Bankruptcy proceedings by creditors
When you run your own business, the idea of being made bankrupt is a daunting prospect. If this happens to you, it’s important that you know what the creditors who are making you bankrupt are going to do, how they’re going to go about it, and what you can do in response. Firstly, let’s look at a quick reminder of what bankruptcy is.
What is bankruptcy?
Bankruptcy is a debt solution whereby any of your goods or assets might be sold to pay off what you owe. After a period of time, usually one year, the debts included in your bankruptcy will be written off – this is known as being discharged from bankruptcy.
You can choose to make yourself bankrupt, or your creditors can apply to have you made bankrupt. People who are self-employed tend to get more threats for bankruptcy than people who are employed (probably because they are more likely to owe money to the tax authorities and trade suppliers) so it’s especially important you know about the bankruptcy process if you run your own business.
How can a creditor make me bankrupt?
If you owe more than £5,000 to a particular creditor, this creditor can apply to make you bankrupt. Generally speaking, they’ll only do this if they can’t come to an agreement with you to pay back what you owe through a payment plan, meaning that they feel bankruptcy is the only way they can get back what they’re owed. Your creditors have to let you know in advance if they plan to make you bankrupt.
Before they can present a bankruptcy petition to the court, a creditor will have to either serve you with a statutory demand or provide evidence that they have obtained a Court Judgment and the sheriff or bailiff could not recover enough assets to pay the debt.
Receiving a Statutory Demand
A Statutory Demand will generally only be sent to you as a last resort, but once you do receive one you’ll have either 18 or 21 days to reply to the demand, depending on how you want to respond.
The demand can only be made if you owe a debt of over £5,000, and should include details of the creditor who sent it plus information about yourself and the debt the creditor is claiming for. Your creditor may give you the demand personally, but if they can’t do this they’ll send it to you via post.
Are you happy to pay the money?
If you know and agree that you owe the money stated in the Statutory Demand, we firmly advise you to come to a payment agreement before you’re made bankrupt. This is because bankruptcy can have a detrimental effect on your business, so if you want to continue trading it’s much more preferable to come to some sort of payment plan or arrangement with your creditors. You could:
- Offer to pay in instalments – this will allow you to pay off what you owe gradually.
- Reduce your debt to a level below £5,000 – whilst not a permanent solution to your debts, getting your debt level below £5,000 means that your creditors won’t be able to make you bankrupt, giving you some breathing space whilst you decide what to do next.
- Refinancing – you could take out a loan to pay off what you owe, but we suggest only doing this if you’re sure you’ll be able to pay it off. Please call us for advice if you’re considering doing this – there may be a debt solution, like an IVA or a DMP, which can help you pay off your debts in a more affordable manner than simply taking out a loan.
- Personal guarantee – you could ask your friend or relative to be a guarantor for the debt. This may stop bankruptcy proceedings, but there are no guarantees that it will.
- Voluntary charge – if you offer a voluntary charge against your property, this means that the debt is secured against your home, like a mortgage, which may stop bankruptcy proceedings.
If you dispute the Statutory Demand
It might be the case that you don’t agree with the Statutory Demand and the amount that your creditor is saying that you owe. If this is the case, then you can go about disputing the Statutory Demand.
If you want to challenge the statutory demand you can apply to the Court to have the statutory demand cancelled – known as Set Aside. You may apply within 18 days to your local County Court to “set aside” the Statutory Demand under the following circumstances:
- There is a dispute regarding the amount of money owed.
- The sum owed is less than £5,000.
- The demand has been issued in error.
- You have the means of paying the debt.
- There is a counterclaim of more than the money owed.
You may have a legal defence to court action being taken against you, such as the creditor being out of time for taking court action – you may need to get advice to see if you’ve got a legal defence.
If you don’t respond to a Statutory Demand
Remember, whether you agree that you owe the money stated in the Statutory Demand or want to dispute it, you still need to reply to the Statutory Demand within 18 or 21 days (the demand itself will state which time period you’ll need to reply in.)
Failure to respond to the demand can result in serious consequences for your business; if they don’t receive a response with 18 or 21 days, your creditor will be allowed to present a petition for bankruptcy against you 21 days after the date of the demand.
You will then have to attend a bankruptcy hearing and find out whether or not you’ll be made bankrupt, at which point your businesses’ assets may be used to recover the debt that you owe. You can find out more about the effects of bankruptcy on your business here.
If you can’t get your debt set aside or don’t respond to the Statutory Demand, then you’ll have to attend a bankruptcy hearing.
You’ll be told when your hearing date is, and it’s essential that if you do receive a hearing date that you attend; this is your last chance to potentially avoid bankruptcy, and not turning up to the hearing is likely to mean that you will end up going bankrupt.
When you oppose the bankruptcy hearing, you should use Form 6, and you have to send it at least five business days before your hearing. In Form 6 you need to show that you have the capability to defend the bankruptcy (these grounds are similar to those required to set aside a Statutory Demand). The most common feasible grounds to defend the bankruptcy include:
- You’ve made a fair, reasonable offer for a payment plan, but your creditor has refused to agree to it.
- You’ve got a county court judgment for the debt that’s payable by installments and you’ve missed no payments on it.
- You’re able to pay off all your debts.
- You dispute some or all of the debt on the Statutory Demand, or you paid the amount you actually owed within 21 days of the Statutory Demand being served to you.
Bankruptcy without a Statutory Demand
It’s possible that you could be made bankrupt without a Statutory Demand being served to you, but you’ll still get plenty of notification before you have to attend a bankruptcy hearing.
Your creditor will need to have a county court judgment or court order awarded against you that they’ve been unable to enforce; if this is the case with your situation, your creditor will be able to make you bankrupt without a Statutory Demand, but they’ll have to notify that this is what they’re planning to do first.
Additionally, your insolvency practitioner can apply to make you bankrupt if you’ve failed an Individual Voluntary Demand (IVA) without sending you a Statutory Demand.
If you’re worried about bankruptcy and would like to see if there are other debt solutions that could prevent you from going bankrupt, why not call our experienced helpline team on 0800 316 1833 ? Our opening hours are 8am to 8pm, Monday to Friday, and 9am to 3pm on Saturdays.