Challenging a Bankruptcy Petition | Avoiding Bankruptcy
A bankruptcy petition is a formal legal request presented to the court by a creditor, typically seeking to declare an individual or business bankrupt due to unpaid debts. The process is governed by the Insolvency Act 1986 and involves several key steps. A business may have grounds to challenge or set aside a petition that has been issued against them.
Understanding Bankruptcy Petitions
A bankruptcy petition is often initiated after a creditor serves a statutory demand, a formal request for payment, to a debtor. If the debtor fails to satisfy the demand or pay the debt within a specified timeframe, the creditor may file a bankruptcy petition with the court, seeking a bankruptcy order to enforce debt repayment.
What is a Statutory Demand?
A statutory demand is a formal written request for payment of a debt owed by an individual or a business. It is a pre-legal procedure often used by creditors to demonstrate that a debt is due and payable. The statutory demand is governed by the Insolvency Act 1986 and serves as a precursor to more serious legal actions, such as bankruptcy proceedings.
Generally, statutory demands are used for debts exceeding a minimum threshold of £5,000. The debtor is given a strict timeframe (usually 21 days) to either pay the debt in full or reach an agreement with the creditor to settle the amount owed.
If the debtor fails to pay or reach an agreement, the creditor may use the non-compliance as evidence of the debtor’s insolvency when seeking a bankruptcy order from the court.
Upon receiving a statutory demand, the debtor has several options, including paying the debt in full, negotiating a settlement, or applying to set aside the demand if there are valid grounds.
Statutory demands are typically used for undisputed debts. If the debtor disputes the debt, other legal avenues may be more appropriate.
Grounds for Challenging a Bankruptcy Petition
A business facing a bankruptcy petition may apply to the court to set aside the petition based on various grounds. Some common grounds include:
Dispute over the debt:
If the business disputes the validity or amount of the debt claimed in the statutory demand, it may challenge the bankruptcy petition on the grounds that the debt is not owed or is inaccurately stated.
Incomplete service of the statutory demand:
The business may challenge the petition if the statutory demand was not served properly or if there were irregularities in the service process. The demand must be served correctly to be valid. It can be served personally, left at the debtor’s last known residence or place of business, or sent by post.
Negotiating a settlement:
If the business is in negotiations with the creditor to settle the debt or has reached an agreement to repay the amount owed, it may apply to set aside the petition.
Payment of debt before the hearing:
If the business pays the outstanding debt in full, including any additional costs incurred by the creditor, before the scheduled court hearing, it may have grounds to request the petition be set aside.
Mistakes in the Petition Process
Any procedural errors in the filing or service of the bankruptcy petition may provide grounds for challenging its validity.
Applying to the Court
To challenge a bankruptcy petition, the business must file an application with the court. Seeking legal advice is crucial during this process to ensure the proper documentation is submitted and the grounds for challenging the petition are effectively presented.
The business typically has a limited time, often within 18 days from the date of service, or 7 days before the hearing, to apply to the court to set aside the bankruptcy petition before the scheduled hearing. Swift action to file with the court is essential to meet legal deadlines.
Challenging a bankruptcy petition provides an opportunity for the business to explore alternatives to bankruptcy, such as negotiating a settlement or proposing company voluntary agreement. A company voluntary agreement is similar to an Individual Voluntary Agreement, but for businesses. Seeking professional advice during this period can help in devising a strategy that aligns with the business’s financial circumstances.
What happens if you fail in challenging a bankruptcy petition?
If a challenge to a bankruptcy petition is unsuccessful, it means that the court has determined that the grounds presented by the debtor (individual or business) were not sufficient to set aside the petition. In such cases, the legal process will typically proceed, and the court may proceed to make a bankruptcy order. Here’s what may happen:
If the challenge is unsuccessful, the court will proceed to issue a bankruptcy order. This formal legal document declares the debtor bankrupt and triggers the commencement of bankruptcy proceedings.
Appointment of a trustee:
Once the bankruptcy order is made, the court will appoint an official receiver or a licensed insolvency practitioner as the trustee. The trustee is responsible for overseeing the bankruptcy estate, which includes the debtor’s assets.
Liquidation of assets:
The trustee will take control of the debtor’s assets and may liquidate them to generate funds for the repayment of creditors. This process involves selling assets such as property, vehicles, and other valuables.
Restrictions on the debtor:
The debtor becomes subject to certain restrictions during the bankruptcy period, which typically lasts for 12 months. These restrictions may include limitations on obtaining credit, running a business, or acting as a company director.
Creditors will be notified of the bankruptcy, and they can submit their claims to the trustee to seek repayment from the available funds. The claims will be prioritised according to the insolvency hierarchy.
Discharge from bankruptcy:
After the bankruptcy period expires (usually 12 months), the debtor may be discharged from bankruptcy. However, certain restrictions may continue for a longer period, and not all debts may be discharged.
Impact on credit rating:
The bankruptcy will be recorded on the debtor’s credit file, and it will negatively impact their credit rating for a significant period. This can make it challenging to obtain credit or open bank accounts in the future.
The debtor has ongoing obligations during the bankruptcy period, such as cooperating with the trustee, providing information about their financial affairs, and not attempting to conceal assets.
How can Expert Commercial Law assist?
Our panel of solicitors have many years of experience in dealing with challenging a bankruptcy petition and can assist in all aspects of debt recovery proceedings including mediation, county court proceedings and negotiation.
We understand the complexities and emotional toll that come with challenging a debt. Our panel is highly skilled and have a deep understanding of this area of law, and are dedicated to providing tailored and compassionate support to each of our clients.
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