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Mis-use of Winding Up Petitions to recover debts

When a company owes you money some advisers will suggest that you consider issuing a winding-up petition to secure payment.

Sometimes the service of a Statutory Demand will be sufficient to secure payment other times it will not. Having threatened to wind up the Company do you now follow through with the threat?  If you do not then you may lose credibility and find yourself slipping further down the queue of those to be paid.

However an ill-advised winding-up petition can lead to an injunction against the issuer and if the court finds that your petition is an abuse of process a significant order for costs could follow!

A winding up petition followed to its ultimate conclusion will lead to the company being compulsorily wound up by the Court, once wound up the creditors of the company are paid in accordance with the Insolvency Act and the petitioning creditor does not get priority.

It is often forgotten that the process to liquidate a company is not designed to be a debt collection tool, if used in this way the Court may find that it is an abuse of process. A winding up petition should not be issued if the debt is disputed or if a cross claim exists which exceeds the debt claimed.

Any payment made by the company after a winding up petition has been issued against it is void if the company is wound up including settlement of the petition debt.

When is it an Abuse of Process to issue a winding up petition?

It is acknowledged by the Courts that the archetypal case of abuse is where a petition is presented not so as to obtain an order but to apply pressure to pay with the threat of an advertisement of the petition being placed.

The question of whether a particular petition is an abuse of process does not necessarily lie with the motive of the petitioner alone. It is likely to be determined by the Court looking into whether in the circumstances insolvency proceedings are the proper means moving forward and the alternatives open to the petitioner.

Finally a note of caution to those advising petitioning creditors, if it is shown that the advisor has advised their client to present an “abusive” petition the adviser could also find themselves liable to pay costs to the company on an indemnity basis.

By Darren Stone