Clients regularly ask me: “Since they’re not paying, why don’t we just wind-up/bankrupt them?"
To be fair, the possibility of winding up a company or making an individual bankrupt can be a powerful incentive for a debtor to settle a genuine debt.
But there’s an important difference between using that possibility as leverage and actually obtaining a winding-up or bankruptcy order.
Once the order is made, the debtor’s available assets are gathered and sold, and the money is distributed according to the law.
Just because you were the one who started the proceedings doesn’t mean you get paid first.
For example, a bank may have a claim over property it financed. The costs of the insolvency process and certain other claims, such as eligible employee wages and statutory contributions, may also have to be paid before ordinary unsecured creditors receive anything.
If you’re a supplier or contractor owed money under an unpaid invoice, you’re usually an unsecured creditor. That generally means you don’t have security, such as a charge over the debtor’s property, to back up the debt.
You share whatever is left with the other ordinary unsecured creditors. If there isn’t enough money left, you may recover only a fraction of your debt, or nothing at all.
So before spending money to wind up or bankrupt a debtor, ask yourself a few questions:
1) What assets are actually available?
2) Who else has a claim over those assets?
3) Is there a more effective way to recover the debt?
In my practice, insolvency proceedings can be useful as a pressure point to encourage settlement, provided there’s a proper legal basis for taking that step.
But when it comes to actually recovering money, I would generally explore more straightforward options first, such as a garnishee order to recover money from the debtor’s bank account, or a writ of seizure and sale to seize and sell suitable assets. I would reserve winding up/bankruptcy only as a preliminary pressure step or as a last resort when no other options are available.
Rudi Cheu (rudi@rulecolaw.com) is a content creator under the Newswav Creator programme, where you get to express yourself, be a citizen journalist, and at the same time monetize your content & reach millions of users on Newswav. Log in to creator.newswav.com and become a Newswav Creator now!
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