1. In legal debt recovery, clients frequently ask me to declare a debtor bankrupt or wind up their company.
2. However, I often recommend against this, especially when better options exist and particularly if the client is an unsecured creditor (meaning they don't have any collateral from the debtor).
3. The main reason is straightforward: unsecured creditors rarely recover any money from bankruptcy or winding up proceedings. In my years of experience, I have only had two unsecured creditors recover anything in these situations.
4. Secured creditors—like banks or hire purchase companies with legal claims on the debtor's assets—might recover some of their money, but even they face challenges; e.g. where assets might not sell for enough money and cashflow is non-existent.
5. To be brutally honest, bankruptcy or winding up proceedings often only benefit the lawyers and liquidators involved, as they get paid regardless of the outcome. Meanwhile, the unsecured creditor might end up losing more, paying legal and liquidator fees without getting any returns.
6. However, in some cases, the threat of bankruptcy or winding up can push a debtor towards settling their debts. For instance, a statutory demand under Section 466 of the Companies Act 2016 can be a powerful threat in certain circumstances.
7. In a future post, I will discuss better options for creditors to recover bad debts, such as garnishing bank accounts, seizing assets, and using Judgment Debtor Summons. Stay tuned!