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Court approves the use of liquidation as a debt collection method

Court approves the use of liquidation as a debt collection method

19 December 2019: The Insolvency and Company Court of England and Wales recently held in Sell Your Car With Us Ltd v Anil Sareen that when a debtor fails to comply with a statutory demand and has no arguable case to dispute a debt, a winding up petition (initiation of liquidation proceedings) is appropriate, despite the courts previously expressing distaste towards the use of a petition as a method of debt collection.

The case involved the defendant company inadvertently paying money owed to Mr Sareen into the bank account of a fraudulent third party who had intercepted Mr Sareen's e-mails. A statutory demand was issued by Mr Sareen who required the company to pay the sale proceeds into his correct bank account and, after they failed to do so, served a winding up petition to recover the debt. In response, the company sought to defend against the petition on the grounds that there was not a debt owing, due to Mr Sareen being responsible for the fraud. They further submitted that, if the debt did exist, the threat of a winding up petition should not be used as a method of debt collection.

The court held that the company alone was responsible for the payment to the fraudster due to a failure to implement checks on the third party's purported identity. This meant that the debt was undisputed and Mr Sareen, as an unpaid creditor, was fully entitled to initiate winding up proceedings. The courts have historically looked dimly on the use of liquidation proceedings in this way but this case affirms a more modern and pragmatic approach: that a failure to pay even a single small debt is evidence that the company is unable to its debts as they fall due, which is the basis of liquidation.

If you are seeking to recover an unpaid debt and need assistance then please do not hesitate to contact any of the BRI management team, who would be pleased to help you. The above case also serves as a reminder to always tread carefully when transferring funds on the basis of an e-mail – make sure you always carry out appropriate verification checks before sending any money – far better to be safe than sorry!