Is it now more acceptable to use insolvency proceedings as a method of debt collection?

It is generally understood that as Insolvency proceedings (Winding Up Petitions or Bankruptcy Petitions) are summary processes. They are appropriate for use against an insolvent debtor and are not to be used as a method of resolving disputes over debts.

However, the recent case of Sell Your Car With Us Ltd v Sareen 2019 indicates that there may be a softening of the Court’s approach.

Here Mr Sareen sold his car through the company.  A fraudster impersonated Mr Sareen on email and part of the sale proceeds were paid to the fraudster’s account.  Mr Sareen served a Statutory Demand on the company demanding payment of the sale proceeds.  The Demand Expired. Subsequently, the company sought to restrain the presentation of a Winding Up Petition on the basis that:

  • The debt was disputed; and
  • The company was not insolvent.

The company argued that Mr Sareen should have taken steps to secure his email communications. It also argued that as it was solvent the use of insolvency proceedings as a method of debt collection was not appropriate.

It is settled law that Petitions based on debts disputed on genuine and substantial grounds are an abuse of process. It is also settled law that the threshold for the Court to determine that a dispute is genuine and substantial is low.

Unsurprisingly the Court decided the company failed to meet that low threshold.

However, it also decided that as the company had not complied with the Statutory Demand it was unable to pay its debts as they fell due – i.e. it was in law insolvent.

The effect of this judgment is to legitimise the use of insolvency proceedings to pursue a debt against a solvent debtor where there is no genuine dispute or cross-claim.