Disputed debts and winding-up petitions—Astra Resources v Credit Veritas USA

In Astra Resources v Credit Veritas USA (CV), the Chancery Division had to deal with an application for an injunction to restrain the presentation of a winding-up petition, where it was alleged that the debt demanded was disputed on substantial grounds, and that the respondent was seeking a winding-up order for an improper—or collateral—purpose.

Original news

Astra Resources v Credit Veritas USA [2015] EWHC 1830 (Ch), [2015] All ER (D) 252 (Jun)

The applicant debtor (Astra) applied for an injunction restraining the respondent creditor (CV) from presenting a winding-up petition in circumstances where CV had served a statutory demand on Astra in the sum of $1,535,000. The grounds of the application were:

  • that the debt was disputed on substantial grounds, and
  • that CV had a collateral purpose in seeking a winding-up order which should disqualify it from doing so—being a reorganisation of Astra following the making of a winding-up order

The Chancery Division (Mr Justice David Richards) dismissed the application. Although part of the debt demanded was disputed on substantial grounds, $600,000 was not. Further, the reorganisation of Astra following the making of a winding-up order could not be said to be for an improper or collateral purpose where such reorganisation would be reliant on the support of the liquidator and also of the court or Astra’s creditors.

What were the facts of the case?

Astra was a holding company with indirect interests in commodities and green technologies and it engaged CV as of 1 August 2013 by a consulting agreement to provide various services including the identification of potential projects, project and portfolio management, and strategic advice and marketing. It was accepted by Astra that CV had brought projects to it, although none led to a transaction.

Under the terms of the consulting agreement:

  • shares in Astra were transferred to CV as a signing fee
  • CV was entitled to be paid a monthly retainer, the amount of which increased every year so long as the consulting agreement had not been terminated (post-agreement fees)
  • CV was entitled to payment for work undertaken by it prior to the consulting agreement (pre-agreement fees)

In December 2014, CV served a statutory demand on Astra in the sum of $1,535,000 comprising of the following:

  • $960,000 in respect of pre-agreement fees and post-agreement fees
  • $500,000 in respect of an alleged separate agreement concerning a project that CV had introduced (project claim)
  • $75,000 in respect of advice given to one of Astra’s subsidiaries in connection with litigation to which it was subject (litigation claim)

Astra applied for an injunction restraining the presentation of a winding-up petition on it by CV.

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

Astra argued that CV should be restrained from presenting a winding-up petition on following grounds:

  • the debt demanded was disputed on substantial grounds (the first ground)
  • CV sought a winding-up order for an improper—or collateral—purpose, which disqualified it from being able to present a winding-up petition (the second ground)

What did the judge decide, and why?

The first ground

There was no dispute as to the relevant law, which was set out by the Court of Appeal in Tallington Lakes v Ancasta International Boat Sales [2012] EWCA Civ 1712, [2013] All ER (D) 14 (Jan) at para [4]:

'...If the company can demonstrate that the alleged debt on which the petition is founded is genuinely disputed on substantial grounds, the court will strike out the petition. There are rare exceptions to this principle...'

The judge therefore went on to consider each of the separate sums demanded and the evidence in relation to each.

Insofar as the project claim and litigation claim were concerned, the judge was satisfied on the evidence before him that there was a genuine and substantial dispute to these claims—it was not clear that the sums in relation to these claims were owed by Astra to CV. However, the claim by CV to the post-agreement fees could not be genuinely and substantially disputed—the terms of the consulting agreement relating to the pre-agreement fees stated that they would be paid upon condition of Astra raising the necessary funds, but there was no such condition in respect of payment of the post-agreement fees.

Astra argued that it was a mistake that the condition was not included in the consulting agreement in relation to payment of the post-agreement fees and that the consulting agreement would need to be rectified. The judge rejected this argument on the basis that:

  • the consulting agreement was fully and carefully negotiated and drafted by the parties and their lawyers over a long period of time, and
  • there was insufficient evidence to show that the consulting agreement did not reflect the common intention of the parties

Astra’s further argument that the post-agreement fees were not due without a proper itemisation of the work undertaken was also rejected. There was no suggestion that CV had not undertaken any of the services it had contracted to provide—indeed, it was accepted by Astra that CV had brought projects to it.

The second ground

The evidence in support of this ground focussed on an email sent by CV’s director to one of Astra’s directors suggesting that, once Astra was in liquidation, a change of leadership and control could be achieved through a reorganisation which would then allow Astra’s shareholders to potentially recoup all of their investment.

This, Astra argued, was evidence that CV was seeking Astra’s liquidation for an improper—or collateral—purpose and was not acting in the interests of creditors or wanted an outcome which would operate to the disadvantage of creditors. Accordingly, any winding-up petition should be struck out as an abuse of process.

The judge rejected this argument on the basis that any reorganisation—whether through a scheme of arrangement or company voluntary arrangement (CVA)—would require the support of the liquidator. Further, a scheme of arrangement would require the court’s sanction (which would only be granted if the proposal was fair to creditors) or, in the case of a CVA, the approval of Astra’s creditors, including CV. The facts in this case were a far cry from the type of collateral purpose which arose in the authorities discussed by Lord Wilson in Ebbvale v Hosking [2013] UKPC 1, [2013] All ER (D) 103 (Mar).

Decision

The judge therefore dismissed the application and declared that CV was entitled to present a winding-up petition against Astra in respect of the post-agreement fees.

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

This case was decided on its own facts, and therefore does not clarify the law to any extent. However, it does serve as a reminder that:

  • an injunction restraining the presentation of a winding-up petition will usually be obtained if the applicant can demonstrate that the debt demanded is disputed on genuine and substantial grounds, and, in this case, it seems that Astra was able to easily satisfy the court of this in respect of both the project claim and the litigation claim—a person who wishes to serve a statutory demand or otherwise threatens to commence winding-up proceedings unless a debt is paid should ensure they are able to evidence liability to pay the debt and, even if the creditor is ultimately successful (as in this case), there may be a risk that any costs order made in their favour may be reduced
  • care should be taken when drafting agreements, particularly in relation to when payment is due to be made by one party to the other, and whether payment is subject to any conditions—in this case, had payment of the post-agreement fees been subject to the condition imposed on payment of pre-agreement fees (as Astra contended was agreed between the parties notwithstanding the terms contained in the consulting agreement), then it appears that the application would have succeeded and an injunction granted
  • the written terms of an agreement will usually be held to represent the intention of the parties, and convincing proof is required by the court to support a claim for rectification of the agreement
  • in the event that an applicant seeks to challenge a statutory demand or bankruptcy or winding-up petition on the basis of improper or collateral purpose on the part of the creditor, they must be able to demonstrate that either:
    • the creditor does not want a bankrupt or winding-up order to be made, but uses the threat of it to put pressure on the debtor to do something that the debtor is otherwise unwilling to do, or
    • the creditor does want a bankruptcy or winding-up order to be made but is not acting in the interests of the class of creditors of which the creditor is one or where the success of the petition will operate to the disadvantage of creditors

Stephen Leslie, solicitor in the LexisPSL Restructuring & Insolvency team

This article first appeared on LexisPSL Restructuring and Insolvency

Further Reading

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

When a winding-up petition can be issued and a company wound up by the court

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First published on LexisPSL Restructuring and Insolvency

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