When are insolvency proceedings appropriate? Top tips for avoiding abuse of process.

When are insolvency proceedings appropriate? Top tips for avoiding abuse of process.

Dominant, substantial or merely sufficient... When is a purpose not a purpose for section 423 of the Insolvency Act 1986?

The recent judgment in the case of Bernhards Sports Surfaces Ltd v Astrosoccer4u Ltd [2017] EWHC 2425 (TCC) has provided a sage reminder that insolvency proceedings should only be threatened and/or utilised in circumstances where a company is genuinely considered to be insolvent.

The claimant (Bernhards) commenced a claim in the Technology and Construction Court to enforce an adjudicator’s decision against the defendant (Astrosoccer4u Ltd).  The defendant had attempted to coerce the claimant to mediate the adjudicator’s decision by threatening to enter insolvency if the claimant did not agree to mediate. The claimant refused, whereupon the defendant filed a Notice of Intention to Appoint Administrators (NOI) to obtain the benefit of an interim moratorium before the enforcement hearing in the TCC. At the hearing for permission to continue the proceedings, Coulson J criticised the defendant (and its solicitors) for filing the NOI, which was found to be unlawful, without merit and intended to stifle the ongoing proceedings. As the NOI was found to be “entirely bogus”, the Court granted the claimant permission to continue their proceedings.

So what can be learned from this case and, more generally, to ensure that you use insolvency proceedings appropriately?

  1. The out-of-court administration procedure should only be used when the company is genuinely insolvent and not merely to obtain the benefit of an interim moratorium to stifle an ongoing claim or the threat of proceedings. The context and motive of the company filing for administration will be examined by the Court.
  2. It is an abuse of process to file successive NOIs simply to obtain the benefit of an interim moratorium when the filing party has no ‘settled intention’ of entering administration;  for example, where a company is seeking to agree the terms of the creditors’ voluntary arrangement (JCAM Commercial Real Estate Property XV Ltd v Davis Haulage Ltd [2017] EWCA Civ 267).
  3. Creditors should exercise caution in using the statutory demand and petition process purely for debt collection where a debtor appears to have another legitimate reason for failing to pay (e.g. it has a set-off or counter claim)
  4. It is established law that a statutory demand and/or petition can only be utilised if the debt is undisputed - to serve a demand/or issue a petition on the basis of a disputed debt is an abuse of process and can potentially result in a hefty costs order against the creditor (and its advising solicitors) in any application to set aside or injunct the demand/petition.
  5. In a similar vein, it cannot be used to shortcut extant litigation i.e. it is inappropriate for a claimant to commence winding up or bankruptcy proceedings against a defendant where there is ongoing litigation, even when  a liquidated debt might be due but the defendant (debtor) has a triable cross-claim that has yet to be determined (Ashworth v Newnote [2007] EWCA Civ 793).  A petition should only be issued where the overall dispute has been decided and the debt liability established.

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