Why You Can't Use Insolvency Proceedings To Recover Debt

02 November 2009

Insolvency proceedings can only be used when a company is genuinely insolvent. They can’t be employed as a means of putting pressure on debtors, warns debt recovery specialist Martin Kingman.

Martin, debt recovery and insolvency manager at leading regional law firm Furley Page,cites a recent case where his team was approached by a client who had a winding up petition made against them without a statutory demand. (A statutory demand is a formal document giving the debtor 21 days to pay the outstanding sum, after which a winding up petition can be made. This is the application to the court to have a company liquidated.)

Furley Page’s client (C) contracted another company (A) to carry out work in the construction sector. A invoiced C for the agreed sum but the end client (E) wasn’t satisfied with some of the work and asked C to put it right.
 
A refused to go back on site until its invoices were paid in full. C, who was subject to penalties if the contract overran, used its own staff to complete the remedial work. Before the work was finished and E had paid C, A presented a winding up petition to the High Court to recover sums due to it.
 
No statutory demand was served and A relied on the fact that a letter before action was unpaid. (This letter sets out the sum claimed and gives the debtor a fixed period of time to pay, failing which further action can be taken.)

Martin comments: “Under the insolvency rules, all winding up petitions must be advertised in the London Gazette seven days after the petition has been served to allow creditors to take part in the proceedings. We were instructed to restrain any advertising of the petition. We sought undertakings from A’s solicitors that it wouldn’t advertise as the subject matter wasn’t finalised and in dispute.

“They refused, so we presented an injunction application restraining them as this was an abuse of the insolvency 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 also for not using a statutory demand.

“This case is a timely reminder to seek advice if you need to recover any outstanding sums – or if you’re considering any form of insolvency process.”

For further information on debt recovery and insolvency issues contact Martin Kingman on 01634 828277.
 

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