Government reforms have now come into force whereby the minimum level of debt over which a creditor can petition for an individual’s bankruptcy will rise from £750 to £5,000. The change came into effect from Thursday 1st October 2015. There had been previous suggestions that there would be an increase to circa. £3,000. The actual increase was therefore much higher than originally expected and we have consequently witnessed an increase on the previous threshold by almost 700%.
The increase is no doubt long overdue with the £750 threshold dating back to the inception of The Insolvency Act 1986 and being well out of line with current inflation rates. Applying the new inflation rates would have meant an increase in the threshold up to £1,984. The sizeable increase will clearly favour debtors over creditors. The bankruptcy petition, or at least the threat of a petition, can be an effective tool for individuals and small and medium sized businesses in pursuing debtors who are refusing to pay what they owe. The proposed rule change will now abolish the advent of this useful mechanism for the recovery of any debt lower than £5,000.
In some arenas, the changes will indeed be welcomed, notably by individual debtors, as they will serve to prevent ruthless creditors from petitioning to bankrupt them over relatively small amounts. Business Minister, Jo Swinson has explained the reasoning behind the reforms suggesting that bankruptcy ought to be reserved “for those with sizeable debts”.
How Will the New Threshold Affect Commercial Debt Recovery
In practice this will mean that it will be advisable for both companies and individuals providing credit facilities below £5,000 to take money on account and ensure that they have in place watertight terms and conditions and contractual documentation in relation to such payments in order to avoid any problems further down the line. The above reforms will certainly make things more difficult for both individuals and small and medium sized enterprises to recover their debts from non-paying individuals.
The potential difficulties for creditors will be further exacerbated by the fact that the reforms have coincided with the March 2015 astronomical rise in court fees which have arguably restricted access to justice. Court fees have risen substantially and by way of example, claims worth £10,000 or more in value now warrant a court fee of 5% of the value of the claim meaning that it will cost a claimant a colossal £10,000 to issue a claim with a value of £200,000.
The service of the Statutory Demand upon the individual debtor had previously served as an efficient, cost-effective and powerful method of recovering debts below £5,000. In the absence of such, an increase in bad debt write offs is widely anticipated.
Winding Up Petitions
The threshold in respect of Winding Up Petitions presently remains unchanged and the money sum specified by section 123(1)(a) of the Insolvency Act 1986 remains at £750. Expert commentary does however suggest that there could be a similar increase in respect of such company debts in the not too distant future. This possible future increase serves as further evidence that companies ought to be taking payment on account in respect of smaller credits and also ought to be reviewing their terms and conditions to ensure they are watertight.
Here at Farleys we are experts at dealing with debt recovery on both a commercial and individual basis. We act for both companies and individuals and have experience of recovering funds from both individual and company debtors. If you have been affected by any of the above issues or would like to speak to one of our specialist solicitors then do not hesitate to contact us today for expert advice on any of the above. To speak to a Commercial Litigation specialist please call 0845 287 0939 or alternatively you can email us.