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May 2015

Statutory demand - Bankruptcy petition threshold changes

Ordinarily the service of a Statutory Demand is the pre-cursor to commencing Insolvency Proceedings.  This is whether it is a Bankruptcy action against an individual or alternatively a Winding-Up Petition against a company. 

The use of Statutory Demands are sometimes used to coerce a Debtor in to discharging sums outstanding, rather than the Debtor having to face the (limited) ignominy of being made Bankrupt.

The threshold at which a Statutory Demand may be personally served is £750.  Service of such a Demand on an individual can induce/coerce payment and does therefore constitute a useful weapon in a debt collector’s armoury.

The Government has however indicated that proposals to increase the current debt threshold of £750 to £5,000 will come into effect on the 1st October 2015. 

The theory behind the suggested changes take into account the fact that disproportionate costs and fees can be incurred in a “small” Bankruptcy when compared to the size of the debt itself.

The Government has taken the view that proportionality is also an issue.  A person’s Bankruptcy may have a significant impact on that individual as compared to the value of a low debt itself. 

Finally, the Human Rights Act rears its head, in that consideration has been given as to whether or not Bankruptcy is the appropriate form of enforcement action to recover low-level debts.

The current threshold of £750 has been in place since the 1986 Insolvency Act came into effect.  A large loaf of bread at that time cost just 33 pence as opposed to say £1.50 now.  The proposed increase in the threshold is however still more than the effects of inflation over the last 20 years.

Creditors should be aware that these proposed changes only relate to individual Bankruptcy Petitions/Statutory Demands and do not impact upon a creditors’ ability to serve a Statutory Demand upon a company.  The Liquidation process can still be commenced against a company in the absence of a Statutory Demand being discharged when claiming £750 more.

The likely change will therefore make it more difficult for creditors to recover smaller debts via this route.  If you would like to discuss any matters arising before the implementation of the proposed change, please do not hesitate to contact Graeme Weir or James Head or by telephone 020 8290 0440.