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UK High Court reaffirms right of creditors to use winding up process to pursue debts

In a recent decision of the UK High Court, which will be of interest to all insolvency practitioners, the Court reaffirmed the right of parties to issue winding up petitions as a legitimate means of securing payment of an undisputed debt from a company.

In Sell Your Car With Us Ltd (SYC) v Sareen, the creditor had engaged the debtor company, SYC, to sell his sports car and, on completion of the sale, to deposit the proceeds in his bank account. Communications were agreed to be conducted by email. A third party fraudster set up an email address similar but different to the creditor’s email and convinced staff at SYC to pay the sum into a bank account other than that provided by the creditor. 

SYS were served with a statutory demand but applied for an injunction to restrain the presentation of a winding up petition. The basis for the injunction was that there was a genuine and substantial dispute between the parties regarding which party was responsible for the fraud. A counterclaim was also advanced on the basis that (1) there was an implied term in the contract that the creditor would take reasonable care over the security of his emails, and (2) there was an implied representation by the creditor that he had reasonable control over the security of his emails.

The Court carefully considered whether these claims constituted a genuine and substantial cross-claim for the purposes of disputing the debt and, despite there being a low threshold, held that they did not.

The application was refused on the ground that the debt was not subject to a substantial dispute and it was accordingly open to the defendant to recover payment of the debt through the winding up process. The judgment considers the authorities, and concludes, following the decision in Cornhill Insurance Plc v Improvement Services Ltd, that the failure by a company to pay even a small indisputable debt is evidence of inability to pay its debts.

The decision also considers the authorities on the issue of abuse of process by using the winding up process where the debt is disputed on bona fide and substantial grounds.

The Judge cites with approval Goode on Principles of Corporate Insolvency Law, 5th Edition, where it is said that it is perfectly proper to bring winding up proceedings to put pressure on a company to pay a debt indisputably due, even if there are other proceedings in train for recovery of the debt, and even if the winding up proceedings are being pursued with personal hostility or even venom.

The decision confirms that it is perfectly legitimate for parties to bring winding up petitions against corporate entities who owe them money in circumstances where there is no genuine dispute.

UK High Court reaffirms right of creditors to use winding up process to pursue debts

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