Is Insolvency the new method of debt collection?

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Judgement sharpens winding-up orders

Judge Rinder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Last week saw a case resolved which could see more winding-up petitions issued across the country as a result.

 

Courts have traditionally taken a dim view of insolvency proceedings being used for debt collection purposes. 

 

When a company can pay a debt but refuses to do so for one reason or another, legally it’s been implied that litigation is the proper recourse. 

 

In the case of Sell Your Car With Us Ltd v Sareen (2019) the company agreed to sell Mr Sareen’s car for a fee – they did and as per the agreement they were due to pay Mr Sareen £51,800. 

 

What happened next was that a criminal third party managed to intercept the emails between the company and Mr Sareen. They posed as Mr Sareen, sending the company fake bank details and asking that £30,000 of the sale price was paid into that account which they duly did.  Needless to say, Mr Sareen didn’t receive it. 

 

The company refused to pay the amount owed to Mr Sareen so he served a statutory demand on the company for the outstanding £30,000 which expired. His next step was to bring a winding-up order against them. 

 

The company tried to have the winding-up order dismissed on two counts: 

 

  • The company maintained that they had a genuine and substantial counterclaim against Mr Sareen and were entitled to have this heard.
  • While it was financially able to pay the debt, the company argued that the threat of insolvency proceedings should not be used just to collect a debt and if Mr Sareen was so confident about his case, he should issue a claim and seek summary judgement.

 

Oh no they didn’t

 

According to The Insolvency Act (1986) the relevant court must be satisfied that there’s an actual due debt when considering a winding-up petition.  

 

It states that insolvency proceedings shouldn’t be used to resolve disputes and when there is a triable issue, that litigation is the appropriate forum to determine liability.  

 

Also that the issue in dispute should be substantial, genuine and that “a mere honest belief that payment is not due” isn’t sufficient. 

 

Similarly a winding-up order or bankruptcy petition may only be presented where the debtor has proven they’re unable to pay the debt. 

 

The judge in this case acknowledged that the threshold for the court to determine that a debt is genuinely disputed is low and if there’s any doubt then the court should proceed with caution. 

 

Given that, the judge ruled that the company’s counterclaim failed to meet this level and they were satisfied that the company owed Mr Sareen the money. 

 

Critically, the judge rejected the company’s assertion that insolvency proceedings were unacceptable as a debt collection method. Regardless of their financial position, the judge considered that if the debtor doesn’t pay the sum claimed in the statutory demand then the court should find that they’re unable to pay debts as they fall due, regardless of their actual financial situation and ability to pay. 

 

This is the most important point – the judge found that by neglecting or refusing to pay a statutory demand then there’s satisfactory evidence for a court to find that the debtor is unable to pay the debt. 

 

This ruling would confirm that it’s fine to bring a winding-up petition to pressure debtors to pay (as long as the debt itself is not seriously disputed). 

 

This judgement underlines that legally speaking, insolvency proceedings are an acceptable method of collecting undisputed debt and that as a result, we might see an increase in the number of winding-up petitions brought to pressure solvent debtors who just don’t feel like paying.  

 

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If you’ve had a statutory demand or a winding-up petition served against you or you’ve been threatened with one then contact us

 

We offer a free initial consultation with one of our expert team of consultants who can go through your unique circumstances with you and come up with a course of action that will hopefully help you get your business back on a firmer footing.

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