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Businesses turning to ‘winding up’ to recover debts

Businesses should consider the best option for them to recover debts after it was revealed many are turning to winding-up proceedings.

Suzanne Dean, Debt Recovery specialist at Lancashire law firm Napthens, reports that clients are asking for advice on the use of winding-up, usually due to financial and time constraints.

Winding up proceedings are available if a business cannot pay debts of more than £750, and are usually a last resort as they would cause the debtor’s business to be closed down.

Suzanne reports that businesses are sometimes using the threat of such action to ‘scare’ businesses into paying a debt.

She warns that the courts have made it absolutely clear that winding-up should not be used for debt collection, and creditors who do so are likely to be penalised by having to pay the debtor company’s costs.

Suzanne cautions that there are both advantages and disadvantages to the use of winding-up proceedings, which should be considered carefully with a legal advisor before action is taken.

She explained: ““Winding-up proceedings may cost less than court proceedings, and often be quicker as debtor companies would wish to avoid these actions being made public. Serving a statutory demand for payment with a threat of winding-up is often enough to cause a debtor business to pay up.

“Conversely, court proceedings will mean that a debtor has to deal with a claim or a default judgement can be obtained against them – this will mean there are various methods of enforcement open to the claimant that aren’t available through winding-up.

“There are disadvantages to consider as well. Once winding-up proceedings are started, other creditors can take them over even if settlement is received.

“The debt involved must be undisputed or the business starting the proceedings could find themselves having to pay the debtor’s costs. Finally, if wound up, a liquidator would be appointed to recover assets and distribute them in priority order – the business starting the proceedings may end up receiving nothing at all.

“Turning to court proceedings instead of winding-up can be expensive – the costs may outweigh the debts, and if the debtor becomes insolvent during the proceedings they will have nothing to pay out. As courts are busy, a disputed claim may also take months to conclude.

“Winding-up proceedings are a serious business and expert advice should always be sought first.”