Insolvency Proceedings Must Not Be Used to Turn the Screw

Insolvency proceedings must not be used as a means of bringing pressure to bear in commercial disputes and are only appropriate where there is a genuine inability to pay debts. The High Court made those points in blocking a winding up petition against a company that was far from the financial brink.

The dispute arose out of the company’s non-payment of a substantial sum allegedly due to a subcontractor. After the subcontractor lodged a petition to wind up the company, the latter was concerned about the impact on its trading reputation. Many of those with whom it did business had expressed interest in the case.

In striking out the petition, the Court noted that the company consistently made a profit and had a turnover in excess of £90 million. Far from being unable to pay its debts, the evidence indicated that it had both cash in hand and a £4 million credit facility that had not been used.

The reason why the company had not paid the alleged debt was because it had a number of arguable defences to the subcontractor’s claim. Such disputes of fact could be readily resolved by adjudication or by ordinary court action and it was inappropriate to deal with them in the context of insolvency proceedings. To proceed with the winding up petition would, in the circumstances, be oppressive and an abuse of process.