Insolvency : A brief case study

ABC Suppliers Ltd -v- XYZ Traders Ltd A thriving business in a dispute with a supplier has been threatened with commencement of winding up proceedings. Factual Scenario ABC Suppliers Ltd (ABC), a confectionary supplier, issued a letter before action to our client, XYZ Traders Ltd (XYZ), threatening that if unpaid invoices in the sum of

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ABC Suppliers Ltd -v- XYZ Traders Ltd

A thriving business in a dispute with a supplier has been threatened with commencement of winding up proceedings.

Factual Scenario
ABC Suppliers Ltd (ABC), a confectionary supplier, issued a letter before action to our client, XYZ Traders Ltd (XYZ), threatening that if unpaid invoices in the sum of £50,000 were not settled within 14 days then a winding up petition would be issued.

XYZ disputed that it was liable to ABC on the basis that the goods supplied were not fit for purpose and as a result no further sums were owed.

XYZ instructed Darlingtons to prevent ABC from presenting a petition to wind up the company. Correspondence between Darlingtons and ABC’s solicitors seeking an undertaking not to present the petition was unsuccessful.

Injunction to restrain winding up

The presentation of a winding up petition can have devastating consequences. Upon advertising of the petition banks will normally shut down the company’s bank accounts. There can also be long-term damage to a company’s creditworthiness.

Further, the company’s goodwill will suffer when customers and suppliers learn that there has been a threat of insolvency proceedings which can continue to resonate even after a petition is dismissed by the court.

If a company learns that a creditor intends to present a petition then it may apply for an injunction to restrain its presentation. If a petition has already been presented then a company can apply to restrain advertisement of the petition.

Seeking an injunction – Procedure

Prior to making the application for an injunction, it is good practice to ask the petitioner to undertake that it will not present a winding up petition (or advertise it, as the case may be). If the petitioner provides an appropriate undertaking, this can potentially avoid the need for an application. If the petitioner unreasonably refuses to give an undertaking, the court may take this into account as regards costs.

We sought appropriate undertakings from ABC but as these were not forthcoming our client opted to apply for an injunction. It should be noted that any injunction application is high risk and expensive, so very careful analysis and experienced advice is strongly recommended.

The court will normally not allow a winding up petition to be presented where there is a genuine dispute about the underlying debt on which the petition is based and it tends to apply a relatively low threshold when attempting ascertaining this.

The application is made to the Companies Court and the procedure is governed by the Practice Direction on Insolvency Proceedings and rules 7.1 to 7.10 of the Insolvency Rules 1986.

In short, we made an application on Form 7.1A seeking an order that ABC be restrained from presenting a petition to wind up XYZ on the basis that there was a genuine dispute about the alleged debt. We attached evidence of the genuine dispute debt in the form of a witness statement.

What happened with our client’s application to restrain the Winding UP petition?

In light of the urgency of this matter we managed to secure a same day hearing before a High Court Judge. On the basis of the evidence presented by Counsel the Judge was satisfied that an interim injunction should be granted preventing ABC from presenting a winding up petition.

A final hearing was heard two weeks later and a permanent injunction was granted. In addition to staving off this “nuclear” threat, our client was awarded costs, on the indemnity basis, as the Judge was satisfied that it was an abuse of court process to threaten insolvency proceedings where there was a genuine dispute (using insolvency processes before securing a Court Judgment is a risky tactic for creditors for this reason).

What if you are threatened with similar action?

Don’t delay and immediately contact your legal representatives! If there is a genuine dispute and appropriate evidence is put forward quickly with a strong letter to the creditor this may avert the immediate threat and create a negotiating position. If that fails, you may decide to apply for an injunction.

As a reminder:-
• The presentation of a winding up petition can have devastating consequences for your company;
• Upon advertising of the petition your bank is likely to close your company account(s);
• There is likely to be long-term damage to your creditworthiness and goodwill.

Daniel Blake Litigation Solicitor DarlingtonsIf you require insolvency advice then please do not hesitate to contact us.
Dalia Ross – Partner
Daniel Blake – Solicitor

Commercial litigation • Dalia Ross

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