Managing debtors in insolvency: key considerations for creditors

Debtor management is vital to running a successful business. While payment is often expected, insolvency can quickly disrupt this assumption and create significant challenges for creditors. This article outlines proactive steps creditors can take, their legal rights (including the use of statutory demands), and the risks involved. By understanding these factors, creditors can make informed decisions to protect their interests when dealing with insolvency.

5 min read Updated on 02 Oct 2025
Managing debtors in insolvency: key considerations for creditors

The benefit of acting early

Being proactive is a theme throughout this insolvency blog series (see Navigating Contentious Insolvency: Why Early Action Matters), and indeed applies to any entity requiring dispute resolution more generally). While it is acknowledged that taking legal advice comes with cost, being prepared early has clear benefits and ultimately these costs may well have result in a net gain by the end of the matter.

When dealing with a potentially insolvent debtor, creditors should act swiftly and strategically. Open communication with the debtor is often a prudent first step. In these situations, knowledge is power. While the involvement of legal representatives at this point is not essential, input with a consideration of future action can be useful.

In broad terms, the establishment of the following can be useful –

  1. Whether the debtor contests the debt. Where an admission of indebtedness can be obtained, this can be utilised later to minimise costs. Conversely, knowledge that the debt is contested increases the chance of more expensive litigation.
  2. The financial position of the debtor. The extent to which this can be determined is reliant on the debtor (and therefore the method of approach) but can be very useful in guiding further action.
  3. Willingness for early negotiation/resolution. Whether this is viable will be fact-specific, but if a solution is possible then this should be explored fully!

Establishing your legal position as a creditor

A creditor’s legal position in respect of a debtor is highly fact-specific, with factors to consider including the information established through the points above, the contractual position between the parties (if applicable), the size or nature of the debt and the creditor’s appetite for taking action.

Where a debt is uncontested (or there is no reasonable ground of the debtor doing so) then the creditor may want to consider issuing a statutory demand.

What is a statutory demand?

A statutory demand is a powerful tool available to creditors. It is a formal demand for payment of a debt and serves to establish that the debtor is unable to pay their debts, thereby creating a presumption of insolvency. This presumption arises if the debtor fails to pay, secure, or dispute the debt within 21 days of receiving the demand.

The receipt of a statutory demand often compels debtors to assess their options quickly, potentially leading to repayment or settlement to avoid the risk of winding-up or bankruptcy proceedings. Legal assistance is not essential in preparing statutory demands, but as the section below demonstrates it is often prudent to take advice to ensure the process has the intended impact.

Contested debts and commercial considerations

Where debts have the potential to be contested, creditors need to undertake a commercial analysis of the options available to them, in light of their understanding of the debtor’s financial position. The options in this circumstance are wide-ranging and creditors will understandably require an understanding of the potential costs involved.

Ultimately, action taken by a creditor may result in insolvency proceedings against the debtor. A creditor’s ability to drive such action will depend on the factors mentioned above. Should the matter reach this point, it is clearly important that the creditor receives pragmatic, commercially-focused advice.

Risks creditors should be aware of

As alluded to above, getting an understanding of the debtor’s position can be vital to being able to effectively select a course of action. Again, early professional assistance can be extremely useful in helping determine this. It can sometimes be a balancing act between a creditor exercising its rights and protecting its position, without spending costs which make doing so disproportionate (either generally or in light of what a creditor can reasonably expect to realise from an insolvent debtor).

The risks of statutory demands

While statutory demands and insolvency proceedings can be effective, creditors must be mindful of the associated risks. As mentioned above, statutory demands can be powerful tools to spur debtors into action, but only if they are legally compliant and used in the correct situations.

Limitations of insolvency proceedings

Similarly, creditors need to be aware that insolvency proceedings are not intended as debt collection tools for individual creditors, but as mechanisms to realise the debtor’s assets for the benefit of all creditors. Misusing these proceedings for collateral purposes may result in the petition being struck out as an abuse of process.

Risks of preferential payments

To add to the potential pitfalls, creditors should also be cautious about accepting repayments from an insolvent debtor, as such transactions may later be challenged by an administrator or liquidator. For instance, payments made shortly before insolvency could be deemed preferential transactions and set aside.

Additionally, directors of insolvent companies may face personal liability for wrongful trading or misfeasance (among other potential claims), which could complicate recovery efforts (see our earlier blog for further information – Considerations for Directors Facing Potential Insolvency).

Conclusion: why early, commercially-focused advice matters

Creditors dealing with potentially insolvent debtors have several tools at their disposal, but should be mindful that no course of action is without its risks. Despite this, it is clear that acting early is always in a creditor’s interests, if only to understand the likelihood of a debt being settled and more generally the position of the debtor. It should be acknowledged that the impact of an insolvent debtor may not only be financial, when considering their role in the client’s own business.

This article should demonstrate the importance of receiving commercially-focused advice and choosing action which is in the client’s best interests, when several options are available. If you have any need for such advice please get in touch with our specialist Insolvency team on 01202 525333 or via our make an enquiry form.

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