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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

10 JAN 2010

Insolvency threshold would be lifted from £750 to £2,000 to protect small businesses under new plan unveiled by the Tories

I have critiqued proposed Tory reforms of English and Welsh insolvency law before. The Party has come up with a new proposal. Speaking on the Andrew Marr Show about a new plan to help businesses Mr David Cameron MP revealed (at 42:39 onwards) that: "The insolvency threshold would be lifted from £750 to £2,000 to protect small businesses under the plan." He went on to note, "When you look at the figures more small businesses have gone bankrupt [?!] in this recession than in previous recessions and a number have been pushed there by the Government itself."

In his defence Mr Cameron was forced to incorrectly deploy the term bankruptcy by Mr Marr who interjected with the term. They both could of course have been referring to sole traders and partnerships, but I fear they had companies (jurisitic persons) in mind.

I presume this announcement relates to s.123 Insolvency Act 1986 (IA86) which notes:

"Definition of inability to pay debts.

(1) A company is deemed unable to pay its debts—

(a) if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or..."

Prima face, this seems a sensible protection against small companies being put into an insolvency procedure by overzealous creditors. However, what if a small business is owed money by another small business (or even a big business)? Let us put the hypothetical figure owed at £1,500; not an insubstantial amount of money. It is for example the same amount that Mr Shailesh Vara MP, the shadow deputy leader of the House of Commons, tried to claim on his expenses for costs incurred before he was elected to the House of Commons.

Many small businesses will feel that the £1,500 is a significant sum to recoup, just as Mr Vara did. They may need the £1,500 to carry on trading. Should they be precluded from recovering the figure by this artificial uplift? It is a delicately balanced question which requires bipartisan consideration.

To date the Conservatives have not published any documentation that expands Mr Cameron's announcement. An alternative way of looking at the proposal is that it will reduce the number of businesses that go into an insolvency procedure thereby cutting down the work of the Insolvency Service, and others (i.e. private firms). A number of further questions remain outstanding; why £2,000 as the new limit? What will the balance be between corporate and other proceedings particularly in relation to partnerships? Finally, what alternative remedies are available for the creditor for debts less than £2,000 and what attitude should the directors of a corporate debtor take where the range of their debts falls below the limit?

Bearing in mind the recent increase in court costs and the deposit on a winding up application, is the increase in the threshold debt to £2,000 completely justified?

This quandary is by no means new; it arose in relation to the threshold debt of £50.00 for a bankruptcy petition, a limit fixed in Victorian times and which had become hopelessly out of date by the 1960s.

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