Pursuing winding up proceedings against a company where the debt is genuinely disputed amounts to an abuse of process

The firm recently had to make an urgent injunction application to court, to try and prevent a large finance company wrongfully attempting to wind-up a client company and advertising the same as public record.

The firm and its counsel successfully argued at a contested hearing, that the finance company, in pursuing winding up proceedings for a debt which was substantially disputed, were committing a clear abuse of process.

The firm secured penalty costs against the finance company and managed to prevent winding up proceedings being wrongfully pursued and published against the client, and which would have seriously affected their financial standing.

The argument for abuse of process is based on a well-established position below, that if a debt is disputed, it needs to be properly determined at court before it becomes payable.

If the debt is undisputed and payable in full, a creditor can issue court proceedings for debt recovery or breach of contract, or, if the debtor appears to be in financial difficulty, can initiate bankruptcy proceedings against an individual or winding up proceedings against a company.

If the debt is disputed on substantial grounds, however, bankruptcy proceedings against an individual or winding up proceedings against a company, are wholly inappropriate, and the dispute needs to be first determined by court proceedings.

If a party tries to side step the dispute and tries to proceed straight to winding up proceedings, and pursues things aggressively against all reason, they will likely incur the wrath of the court and become liable for a substantial financial penalty on costs.

Case summary

In this case, the company client had entered into a high value commercial hire contract which provided automatically for very onerous additional payments whenever the client sought to terminate the agreement, and which amounted, in effect, to an unlawful financial penalty.

Even more problematically, this onerous term had been hidden deep within heavy and unclear terms and conditions and had not been brought to the client's attention.

The client company disputed that the financial penalty for termination was fair in all the circumstances and informed the financier of the same.

The financier disregarded the client's objections and opted to serve the directors of the client company personally with statutory demands demanding the full amount, or else bankruptcy proceedings would be started.

The firm found there were serious deficiencies in the content and manner of service of the statutory demands against the directors which rendered them in effective and these were withdrawn by the financier at the last minute after a threat of an application.

The financier kept demanding payment, ignoring the client's objection, and asserted the debt was payable whether or not the client liked it, and said a failure to pay was proof enough that the client company simply could not pay and should be wound up.

The firm outlined clearly that it was not that the client was in financial difficulty, but rather they disputed liability, on the basis that the termination sum was a financial penalty, was overly onerous and not brought sufficiently to its attention and was therefore unenforceable.

Having initial pursued the company directors personally, in reaction, seemingly in the heat of the moment, the finance company proceeded, via its solicitors, to apply for a winding up petition against the client company without further notice, despite being aware the debt was disputed, and despite assurances that the client company was not in financial difficulty.

Winding up petition was sealed

The finance company's solicitors announced they had obtained a sealed winding up petition without reference to the company or the firm which they intended to advertise in a public newspaper.

Injunction

The financier's solicitors were heavy handed and unapologetic throughout and refused to cooperate.

The firm had to make an urgent injunction application on behalf of the client company to prevent this from happening and argued it amounted to an abuse of process, as there was a substantial dispute, and the winding up petition was sought without proper notice to the company.

Failure to withdraw amicably

The finance company and its legal representatives were invited to withdraw the winding up petition and refrain from continuing with proceedings, but refused to do so unreasonably and the matter proceeded to a contested hearing, for which both parties had to prepare at significant cost.

Result of hearing

The Judge found against the finance company, and outlined in matters where there is a genuine dispute as to liability, pursuing a company for a debt via winding up proceedings amounts to an abuse of process. The Judge condemned the approach saying the petition ought never to have been presented.

The Judge awarded the full costs incurred by the client on a penalty basis to be paid by the finance company.

Lessons to be learned

The case provides a useful reminder on the dangers of parties trying to pursue debts aggressively via winding up proceedings, in an incorrect manner, when the debt is genuinely disputed, and when there is no real reason to suspect the debtor is in financial difficulty - doing so can lead to a substantial financial penalty and criticism from the court.

Caveat against using statutory demands for debt recovery

Although it is common practice for statutory demands to be served as a means of debt recovery by individuals and solicitors, this too can amount to an abuse of process where the debt is known to be disputed, and the case should serve as a reminder not to abuse bankruptcy proceedings generally as an artificial method of increasing pressure.

If your company is facing a winding-up proceedings based on an unreasonable debt, or if you are faced with a statutory demand personally based on a commercial debt which is substantially disputed.

Call us on 0203 811 4850 or make an enquiry online.