The Insolvency and Company Court of England and Wales recently held in Sell Your Car With Us Ltd v Anil Sareen  EWHC 2332 (Ch) that, when a debtor fails to comply with a statutory demand and has no arguable case to dispute a debt, a winding-up petition (initiation of liquidation proceedings) is appropriate, despite judges previously expressing distaste towards the use of a petition as a method of debt collection.
The case involved the defendant company, Sell Your Car With Us Ltd, inadvertently paying money owed to Mr Sareen into the bank account of a fraudulent third party who had intercepted Mr Sareen’s emails. Via statutory demand, Mr Sareen then required the company to pay the sale proceeds into his correct bank account and, after they failed to do so, initiated a winding-up petition to recover the debt.
In response, the company sought to restrain the petition on grounds that there was not a debt owing due to Mr Sareen being responsible for the fraud. They further submitted that, if the debt did exist, the threat of a winding-up petition should not be used as a method of debt collection.
The court held that the company alone was responsible for the payment to the fraudster due to a failure to implement checks on the third party’s purported identity. This meant that the debt was undisputed, and Mr Sareen, as an unpaid creditor, was fully entitled to initiate a winding-up petition
The English courts “have historically looked dimly” on the use of liquidation proceedings in this way. The present case affirms a more modern and pragmatic approach: a failure to pay even a single small debt is evidence that the company is unable to its debts as they fall due, which is the basis of liquidation. New Zealand’s process for initiating liquidation proceedings is similar the United Kingdom’s, and New Zealand courts have moved to adopt the more pragmatic approach now signalled in the UK.
The full decision can be found here.