Covid-19, Debt Collection, and Winding Up Petitions

In these unprecedented times for small and medium sized businesses, when lockdown and furloughing has left many unable to trade and earn profits at all, can it be proper for a creditor to choose to issue a winding up petition immediately, without first warning the debtor or using other remedies? And what action should a company facing a petition take when it would not hesitate, in an ideal world, to pay the debt in full but simply cannot do so when its income has dried up?

We encountered a recent example from a debtor’s perspective. No prior warnings about what was admittedly a sizeable account balance, only a threat to cut off future supply of service.  No legal letter and no statutory demand. The creditor, presumably influenced to some extent by the debtor’s decision to break off the trading relationship for other reasons, went straight to the issue of a petition.

It hardly needs to be said that for a company debtor, this is deadly serious. There is, of course, an initial grace period when a petition will remain a private matter between creditor and debtor. However, once that grace period is over, the creditor is at liberty to “advertise” the petition, and indeed under a duty to do so if it still wishes to pursue the remedy of winding up. Once the outside world knows – bankers, landlords, other creditors – the debtor company’s survival prospects may be bleak.

“But surely petitions aren’t supposed to be used for debt collection?” That was the traditional view. Nowadays it does not carry quite so much weight. It has even been confirmed via legal authority that “a petition presented in order to bring pressure on a company to pay a debt which is indisputably due is perfectly proper, even where other proceedings are in train for recovery of the debt and even if the winding up proceedings are being pursued with personal hostility or even venom.”

The key phrase there is “indisputably due”. If there is nothing about the debt that can be disputed, and no scope for a substantial counterclaim, the debtor company will not at first sight have a leg to stand on for the purpose of opposing the petition. And yet…

It is common knowledge that one of the steps taken by the government in the face of the Covid pandemic was to facilitate the availability of commercial loans. In the case we encountered, the creditor had issued its petition – without prior warning – after the lockdown announcement on 23 March and the publication of related measures about business funding. There was scope, against that background, to argue that the circumstances were so special and unprecedented that the use of a petition for the collection of the debt was an abuse of process.

Was this going to lead to a ground breaking application for the petition to be struck out? No, but only because the creditor decided to accept an open offer of monthly instalments, and agreed to bear its own costs rather than seek to insist that the debtor paid them as well as the principal debt. What would the court have decided about the propriety of issuing this petition, without prior warning or statutory demand, rather than the issue of mainstream court proceedings with a view to default judgment and sheriff enforcement? We will never know.

As we prepare to emerge from lockdown, businesses will have debts to collect, or as the case may be to pay or restructure. Will it be proper to pursue those debts with “hostility and even venom”, by going straight to the issue of a petition? It may be – but the process is an expensive one, and it would make no sense to go down that route if the debtor might have good grounds to refuse to pay the costs. The wise debtor, who wants to do what is right but resents the thought of being bullied, may be in a position to cite the Covid pandemic’s wider background and look to face an unduly aggressive creditor down.

Either way, we can advise on your best options. Call us on 0121 325 5402 or email David Cooper via dmc@coxcooper.co.uk .

Posted in