If a creditor is owed money by a debtor and the debt is not disputed then, usually, the quickest way to extract payment would be to serve the debtor with a statutory demand (a formal demand for payment) and, if the demand is not met, issue a bankruptcy petition (if the debtor is an individual) or a winding-up petition (in the case of a company). However, if the debt is disputed – i.e. the debtor “won’t pay” rather than “can’t pay” – then the insolvency process should not be used. Instead, a claim should be issued at court. Insolvency proceedings should not be used as a means of enforcing the payment of debts.
The recent High Court case of Breyer Group plc v RBK Engineering Limited highlights this principle. In that case Breyer was a contractor on a building contract; it appointed RBK as a subcontractor. The works to be carried out by RBK were covered under a written contract. However, further works were done by RBK without an agreement as to contractual terms. Due to the lack of a written contract, a dispute arose as to the quality of the work provided by RBK. RBK issued a winding-up petition for £258,729.16 against Breyer for unpaid invoices. Breyer refused to pay RBK arguing that RBK should remedy the defective works at its own cost.
The court struck out the petition. It found that Breyer was not insolvent but that it had not paid the sums claimed by RBK as it had various defences and cross claims relating to the terms on which the work has been undertaken and the quality of that work. It was inappropriate for such defences and cross claims to be dealt with in insolvency proceedings and the proper place for the dispute was in ordinary court proceedings.
The use of insolvency proceedings to enforce the payment of the debt was considered to be “oppressive” and “an abuse of process”. The court said that “while the court must be astute to avoid having the wool pulled over its eyes by a debtor trying to escape its obligations, it must be equally astute to avoid an injustice being caused by a potential creditor using insolvency proceedings to make it less likely that a justified defence or counterclaim will be pursued because the alleged debtor will be pressurized into paying the claim in full before that can be done”.
This case reinforces the principle that an insolvency procedure such as winding-up proceedings should not be used to pressurize a debtor into paying a debt which is the subject of a genuine dispute. Any creditor who issues a petition for a disputed debt risks that petition being challenged and a costs order being made against them.
Blacks Solicitors offer expertise on all forms of disputes and can advise on any issues relating to insolvency. Please contact Luke Patel on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.