Bankruptcy Procedure

In Part 1 of these series of articles, we talked about the merits of using insolvency proceedings as an effective method of recovering unpaid council tax (click here to read)

In Part 2, we will look at the bankruptcy procedure in more detail and try to provide guidance on how to commence proceedings, whilst also ensuring that due caution is applied, prior to instigating bankruptcy action.

In his report into the complaint against Manchester City Council by a debtor referred to as Mr Joseph, the Local Government Ombudsman regarded the Council’s lack of a written policy of guidance for Officers to be a fundamental flaw. He went on to say in reaching his conclusions that:

“Any policy on the use of bankruptcy should contain the following advice to officers;

  • To keep in mind the severity of the collection method, so that it is generally only used as a policy of “last resort” when other collection methods have failed and payment arrangements have not been adhered to;
  • To give the debtor due warning as to the potential consequences and costs of bankruptcy before steps are taken to initiate such proceedings; I do not expect to see the consequences of bankruptcy explained when a statutory demand is issued, as by this time the debtor (especially one on state benefits or low wages) may have too little time to make alternative payment arrangements to avoid bankruptcy and the Council, having instructed agents and incurred costs as a result, may be unwilling to accept anything less than full payment of the debt in a short period of time;
  • To weigh in the balance factors that will influence the decision to pursue bankruptcy including the potential availability of other collection methods, the debtor’s payment history and what is known about the debtor’s circumstances including his entitlement to state benefits, any known health (especially mental health) problems, availability of assets etc;
  • To keep a written record of the considerations applied in each individual case”.

Although we stated in Part 1 that regulations do not seem to assert that a ‘last resort’ approach must apply, we do strongly recommend that any councils using or considering the use of bankruptcy proceedings ensure that they implement robust procedures so that rigorous checks are made prior to the commencement of insolvency action.

One way of ensuring that you provide the debtor with due warning as to the potential consequences and costs of bankruptcy is to instruct your Solicitor to issue a ‘Letter Before Action’. Alternatively, Councils may also wish to consider whether it is sensible to warn debtors about the consequences of bankruptcy at the start of the enforcement process. That might be at the issue of a reminder notice or at the summons stage. Perhaps a warning could also be published on the Council’s webpage.

1.    A Solicitor’s Letter Before Action (‘LBA’)

At Welbeck Law LLP, we ensure that the ‘Letter before Action’ sets out in clear and concise terms:-

  • The amount to be paid;
  • A warning that unless the debt is paid within a specified number of days (usually 7-14), a Statutory Demand will be served;
  • The consequences of the Statutory Demand;
  • The consequences of bankruptcy in the event of non-payment of the sum due.

If the debtor does not heed the warning provided by the ‘LBA’, the Council should instruct their Solicitor to commence bankruptcy proceedings by serving a Statutory Demand on the debtor.

 

2.    The Statutory Demand

Welbeck Law LLP will draft the Statutory Demand on behalf of the Council and make arrangements for the document to be served by a Process Server.

The Statutory Demand will be sent to the Process Server, who will be instructed to serve the Debtor personally and prepare an appropriately worded Witness Statement of Service, for filing with the Court.

 a)   Complying with the Statutory Demand

Within 21 days of being served with the Statutory Demand, the Debtor has the option to:

  • Settle the debt in full;
  • Make a reasonable offer of payment;
  • Secure the debt;
  • Compound the debt.

(NB – In Part 1 we made reference to the LGO’s decision in the case involving Thurrock Council. It is important to emphasise the fact that a council has no legal grounds upon which to recover costs should they enter into a settlement arrangement with the debtor at this stage).

Alternatively, the Debtor can apply to set-aside the Statutory Demand within 18 days of being served. There are limited grounds for doing so and these are:

  • The debt is disputed;
  • The Debtor has made a reasonable offer that has been rejected;
  • The debt is secured;
  • There has been a procedural error or irregularity.

If the Debtor chooses not to comply with the Statutory Demand, we recommend that you instruct your Solicitor to draft a Bankruptcy Petition for presentation to the Court, which can be as soon as the 22nd day after service.

However, we only recommend the commencement of bankruptcy proceedings where there is a clear prospect of payment of the debt upon service of the Petition or where the Debtor has substantial property equity which would be realisable within a bankruptcy.

3.    The Bankruptcy Petition

Prior to presenting the Petition for issue, Welbeck Law LLP will make a search of the Court record (High Court only) to ensure that there are no existing or prior Petitions.

The Petition is presented at the Debtor’s local County Court (or in the High Court as the case may be) and a hearing date for the Petition will usually be between 6 – 8 weeks from the date of issue.

Once the Petition has been issued by the Court, Welbeck Law LLP will make arrangements for the document to be served by a Process Server.

The time between service of the Petition and the actual Petition hearing is an extremely important period of time and we make considerable efforts to contact the debtor to try to prompt payment and re-iterate the consequences of being adjudged bankrupt.

Having established contact, Welbeck Law LLP will recommend that the debtor seeks legal and/or financial advice if it is evident that the debtor needs or would benefit from such expert advice.

From our experience, we find that the general rule of thumb with regard to recoveries is the ‘third, third, third’ rule. By this we mean that generally speaking, we find that a third of debtors will pay the debt and costs at the Petition stage; another third will pay the debt but not the costs at the same stage and the final third will be adjudged Bankrupt.

As we have done with many of our Local Authority clients, we are happy to discuss the use of insolvency action as an effective recovery tool with you and assist in implementing procedures to maximise the collection of council tax and other charges.

We are willing to provide you with a free consultation at your office detailing the service we can offer, sometimes on a ‘no win, no fee’ basis. If this is something of interest to you, please call or e-mail Jeremy Boyle (jb@welbecklawllp.co.uk) or Mark Hodges (mark.hodges@welbecklawllp.co.uk) on 020 7467 3999, quoting Opportunities Magazine.

You can also visit our website http://www.welbecklawllp.co.uk/

Disclaimer

The information and any commentary on the law contained in this article is provided free of charge for information purposes only.

No responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by any member or employee of Welbeck Law LLP. The information and commentary does not and is not intended to amount to legal advice and is not intended to be relied upon.

You are strongly advised to obtain advice from a Solicitor about your specific case or matter and not to rely on the information or comments in this article.

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