Recovering Money Owed from an Insolvent Business

• Dispute Resolution

Discovering that a business that owes you money is insolvent (or is about to be) can cause significant stress and concern about how you are going to recover your money. Whether you are a business or individual, protecting cash flow is paramount, and so it is incredibly important to determine how and if you can recover money owed from an insolvent business.

There are various steps you can take, but before reviewing those – it is first important to understand:

1. What type of “business” owes you money; and
2. Whether that business is indeed “insolvent”?

What is a “business”?

This might seem like an obvious question. However, a “business” can come in many forms.  The most common of which include:

• Sole traders
• Partnerships
• Limited liability partnerships (LLPs)
• Limited companies

Whether you are likely to recover money owed from an insolvent business depends upon the type of business, whether you are dealing with individuals or corporate entities, and the business’s financial position – because, ultimately, if the business has no assets, or there are lots of other creditors who take priority, you may never recover your money.

What is “insolvent”?

Insolvent means that the business cannot pay its debts as they fall due. The business might be formally insolvent (for example a Winding Up or Bankruptcy Order may have been made), or the business might simply be headed that way and facing insolvency in the future.

Practical First Steps for recovering money owed from an insolvent business

Your chances of recovery will depend upon various things, including the amount owed to you, how far you are willing to go to recover the money, and, crucially, how much you are willing to spend doing so.

If you suspect that a business may be insolvent (or is facing insolvency), there are several practical steps you can take to confirm this, including:

• Writing to the business to ask what’s happening (e.g. via its email/chat function)
• Calling the business or visiting any office or shop (as correspondence is too often ignored)
• Looking at the business’s website – if an administrator or receiver has been appointed there should be details of who to contact
• If you bought an item and wish to return it or that item never arrived – depending upon how you paid for it you could try to get your money back via your credit card, debit card or a ‘buy now, pay later’ provider
• You can search the Individual Insolvency Register (against, an individual/sole trader’s name or the trading name of a business: https://www.gov.uk/search-bankruptcy-insolvency-register
• You can search for a company or LLP’s details at Companies House: https://find-and-update.company-information.service.gov.uk/; and/or
• You can search on the London Gazette’s website for any insolvency notices: https://www.thegazette.co.uk/all-notices.

Next step: Proof of Debt Form

If your enquiries confirm that the business is formally insolvent, your options to recover money owed from the insolvent business may be very limited, especially if you have no security for the debt.

However, you can lodge a claim with the Insolvency Practitioner (IP) (such as the official receiver, liquidator or trustee in bankruptcy) by submitting a “proof of debt”.

Proof of debt is a standard form and can be obtained online or by contacting the relevant IP, whose details should have been provided either on the business’s website or via the Companies House or Individual Insolvency Register search results.

However, submitting proof of debt, unfortunately, does not guarantee a full recovery.

This is because, whilst the IP will look to recover money from the sale of any of the business’s assets, this money will eventually be distributed to creditors according to a strict order of priority. This can make recovering money owed from an insolvent business very difficult. The priority list is detailed below:

• Secured creditors (i.e. those who’ve made loans secured on assets / fixed charge holders)
• The IP’s fees and expenses
• Preferred creditors
• Floating charge holders (companies only)
• All unsecured creditors
• Any interest payable on unsecured debts (post-liquidation); and
• The shareholders (companies only).

If you are an unsecured creditor, and there is sufficient money left after the prior ranking creditors have taken their share, you may receive dividends payable on a regular basis.

However, it should be acknowledged that often this payment will be low (for example 1p in every £1 owed), and it may be months, or in some cases years, before you receive anything, if at all.

What are your other options if the business is not formally insolvent yet?

If the business is in financial trouble but not yet formally insolvent, there are other options available to you depending on your individual circumstances and whether or not you hold any security for the debt.

Serving a Statutory Demand

Service of a Statutory Demand (SD) upon a business is often enough to prompt payment. However, it should not be used where the debt is disputed.

Failure by the business to pay the money within 21 days of service of the SD can be relied upon as evidence that the business cannot afford to pay its debts, and the creditor may use this as evidence for instigating insolvency proceedings.

Money Claim

If the debt is likely to be disputed another option is for you to issue a money claim to obtain a judgment / CCJ for the debt, plus any costs if you are successful.

However, in most cases, prior to issuing a claim you will have to send a Letter Before Claim to comply with the necessary Pre-action Practice Direction and/or Pre-Action Protocol if one applies.

If you are fortunate enough to obtain a judgment prior to the business becoming insolvent you can look at ways to enforce that judgment, which could include obtaining security for your debt (placing you higher on the priority list), subject of course to anyone with a prior interest.

Insolvency Proceedings

Insolvency proceedings are often, rightly, considered to be a last resort as this can be devastating for any business. However, issuing proceedings often prompts the business to put forward payment proposals to you and/or other creditors.

That being said, it is likely that you will not be a business’s only creditor, and in initiating proceedings there is a risk that you may, again, be “throwing good money after bad” because there may be nothing “left in the pot” after any other party with priority has taken their “cut”.

Further, to commence formal insolvency proceedings against a company the minimum debt must be £750 and against an individual this minimum debt must be £5,000.  As with SDs, the debt must also be undisputed, otherwise, you may find yourself on the other side of an injunction application which, if successful, could result in you being ordered to pay the business’s costs.

In addition to any solicitors’ costs, the current fee (in October 2024) for issuing insolvency proceedings against a company totals £2,932 and against an individual total £1,832 (in each case being a court fee of £332 plus the relevant IPs deposit).

Summary

Recovering money owed from an insolvent business is not straightforward. Considering the likely costs of any proceedings or action against an insolvent (or soon-to-be insolvent) business you should give serious thought regarding whether you are willing to spend money to try to recover the sums due to you; with the added risk that you may not recover the money you are owed.

If you have any doubts regarding your legal position and/or would like us to advise you further regarding your options, the risk and the likely costs you will incur please contact GA’s specialist dispute resolution team. Call 01752 203500 or you can also email me directly via eloise.adams@GAsolicitors.com.

All content on this website (inclusive of guides, blogs and imagery) is strictly copyrighted by Gill Akaster LLP, trading as GA Solicitors. It is not to be used by any third party without prior contact and permission. Any requests for content should be sent to katy.mckenna@GAsolicitors.com.