Obtaining an injunction to prevent winding-up proceedings

Joseph Navas and Mark Steggles recently assisted a corporate client in obtaining an injunction to restrain the presentation of a winding-up petition against it, based on a debt that was genuinely disputed on substantial grounds. They instructed Adam Riley of 3 Hare Court as Counsel.

The client had been served with a statutory demand in respect of a sum of money which another company (the respondent) claimed was due from the client.  Both Thomson Snell & Passmore and the client had explained to the respondent that the client was not responsible for the alleged debt and that the respondent was pursuing the wrong entity, but the respondent and its solicitors paid no attention and doubled down.

This is, unfortunately, a tactic that some creditors adopt, because a statutory demand carries significant consequences, some of which are as follows:

• On the expiry of a statutory demand, there is a presumption that the debtor (the paying party) cannot pay its debts as they fall due
• If the debtor is a corporate entity, and it is deemed that the entity cannot pay its debts as they fall due, they are at risk of the court making a winding-up order against them
• Even if a winding-up order is not made, the presentation of a petition and advertisement in the Gazette can cause extreme commercial difficulties for the entity (including frozen bank accounts and a refusal to obtain credit) and reputational harm.

A statutory demand should therefore only be used in circumstances where there is a clear and undisputed debt owing, and where the creditor genuinely considers the debtor to be insolvent. However due to the severe consequences of a statutory demand and subsequent winding-up proceedings, some creditors will misuse the statutory demand to force payment of a sum of money which it knows is disputed.

In this case, Joseph, Mark and Adam successfully obtained an injunction to restrain the respondent from taking further insolvency action against the client.  The court granted the injunction because it was satisfied that there was a legitimate dispute as to the debt, and therefore ruled that the use of a statutory demand was an abuse of process and ordered that the creditor pay the client’s costs of making the application on an indemnity basis.

The injunction has successfully prevented improper use of the insolvency process and has saved the client significant cost and management time in having to deal reactively with the consequences of inappropriate action by the respondent.