Liquidation and Disputed Debts
Last year’s Court of Session decision in the Purewal case dealt with the issue of “inability to pay debts as they fall due” and served as a warning for creditors seeking to use insolvency as a debt recovery tool. In a recent Sheriff Court decision, the Petition of PEC Barr (Holdings) Limited (“PEC”), the question of inability to pay debts has come under scrutiny once again.
PEC presented a creditor petition for the winding up of Munro Holdings UK Limited (“Munro”) at Edinburgh Sheriff Court. Munro had a caveat in place which was triggered on presentation of the petition and a caveat hearing was fixed to determine whether the first order in the petition should be pronounced.
PEC relied on an expired statutory demand as evidence of Munro’s inability to pay its debts as they fell due and argued that they need only show a prima facie (good, arguable) case for the Court to pronounce the first order.
Munro’s position was that PEC’s debt had been satisfied in part and that the outstanding balance was in dispute. Munro’s solicitor argued that the appropriate test to apply in considering whether to pronounce a first order is whether the petitioner would be entitled to an order at all. On the basis of Purewal it was argued that where there is a bona fide disputed debt, the winding up petition should be dismissed.
The Sheriff’s view was that refusing to grant the first order would mean he was prejudging the issues of inability to pay debts and the question of the disputed debt. In his view, he would have to be satisfied that Munro would be bound to succeed in their opposition to the petition before he could refuse the first order. He could not be satisfied that this was the case. On that basis, the first order was granted with the merits of the winding up to be considered at a later date once Answers had been lodged.
This decision may come as a surprise to those practising in the insolvency field as it has long been understood that liquidation is not the appropriate procedure for dealing with disputed debts. This position was cemented by both the Purewal decision and the subsequently decided Macplant Services Limited case.
The Purewal decision suggested that it may not be sufficient for a petitioning creditor to prove that the debt is undisputed and has not been paid. The petitioner must also show that the non-payment gives rise to the inference that the company is unable to pay its debts as they fall due.
Given such a high test being set for undisputed debts, the Sheriff in the present case appears to have taken a step back from Purewal in allowing a petition to proceed on the basis of an apparently disputed debt. However, it is possible that the Sheriff may have taken a different approach and applied a higher test had PEC sought the appointment of a provisional liquidator (as was the case in Purewal).
Purewal was subject to an appeal but no written decision was issued by the Division so substantive judicial comment on Lord Glennie’s decision is still awaited. In relation to the present case it would be surprising if practitioners took this decision as a green light to proceed with liquidation where a debt is in dispute, contrary to established law and practice. Undoubtedly neither case will have the final say on the matter and the issue of inability to pay debts will come under further judicial scrutiny in the future.
For further information please contact: Jennifer Antonelli