Is the Winding up Procedure appropriate for mere Debt Collection?

The winding up procedure should generally be considered a last resort for Creditors; but with the threat or commencement of winding up proceedings, comes a significant amount of pressure for a company to pay their outstanding debt. This has resulted in the winding up procedure becoming an increasingly popular method of debt enforcement.

Sell Your Car With Us Ltd v Anil Sareen [2019] EWHC 2332 (Ch) is a recent case that confirms there is no strict rule that the winding up procedure is an inappropriate method of debt enforcement. It is within this case that Insolvency and Companies Court Judge Burton held that:

“Whilst the courts have historically looked dimly on the use of such proceedings for debt collection, there is a long line of authority leading up to and following Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114 which confirms the right of a creditor owed an undisputed debt to petition the court for winding-up. This is because a failure by a company to pay even one, relatively small debt, is evidence that the company is unable to pay its debts as they fall due”.

If a debt is genuinely disputed, to bring winding up proceedings, would be an abuse of the court process and in such a circumstance an appropriate alternative to the winding up procedure should be sought.

This is not to say that a Creditor cannot bring winding up proceedings if a debt is disputed (see Lachonta Foundation v GBI Investments Ltd [2010] EWHC 37 (Ch)) it just means that the threshold for a Company establishing a defence, cross claim or offset is a low one.

Regardless, it is clear to practitioners that the number of winding up petitions will continue to increase as the Insolvency and Companies Court interpretation of the procedure changes. With Creditors increasingly running out of patience, practitioners believe that the number of petitions will soon overtake the historically higher number of voluntary liquidations, if they have not already done so.

Written by : Leonie-Robyn Murtagh, Solicitor, Defended Litigation team

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