Can't Pay Won't Pay by Leonard Wallace

Posted On: 30 October 2009

Author: Leonard Wallace

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Can’t Pay – Won’t Pay

By Leonard Wallace

Inability to pay Debts in Corporate Insolvency?  Best Tactics for Recovery

The threat of a winding-up petition is undoubtedly a powerful tool in any creditor’s armoury.

Section 122(1)(f) of the Insolvency Act 1986 provides that a company may be wound up if it is unable to pay its debts.

The definition of inability to pay debts is found in Section 123(1) and includes:

(a ) if a whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company's registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or...
(c ) if, in Scotland, the induciae of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made, or...
(e ) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.

Section 123(2) also provides that a company is unable to pay its debts if it can be shown that its assets are less than its liabilities.

Ground (a) is the Statutory Demand procedure.  The beauty of this procedure is that if there is anything approaching a bona fide dispute then it ought to be flushed out before significant expense has been incurred.  The downside is that there is a three week period of notice.

Ground (e) has become a much more common ground in recent years.  If there is reasonable apprehension that the assets of a company are being misappropriated by the directors then obvious time constraints may dictate this as the preferred route towards debt recovery through a winding-up petition.  However, there are pitfalls for the unwary.

Points to Note

• The petitioning creditor must set out a prima facie case in the petition.

• It is not enough to simply show that there was an unexplained failure to pay following a demand for payment.

• The burden of satisfying the court that a company is unable to pay its debts as they fall due lies with the petitioning creditor.

• A winding-up petition is not a suitable remedy to resolve commercial disputes.

• When seeking a provisional liquidator ex parte there must be a full disclosure of all matters, whether favourable or unfavourable to the granting of a winding up order.

Running into Difficulty

Prima facie case

In the case of Gillespie v Toondale Ltd 2006 SC 304, Lady Cosgrove examined the test of a prima facie case when considering recall of inhibition.  She found that an aspect of a prima facie case was that there was a “good arguable case” and that the test was a substantial hurdle for a pursuer to mount.  It is not sufficient to advance a “colourable case”.  Interestingly, Lady Cosgrove stated that “if there is an apparently substantial defence to the pursuer’s claim it is difficult to say, on the basis of the whole material before the court, that the claim amounts to a good arguable case.”

Unexplained failure to pay following a demand for payment

By petitioning under 123(1)(e) a petitioner is necessarily relying on the inference that a company is unable to pay its debts as the fall due.  In the case of Blue Star Security (Scotland) Ltd Petitioners 1992 SLT (Sh Ct) 80, Sheriff Principal MacLeod was satisfied that an undisputed debt and an unexplained failure to pay was sufficient to deem a company unable to pay its debts as they fell due.  However, in the case of Purewal Enterprises Ltd Petitioner 4th September 2008 unreported, Lord Glennie says this:

“Whether or not the necessary inference should be drawn will depend upon all circumstances.  It does not follow from the Blue Star case that it will always, or even usually, be enough to show a demand for payment within a short time followed by a failure to pay.  In some cases, such a demand and such a failure, when viewed in light of what has gone before, may indeed be indicative of an inability on the part of the company to pay its debts as they fall due.  But it does not necessarily give rise to that inference; and it should not be assumed that s123(1)(e) can simply be used as a speedier and less formal version of the statutory demand process set out in s123(1)(a).”

(Continued.  To read full papers please click on the link at the top of the page.)