payment, every debtor immediately arranged to settle their debts in full. Unfortunately for funders, however, debt recovery is often a much longer, and more convoluted, process.
In leasing, most debt-recovery journeys begin in the same way: by issuing a termination notice and demand. The events that follow, however, are often a matter of both commercial discretion and personal preference.
In this insight we consider what is perhaps the biggest choice that funders face regarding debt-recovery: whether to issue Part 7 proceedings or present a bankruptcy petition.
How long does each process take?
It is possible for bankruptcy petitions to progress from presentation to final order within a matter of weeks. In contrast, in the County Courts (where most low and mid-value claims are issued) commencing legal proceedings is a much longer process. It can take several weeks for a claim to be issued, let alone concluded. Realistically, if defended, Part 7 proceedings can take many months (or even years) to reach trial.
However, it should be noted that default judgments can be secured within weeks from the date of issue where no defence (or acknowledgement or service) is filed. Not all claims take years to conclude and, especially in the leasing and asset finance sector where terminations sums are (usually) due immediately as a debt, applications for summary judgment and/or strike out often are a legitimate means of securing judgments quickly and cost-effectively.
A high-pressure tactic
Judges often take a dim view of creditors attempting to use the threat of bankruptcy as a first-stop debt collection strategy. It is, however, undeniably a higher-pressure tactic than issuing legal proceedings.
If a debtor is declared bankrupt then, among other things:
- their assets will vest in (be controlled by) the Official Receiver to be collected, sold, and distributed to unsecured creditors;
- they can no longer remain a director, or be involved in the management, of a company until discharged from bankruptcy; and
- the bankruptcy will remain on the debtor’s credit file for six years, meaning they will struggle to obtain new credit or open bank accounts.
Most debtors are opposed to being declared bankrupt, as it prevents them from carrying on their normal lives and/ or running their businesses. Although unsatisfied judgments also affect a debtor’s ability to obtain new credit, they are substantially less intrusive on their day-to-day life.
What are the costs involved?
It currently costs £1,802 to present a bankruptcy petition against an individual (made up of £302 for court fees and £1,500 for a petition deposit).
For claims between £10,000 and £200,000 the issue fee for Part 7 proceedings is calculated as 5% of the sum claimed.
Put simply, every bankruptcy petition costs the same as the fee for issuing proceedings to recover a £36,040 debt. That doesn’t seem like a wholly unrealistic average, which suggests that the relative costs of issuing and presenting petitions largely balance out.
Bankruptcy petitions are likely to involve higher legal costs in the short term, due to the speed with which hearings are listed as well as the Court’s tendency to adjourn and quickly re-list hearings where there is any suggestion of an issue with service, or a promise of payment.
However, the total legal and administrative costs of bankruptcy are (generally) lower than issuing proceedings – trials are an expensive process, and there’s no guarantee that the Court will make a costs order (whether partial or full) in the claimant’s favour at the end.
Is the debt undisputed?
It is important to remember that statutory demands and bankruptcy petitions are only suitable for undisputed debts. If a debtor can prove that a debt is disputed on substantial grounds (or grounds which “appear to the Court to be substantial”), or that they have a counterclaim, set off or cross demand which equals or exceeds the sums claimed, the Court is likely to grant a debtor’s application – if made in time – to set aside any statutory demand served on them.
Legal proceedings, on the other hand, are founded in disputes and predicated on the basis that the Court will need to weigh up the evidence before them and decide “on the balance of probabilities” whether the claimant has proved that the debt is due.
Are delays likely?
Bankruptcy proceedings are frequently beset by frustrating delays. Issues with service of a bankruptcy petition itself, or (if used) the Statutory Demand upon which a petition is founded, often result in adjournments, and necessitate subsequent applications for permission to rely on substituted (rather than personal) service.
Part 7 Proceedings in the County Court, on the other hand, rely largely on service by the Courts (to the addresses set out in the Claim Form). Providing that address is correct, service will be deemed to have taken place even if the relevant Order/ Judgment is returned to the Court as undelivered (although this presumption of “deemed” service is open to challenge by the debtor). It is considered best practice to re-serve anything initially issued by the Court since this can help avoid the cost of defending a potential set-aside application.
What happens next?
Once a debtor has been made bankrupt, or a judgment has been made against them, what are the next steps?
In the case of bankruptcy, the petitioning creditor now ranks as an unsecured creditor in the debtor’s bankrupt estate alongside all other unsecured creditors who can prove a debt in the bankruptcy.
If a judgment has been obtained, the creditor can now seek (among other things) to secure the debt by a charging order over the debtor’s properties (if owned) or instruct a High Court Enforcement Officer to obtain and execute a writ of enforcement over the debtor’s assets. Unless the debtor has assets over which a judgment debt can be enforced, however, creditors may end up frustrated.
This article has been reworked from that initially published by Leasing World.