Bold petitioning creditors beware

Is a winding-up petition bound to be struck out where there is a clash of evidence, and notwithstanding a challenge to the credibility of the company’s evidence? Elaine Palser of 9 Stone Buildings considers the recent decision of Gabriel Moss QC (sitting as a deputy judge of the High Court) in Re A Company.

Original news

Re A Company [2016] EWHC 1046 (Ch), [2016] All ER (D) 103 (May)

The Companies Court dismissed the petitioners’ petition for the winding-up of a company where, among other things, the company had produced evidence that was, on its face, sufficient to raise a bona fide dispute as to the receipt of three payments. The evidence showed that the debt was being disputed bona fide and on substantial grounds.

What was the background to the hearing?

The petitioners presented a winding-up petition, stating that the company was indebted to the petitioners in the sum of £270,000 odd in relation to some 25 agreements. The petition stated that the company was insolvent because the petitioners had, by a letter, demanded payment of the debt but the company failed to make payment. In correspondence, prior to presentation of the petition, the company had sought clarity as to the various bases for the sum claimed, but to little avail.

The company obtained a without notice injunction restraining advertisement of the petition pending a hearing on notice to strike out the petition on the basis the debt was disputed on bona fide and substantial grounds. On the return date the petitioner accepted that there was a bona fide and substantial dispute in respect of 22 of the agreements, but sought to argue that the petition should proceed on the basis of £100,000 odd outstanding in respect of three of the agreements. The company claimed it had never been paid by the petitioner in relation to those three agreements, and therefore the petitioner could not seek repayment of those monies from it.

During the course of the hearing, the company and the petitioner produced bank statements. The petitioners’ bank statements showed that two payments had been paid to the company’s designated account, but the company’s statements revealed no such payments. The third payment was alleged to have been paid into an account which the company said was not its account, and the invoice produced by the petitioner providing those account details was allegedly not the company’s invoice. The company produced what it claimed were its genuine invoices.

What were the legal issues the deputy judge had to decide?

The judge had to determine if the petition was disputed on bona fide and substantial grounds such that it ought to be struck out or dismissed.

What were the main legal arguments put forward?

The company’s position was that, on the evidence, the debt was disputed on bona fide and substantial grounds, and the court could not resolve the conflicting evidence about bank statements and invoices at a petition hearing. This would involve a trial with cross examination and expert evidence. If the petitioner wished to pursue the alleged debt, it ought to issue a claim.

The petitioner argued that the company’s evidence was not credible. It was suggested that the company’s bank evidence had been doctored as there were some gaps on the statements, and that the petitioner’s bank evidence ought to be preferred. It was also argued that the company would have raised the non-payment point earlier if it had genuinely not been paid. In the alternative, the petitioner sought an adjournment of 19 days, by which time the petitioner claimed it would have definitive evidence from its bank that the company had been paid.

What did the judge decide, and why?

The petition ought to be struck out or dismissed. Although the onus was on the company to show a bona fide dispute, the company had produced evidence which, on its face, was sufficient to raise such a dispute. Without conclusive evidence from the petitioner’s bank, it was not possible to find that the company’s director had perjured himself or tampered with bank statements. The fact that there was circumstantial evidence which raised questions about the credibility of the company's evidence was not sufficient to allow the petition to remain on foot.

The judge would also not grant an adjournment. The company should not have a petition hanging over it, particularly given that if news of the petition got out, the company risked losing its funding. This could be fatal, and prejudice the company’s creditors and shareholders in circumstances where the evidence presented was that the company was solvent and profitable.

To what extent is the judgment helpful in clarifying the law in this area?

While the court will not be fobbed off by the raising of unmeritorious purported defences, once there is a serious clash of evidence then it is inevitable that the petition will be struck out. A challenge to the credibility of a company’s evidence will invariably be insufficient where it is not possible to resolve the conflict on the papers and in a very short period of time.

If an alleged creditor wishes to proceed by petition, the debts must be clearly established, since it is not the practice of the Companies Court to allow prolonged argument or cross-examination in relation to an alleged dispute. If a petition hearing takes a course that is different from that which was envisaged, the petitioner is unlikely to be given extra time to try to establish its case.

Petitions are not meant to be debt-collecting exercises for individual creditors. They are meant to be a mechanism for putting a debtor who is insolvent into a collective form of insolvency proceedings for the benefit of all its creditors and, if applicable, other stakeholders.

What practical lessons can those advising take away from this case?

Petitions should only be presented where the debt is clearly established. To be sure a debt is clearly established, it is advisable first to test the strength of the case in correspondence. Where there is any doubt, whether to present a petition will depend on the risk aversity and financial strength of the alleged creditor. This is because if a petition is struck out the petitioner will invariably have to pay the company’s costs. Furthermore, challenges to the credibility of the company’s evidence that cannot be resolved swiftly on paper are likely to fail. While an ordinary action is more time consuming, there remains the option of summary judgment in a strong case.

Elaine Palser is a barrister at 9 Stone Buildings. Her practice includes all aspects of insolvency, commercial dispute resolution, and contentious trusts and probate. Elaine is recognised as a leading junior in insolvency, and trusts and probate. She is also a CEDR-accredited mediator.

Interviewed by Hannah Thompson.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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When can you wind-up a company when the debt is disputed?

A summary checklist and timeline for the presentation, service and advertisement of a winding-up petition to the court by a creditor of a company registered in England or Wales

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First published on LexisPSL Restructuring and Insolvency

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