17 Oct 2019

According to the recent case of Sell Your Car With Us Ltd v Sareen [2019] – yes, they are. 

Historically the courts have looked dimly on the use of insolvency proceedings as a method of debt collection. For this reason, where an individual or company appears to have the means to pay a debt but apparently refuses to do so, the courts have implied that the only proper legal recourse is through litigation. In this case, the judge explained why she considers this submission to have been taken too far. 

Background

Sell Your Car With Us Ltd (the Company) agreed to sell Mr Sareen's car for a fee. The Company successfully sold the car and, in line with the agreement, the Company was due to pay Mr Sareen £51,800.

A third party subsequently intercepted emails between the Company and Mr Sareen. The third party posed as Mr Sareen and sent bank details to the Company requesting that £30,000 of the sale price be paid into that account. When the Company sent the money, Mr Sareen of course did not receive it.

Mr Sareen served a statutory demand on the Company for the outstanding sum and the demand expired. The Company sought to restrain the presentation of a winding-up petition on two bases:

  1. That there remained a genuine and substantial dispute between the parties and that the Company was entitled to counterclaim against Mr Sareen; and
  2. That it was financially able to repay the debt. The Company asserted that the threat of insolvency proceedings should not be used as a method of debt collection and claimed that if Mr Sareen was so confident in his case that he should issue a claim and seek summary judgment. 

The Law

In accordance with the Insolvency Act 1986, when considering a petition, the Business & Property Court (or the relevant Bankruptcy Court) must be satisfied that there is a debt due. Insolvency proceedings (a summary process) should not be used to resolve disputes. Where there is a triable issue, the appropriate forum to determine liability is litigation. However, the issue in dispute should be substantial and genuine – "a mere honest belief that payment is not due" is not a sufficient submission. 

A winding up or bankruptcy petition may only be presented where the debtor has demonstrated an inability to pay its debt. 

The Decision

The judge acknowledged that the threshold for the court to determine that the debt is genuinely disputed is low. If there is "any doubt", then the court should proceed with caution. However, the judge in this case considered that the Company's cross-claim failed to meet that low threshold. The judge was satisfied that the Company was indebted to Mr Sareen.

Most notably, the judge did not accept the Company's assertion that insolvency proceedings were not acceptable as a method of debt collection. The judge considered that regardless of the debtor's financial position, if a debtor (as prosperous as it may appear to be) does not pay the sum claimed in a statutory demand, then the court should find that the debtor is unable to pay its debts as they fall due. 

Practical Applications

It is not rare for a debtor to leave its debts unpaid, despite appearing to have sufficient means to settle those debts. Where previously doubt has been cast on using insolvency proceedings as a debt collection method in such circumstances, this judgment makes it clear that neglecting to pay the sum due in a statutory demand is satisfactory evidence for the court to find the debtor to be unable to pay its debt. 

The judgment also confirms that it is "perfectly proper" to launch a petition in order to bring pressure on a debtor to pay a debt – providing, of course, that the debt is not substantially disputed. The judge went so far as to say that the creditor could do so "with personal hostility or even venom", but that part is definitely optional!

Conclusions

Key points arising from the judgment:

  • Insolvency proceedings are an acceptable method of collecting an undisputed debt. 
  • Even a substantial company, or a prosperous individual, can properly be presented with a petition if they have neglected to pay the creditor's statutory demand. 
  • Insolvency proceedings should not be used where the debtor has a genuine dispute or counterclaim; but if the court decides that the debtor's dispute would inevitably fail, the creditor should be allowed to seek recovery of the debt via insolvency proceedings. 
  • Following this case, we may see an increase in the use of winding up petitions as a method of putting pressure on a solvent company/individual to pay their debts.