EWHC 1206 (Ch)
Deputy Judge Alexander QC had to consider an application for an order that R be restrained from proceeding further with a creditor’s petition to wind up B. The Judge was in no doubt that the application was misconceived. First B was not unable to pay its debts. B on the evidence provided to the court was solvent with cash in hand and a substantial unused credit facility. Further, the reason B had not paid the substantial sums claimed was that it had arguable defences as well as substantial cross-claims of its own. The Judge was clear that:
“The proper place for the dispute between the parties is either Adjudication under the scheme established under the Scheme for Construction Contracts or ordinary proceedings. The dispute could be readily resolved in either forum.”
This was not a case of “can’t pay” but of “won’t pay”. However, a petition will not be struck out merely because the company alleges that the debt is disputed. The Companies Court will not allow a winding-up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds. This is because the effect of presenting a winding-up petition and advertising that petition is to put upon the company a pressure to pay (rather than to litigate) which is something quite different from an ordinary court case. Here, the Judge noted that the continuation of the winding-up proceedings was likely to have an adverse impact on the business of B, both as a result of creating an adverse credit reference and because of the impact of such a petition (and knowledge of it) on other contracts as well as banking relationships.
The Judge accepted that the petition debt was disputed on bona fide and substantial grounds and that there was a potential substantial cross-claim. R was in the position of a conventional claimant on an invoice where the liability to pay the bill was disputed and where the dispute was “wholly unsuited to resolution in insolvency proceedings”. The Judge continued that winding-up proceedings are not:
“the place for resolving genuinely disputed debt claims which the court cannot properly determine, either as to merits or as to quantum … such proceedings can operate as a form of commercial oppression, where the very existence of proceedings can be the source of disproportionate injustice. While the court must be astute to avoid having the wool pulled over its eyes by a debtor trying to escape its obligations, it must be equally astute to avoiding injustice being caused by a potential creditor using insolvency proceedings to make it less likely that a justified defence or counterclaim will be pursued because the alleged debtor will be pressurized into paying the claim in full before that can be done.”