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Can liquidation be used as a form of debt collection?

15 October 2019 Written by Stephen Cowan Category: Blog

The case of Sell Your Car With Us Ltd v Sareen, decided in the English High Court in 2019, is a timely reminder that insolvency proceedings can be used as a form of debt collection, even although some judges frown upon the practice.

Sell Your Car With Us Ltd (“Sell Your Car”) applied for an injunction to restrain Sareen from presenting a winding up petition on the grounds that the alleged debt was subject to a dispute and that there was the possibility of a valid counterclaim. In addition, they said that, because they were in a financial position to pay the debt, the threat of insolvency proceedings should not be used as a method of debt collection.

The facts of the case

Sell Your Car agreed to sell Sareen’s car for a fixed fee, which they did for £51,800. However, a fraudster intercepted email exchanges between the parties, the result of which meant that rather than Sell Your Car sending Sareen £30,000, it was sent to the fraudster instead. Following discovery of the fraud, Sell Your Car sent Sareen the balance of £21,800 but did not recompense him for the £30,000.

Sareen then served a statutory demand on Sell Your Car for the £30,000. They sought to have any winding up petition restrained on the basis that the debt was subject to a counterclaim on the grounds that Sareen should have taken greater care of his email account and that this warranted further examination. In addition, they argued that the failure to exercise adequate control over the email account was a “misrepresentation”.

Sareen’s position was that Sell Your Car’s arguments were neither genuine nor serious. This was because the foregoing terms could not be implied into the contract, in which event Sareen was not in breach of any implied contractual term. Even if such a representation could be implied as a term, at the time it would have been made it would not have been done with any contractual intent.

What was the decision?

The court initially stated that if there were a genuine counterclaim, then the liquidation petition could be restrained. In the judges' view there was no implied term that Sareen would take reasonable care over the security of his email account.

With regards to using the petition as a means of debt collection it was held that: ‘while winding up proceedings … is an abuse of process on a claim in respect of which there is a triable issue, an unpaid creditor of even a substantial and prosperous company, whose debt is not disputed, is entitled to petition for its winding up, I do not therefore accept the Applicant’s contention that insolvency proceedings should not be used as a method of debt collection’.

Conclusion

This is another reminder that, should a creditor by-pass debt recovery litigation of taking court action for a judgment debt and then enforcing it, but instead use an insolvency process as a means of debt collection, Insolvency Act 1986 (sections 122(1)(f) and 123(1)(e)), it will be no defence to a liquidation petition that the debtor company has the financial resources to pay the debt.

Indeed, where a debtor company disputes the debt, it will have to establish a substantial ground for doing so in order to avoid a winding up petition from being successful. The value of the company’s assets will be irrelevant.

However a small reminder to creditors: if there is a material non-disclosure by them of a material dispute on bona fide grounds then they will face their petition being dismissed.

The message is clear – creditors should reveal and disclose everything relevant to their legal advisors to ensure the success of their case. By so doing, then the liquidation route can often be a very successful tool as a means of rapid debt recovery.

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