Restraining a winding-up petition—the threshold test for a cross-claim (Re a company (No 5245 of 2017))

Cleon Catsambis, barrister at 39 Essex Chambers and counsel for the applicant, sets out the test used to establish a cross-claim in order to restrain a winding-up petition.

Re a company (No 5245 of 2017) [2018] EWHC 275 (Ch), [2018] All ER (D) 128 (Feb)

What are the practical implications of this case?

This case considered and applied the threshold test for having a ‘genuine and serious cross-claim’ in respect of applications for injunctions to restrain winding-up petitions. In applications of this kind, the court has to balance the competing rights and interests of an undisputed creditor with those of a debtor facing potential winding-up, but which asserts a cross-claim that exceeds the value of the debt.

It is clear that bare assertions will not suffice, and that spurious or last-minute cross-claims should not be permitted to defeat undisputed debts. However, a cross-claim need not be fully particularised or evidenced in order to satisfy the test. There is also no requirement to have issued proceedings (although any delay in doing so may be a relevant consideration).

The court in this case summarised the relevant legal principles and re-affirmed that the court would not engage in a detailed examination of the cross-claim. Provided the cross-claim was one of substance, the court would proceed cautiously and, in the absence of special circumstances, allow a debtor company the opportunity to establish its cross-claim in ordinary civil proceedings.

What was the background?

M issued a statutory demand on L in respect of a debt pursuant to a loan agreement. L did not dispute the debt, but it sought an injunction to restrain M from presenting, advertising or otherwise publicising a winding-up petition on the basis that it had a cross-claim against M which exceeded the value of the debt and hence the winding-up petition would be an abuse of process.

The cross-claim involved allegations of negligence, breach of contract and misrepresentation on the part of M and its director personally, and was provisionally quantified at £2.8m (compared to a petition debt of £180,000)—these allegations were ‘hotly contested’.

David Stone, sitting as a Deputy High Court judge, heard L’s application and had to determine whether there was a genuine and serious cross-claim that warranted granting the injunction.

What did the court decide?

The legal background to such an application is relatively uncontroversial. Rule 7.24 of the Insolvency (England and Wales) Rules 2016, SI 2016/1024 and a series of Court of Appeal decisions including, most notably, Re Bayoil SA [1998] EWCA Civ 1364, [1999] 1 All ER 374, Dennis Rye Ltd v Bolsover District Council [2009] EWCA Civ 372, [2009] All ER (D) 41 (May) and Tallington Lakes Limited v Ancasta International Boat Sales Limited [2012] EWCA Civ 1712, [2013] All ER (D) 14 (Jan). However, the judge noted that ‘counsel for the parties urged on me two very different approaches to applying the relevant principles’.

On the one hand, counsel for L submitted that, in assessing the cross-claim, it was not the role of the court to ‘get into the weeds’ on the details—the court need only satisfy itself that the cross-claim is genuine and serious and exceeds in value the amount claimed in the statutory demand. If that is the case, then provided there are no special circumstances, an injunction should be issued.

On the other hand, counsel for M submitted that the authorities required a detailed assessment of the strength of the cross-claim and invited the court to undertake a thorough examination of the evidence.

The judge accepted that it was not the function of the Companies Court to conduct a mini trial on the merits. He was satisfied that L’s cross-claim, as set out in its letter of claim, was genuine and serious. He noted that ‘it is appropriate to proceed cautiously—particularly given the draconian result should a winding up petition be presented’. He therefore concluded that L ‘ought to be given an opportunity to particularise and file its claim, an opportunity it will likely be denied if [M] is not restrained from presenting a petition’.

Interviewed by Stephanie Boyer.

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

Further Reading

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What to do if you are served with a statutory demand and you dispute the debt

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

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