When you are struggling to recover your money from a recalcitrant debtor company, applying for its liquidation can be a very powerful collection tool. Suddenly the directors are faced with the imminent prospect of completely losing control of their company, its business and its assets to a liquidator. If the directors are just fighting a rearguard action to delay paying you, a liquidation (or “winding-up”) application should immediately focus their minds on finding a way to settle the debt.
But be warned – this only works with undisputed debt. A recent SCA (Supreme Court of Appeal) case illustrates.
A R9m claim disputed
Defending the claim – what a debtor must prove
The SCA confirmed that, in order to defend a liquidation application, an alleged debtor needn’t prove that its defence to the claim will succeed at trial. On the contrary, all it has to prove is that it disputes the alleged indebtedness on grounds that are both –
The court will decide, on the basis of the documents filed with it, whether or not the alleged debtor has raised facts which, if proved at a trial, would constitute a good defence. If the defence is “not unreasonable” and if “a lack of bona fides cannot readily be inferred from the papers”, the liquidation application is likely to be dismissed.
A clear lesson for creditors
“In essence”, held the Court, “the matter serves as a stark reminder that winding-up proceedings are not designed for the enforcement of a debt that the debtor company disputes on bona fide and reasonable grounds”.
So whilst a liquidation application can be a formidable weapon to use against a problem debtor, if you apply on the basis of a disputed debt you are probably just wasting your time and money, putting yourself in the wrong unnecessarily, and risking an adverse costs order (on a punitive scale if you are found to have “abused the court process”).
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)