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Abuse Of Process Using Insolvency Proceedings As A Means To Recover Debt
Insolvency proceedings can only be used when a company is genuinely insolvent, they are not a substitute for debt recovery proceedings.
Date: June 2009
The following case study comes as a timely reminder to all involved in debt recovery matters that even when in the midst of a recession and when people are trying to do everything they can to recover sums as quickly as possible, insolvency proceedings must only be used where there is a genuine insolvent company and the sums in question are not disputed.
Where disputed sums are involved the only way to proceed is using a claim form in the courts and not through the insolvency courts.
Recently Furley Page debt recovery team was approached by a client who had a winding up petition made against them without a Statutory Demand being used. [A Statutory Demand is a formal document under the Insolvency Act 1986 which gives the debtor 21 days in which to discharge the outstanding sum failing which a winding up petition can be presented.]
The facts of the matter are as follows:
Our client ('C') contracted with another company ('A') who was a sub-contractor for C's work in the construction sector. A carried out the work and invoiced C for the agreed sum. Unfortunately the end client ('E') was not satisfied with some of the work that A had carried out and they requested that C put this right.
A was requested back on site to rectify their work before their invoices were paid. A refused to go back on site until they were paid in full.
C, who was subject to penalties if the contract overran, used their own staff to complete the remedial work, to avoid the penalties. Whilst the remedial work was being carried out, and before E had paid C for the work; A 'presented' to the High Court a winding up petition. [A winding up petition is a formal application to the court to have a company liquidated by the court. ]
No Statutory Demand was served and A looked to rely on the fact that 'a letter before action' was unpaid. [A letter which sets out the sum claimed and gives the debtor a fixed period of time to pay, failing which further action will be taken.]
We were instructed to avoid the advertising of the Petition which can only occur 7 days after service of the Petition on the company. [Service is when a document is delivered to the debtor. Under the Insolvency Rules all winding up petitions must be advertised to allow other creditors to take part in the proceedings.]
We sought undertakings from the solicitors acting for A that they would not present as the subject matter was not finalised and in dispute. [Present means advertise the petition – under the Insolvency Rules all advertisements must take place in the London Gazette.]
They refused to provide an undertaking and therefore we presented an injunction application restraining the presentation as this was an abuse of process. The application was successful and A's solicitors were severely criticised by the Judge for using insolvency proceedings as a method of debt recovery where there was a genuine dispute and for not using a statutory demand.
This information has been prepared to highlight some key issues. It is intended for general guidance only and is no substitute for specific legal advice. It is based on our understanding of the current legal position and is, of course, subject to changes in the law after 2 June 2009.
Should you require any specific legal advice on the issues covered above please contact Martin Kingman, Debt Recover and Insolvency Manager.
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