Winding up petition founded on judgment debt subject to pending appeal

Author: Simon Hill
In: Article Published: Thursday 20 December 2018

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When a judgment creditor is considering whether to present a winding up petition against a corporate judgment debtor, an issue can arise as to whether the judgment creditor can found the winding up petition on the judgment debt if the judgment debtor is appealing the judgment debt. To put it another way, will the judgment debtor company be entitled to defend the creditor’s winding up petition on the basis that the judgment debt founding the petition will be, or is subject to a pending appeal? In addition, what is the position if there is a stay of execution granted on the judgment debt?

This article will consider these issues, and the cases of El-Ajou v Dollar Land (Manhattan) Ltd [2007] BCC 953 (‘El-Ajou’) and Re BLV Realty Organisation Designs Ltd [2010] EWHC 1791(Ch) (‘Re BLV Realty’).

Non-Judgment Debts

As readers will be aware, where a creditor winding up petition is founded upon non-judgment debts that are bona fide disputed on substantial grounds, the petition is liable to be dismissed on the basis that, for the purpose of the statutory provisions, the petitioner has not been demonstrated (to a sufficient degree of certainty) that he is a creditor of the respondent[1]. Where such substantial grounds are shown, the petitioner’s status as the debtor’s creditor has been, for the purposes of the Companies Court, fatally called into question. Any would-be petitioner will be, or at least, should be conscious of this risk, and ought not to present a winding up petition where the debtor might be able to show substantial grounds for disputing the debt's existence. The would-be petitioner should instead bring a normal claim in the ordinary courts, and obtain judgment on the claim against the alleged debtor. 

Judgment Obtained

Where a creditor has obtained a judgment in his favour on a claim (or simply obtained a costs order in his favour), the creditor will be a judgment creditor, and so will have his status as a creditor confirmed. However, while the judgment creditor’s status as creditor is established, it is not immutable, since any judgment and order is liable to be set aside following a successful appeal. Of course the judgment and order may not be appealed, but where the judgment debtor appeals or, at least indicates it intends to appeal, doubt as to the judgment creditor’s status as ‘creditor’ could, in theory, creep back in. 

Appeal Pending is No Defence to Winding Up Petition

Warren J in El-Ajou considered this issueIn El-Ajou, Warren J said, at paragraph 9:

‘In a case where the court has ruled in favour of a claimant that a debt is due, then the claimant is, in my judgment, unquestionably a creditor, even if the judgment is the subject matter of an appeal. If the creditor then petitions for a winding up based on the judgment debt, it is no defence to the petition that the judgment may be overturned on appeal.

It follows from this that a judgment creditor can petition and seek a winding up order on the basis of a judgment debt, notwithstanding the judgment debt is subject to an appeal[2]

However, a judgment debtor company, facing a winding up petition, can apply for an adjournment of the winding up petition, pending final determination of the appeal[3]. In El-Ajou, Warren J noted that a judgment debtor company facing a winding up petition while appealing the underlying judgment, might obtain from the Companies Court, a stay of the winding up proceedings. At paragraph 9, Warren J in El-Ajou said:

‘It may be that the [judgment creditor company] could, depending on the facts, obtain a stay of the petition pending an appeal.’

In the author’s view, a Companies Court is more likely to adjourn rather than stay the petition pending the final determination of the appeal. Whether to grant an adjournment (or stay) will be a matter of discretion for the Companies Court. On the propensity of the Companies Court to adjourn, the authors of Sealy & Milman 2018 Edition, state in their commentary to section 123 of the Insolvency Act 1986:

‘Although it would not normally be appropriate to make a winding-up order on the basis of a judgment debt when an appeal against the judgment is pending, there are rulings to the contrary in [A&BC Chewing Gum; El-Ajou and Re BLV Realty]’

Preserving the Parties' Positions Pending Appeal Determination

One aim of granting an adjournment/stay, or conditional dismissal (or other measure), might be that it provides a means of preserving the interests of the parties pending the final determination of the appeal. 

Revising the Court Method of Preserving the Parties' Positions

Where the Companies Court has resolved to balance the competing interests, by conditionally dismissing the petition if the judgment debtor puts up security for the judgment debt pending final determination of the appeal, and that security was not paid, the Companies Court may be reluctant to ignore the non-compliance, and grant an adjournment of the petition instead. This was the position in Re BLV Realty Organisation Designs Ltd [2010] EWHC 1791 (Ch) (‘Re BLV Realty’), where Roth J heard a winding up petition founded upon an unsatisfied judgment debt made about 6 months earlier for £60,000 (a payment on account of costs order; the ‘Costs Order’). That Costs Order was the subject of an application for permission appeal to the Court of Appeal. By the time of the first hearing of the petition before Roth J, the Court of Appeal had declined on paper to grant the judgment debtor permission to appeal the Costs Order, but notwithstanding, Roth J was concerned about making a winding up order while the validity of the Costs Order was still subject to a pending application before the Court of Appeal[4]

To address this, Roth J had decided at the first hearing to order that the judgment debtor company ‘…should put up security of £60,000 pending the resolution of the matter in the Court of Appeal.’ (paragraph 4). That order gave 14 days to pay the £60,000 ‘…to be held in escrow by its solicitors…and that if it did so then the petition would be dismissed. If it did not do so, then the petition could be restored.’ (paragraph 5). In due course, the judgment debtor company failed to pay the £60,000 to its solicitors by the due date, and the petitioner restored the petition for a second hearing. At that second hearing, the judgment debtor submitted that:

‘…the petition should be adjourned pending the hearing before the Court of Appeal on [2 weeks hence].’ 

but this was rejected by Roth J, who said, at paragraph 7:

‘I do not accept that submission. The whole purpose of the order which the court made … was to provide a means of preserving the interests of the parties pending the hearing before the Court of Appeal. For this court now simply to adjourn the matter would be to undermine the very basis on which the previous order was made.

The security order could not be disregarded – preserving the interests of the parties ‘...was resolved in this way. An order was made and it seems to me that prima facie that order should take effect.’ (paragraph 10). Roth J refused any further adjournment of the winding up petition, and made a winding up order.[5]

Stay of Execution on Judgment Debt

Turning now to the affect, if any, that the imposition of a stay of execution on a judgment debt has on the judgment creditor’s ability to petition for a winding up order. As part of the appeal process, a judgment debtor can apply[6] for an order staying the judgment debt under CPR r.52. The default position, as CPR r.52.16 (formerly r.52.7)[7] makes clear, is that the judgment order (the lower court order) is not stayed merely because an appeal is issued and pursued[8]. For the judgment debt order to be stayed, there must be a specific order of the court, either from the lower court or appeal court, staying the judgment order. 

The law seems to be that a stay of execution on a judgment debt will not preclude a winding up petition being properly founded upon that judgment debt.

In Woodley v Woodley (No.2) [1994] 1 WLR 1167, a Court ordered a husband (judgment debtor) to pay £60,000 to his wife (judgment creditor), but stayed execution of the order pending an appeal. The Court of Appeal held that, for the purpose of section 5 of the Debtors Act 1869, the judgment order remained ‘due from him in pursuance of any order or judgment…’ throughout the period the stay of execution applied. Balcombe LJ said, at 1178:

The debt of £60,000 became due from the husband …in pursuance of the order … and did not cease to be so due merely because the procedure for enforcing the order by way of execution was stayed pending the appeal.’

And later, at 1178:

‘…I entertain no doubt that the existence of the stay of execution did not affect the liability of the husband to pay the lump sum order during the period [date of order] to [date debtor assets vested in Trustee in Bankruptcy]…

This would seem to support the view that a stay of execution does not prevent the judgment debt being relied upon in a winding up petition, however it might be argued that this ratio may be limited just to the true construction of section 5 of the Debtors Act 1869, and does not have wider application. On the other hand, the authors of Applications to Wind Up Companies, 3rd Ed, 2015, derive support from this case (along with other common law jurisdiction cases[9]) for the following statement, at 7.60:

A judgment creditor’s petition is not a writ of execution to enforce the judgment and so does not require permission under CPR r.83.2. Therefore a stay of execution of a judgment against a company does not preclude the judgment creditor from petitioning for the company to be wound up – a judgment debt is still due despite a stay of execution.’[footnotes removed]

Some instruction can be gleaned from Re Company (Nos.22 and 23 of 1915) [1915] 1 Ch 520 (‘Company 1915’), another case potentially limited to the construction of a particular statute. The case turned on the construction of the Courts (Emergency Powers) Act 1914, section 1(1), which read:

From and after the passing of this Act no person shall - (a) proceed to execution on, or otherwise to the enforcement of, any judgment or order of any Court … for the payment or recovery of a sum of money … except after such application to such Court and such notice as may be provided by rules or directions under this Act’

The issue was whether this precluded a judgment creditor from presenting a winding up petition before first making an application to Court. The Court of Appeal held that a winding-up petition was neither a proceeding to execution nor a proceeding to the enforcement of a judgment within the meaning of that sub-section.

Phillimore LJ said, at 528:

In some general loose sense an unsatisfied creditor may be said to be enforcing his judgment by presenting a petition for a winding-up. But, except that his judgment is evidence of his debt, a judgment creditor is in no better position for a winding-up than any other creditor.

…any creditor whose debt is sufficiently large can present a petition and procure an order if he satisfies the Court that the company is unable to pay its debts; and s. 130 of the Act of 1908 provides four tests of inability. … [the petitioner] can avail herself of test number 4 not as a judgment creditor but as a creditor. In the particular case she is a creditor because her damages have been liquidated by a judgment. But it would be the same if she were a simple contract creditor whose debt was merged in a judgment. She is not therefore seeking to enforce her judgment. She is proceeding to a new alternative mode of recovering her debt, a mode by which she no longer seeks to recover for herself alone but for the benefit of all the creditors, as in a creditor's suit for the administration of the estate of a deceased debtor or in a bankruptcy.’

Lord Cozens-Hardy MR said, at 525-526:

The company contend that the petitioner is, within the meaning of s. 1, sub-s. 1 , of the Act, proceeding to “execution on the judgment” or otherwise proceeding “to the enforcement of the judgment.” [N]ow “execution on the judgment” is a technical term. It is a legal process by which the judgment creditor, in that character and for his sole benefit, by a proceeding in the same action seeks to satisfy his judgment wholly or partially. I think it is plain that a winding-up petition is not execution on a judgment. It lacks almost every element of such an execution. The present petitioner comes under s. 130 of the Companies (Consolidation) Act, 1908 , as a creditor, and none the less because she proves the debt by the production of a judgment…she does and can rely upon sub-s. (iv.). She alleges that the company is unable to pay its debts. And she also alleges that it is just and equitable that the company should be wound up - s. 129 (v.) and (vi.)…’

In the more recent case of Ridgeway Motors (Isleworth) Ltd v Alts Ltd [2005] 1 WLR 2871 ('Ridgeway Motors')Mummery LJ at paragraph 29: 

A winding up petition is neither (a) … nor (b) a process of execution of the judgment on which the petition is based. It is sui generis, being in the nature of a wider legal proceeding available for the collective enforcement of the admitted or proved debts of the company for the benefit of the general body of creditors on a pari passu basis: see, for example, In re Lines Bros Ltd [1983] Ch 1, 20’

While supporting the positon that a winding up petition is not execution and so not affected by a stay of execution imposed on a judgment debt, it is however open to debate whether this observation in Ridgeway Motors was obiter, as the issue before the Court of Appeal was whether a winding up petition fell within the meaning of the expression "an action upon any judgment" within Limitation Act 1980 section 24(1). 

Conclusion

Where a judgment creditor petitions for the winding up of a company judgment debtor on the basis of the judgment debt, it is not a defence to the petition, for the  judgment debtor to say that it is appealing the judgment debt. Further, the fact that the judgement debt is subject to a stay of execution will not, it seems, preclude the judgment debt from properly founding the winding up petition. However, the existence of an appeal may be a basis for the Companies Court granting an adjournment, or stay, or conditional dismissal, to preserve the competing parties interests until the appeal is finally determined.  

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.


[1] See El-Ajou v Dollar Land (Manhattan) Ltd [2007] BCC 953, where Warren J said at paragraph 8 said:

‘The reasoning by which the courts have rejected petitions where the debt is bona fide disputed on substantial grounds is because in such a case the petitioner cannot be said to be “a creditor” for the purposes of the statutory provisions. See, for instance, the decision in Mann v Goldstein [1968] 1 W.L.R. 1091, adopted by the Court of Appeal in Stonegate Securities Ltd v Gregory [1980] Ch. 576. I quote from the earlier judgment:

“For my part, I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor's petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds), since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of the process of the court.”

It is an abuse of process (i.e. the ability to present a winding up petition without first obtaining judicial permission) for putative creditors to petition for a company’s winding up as a means of putting pressure on the company to pay, where that putative creditor’s claim is bona fide disputed on substantial grounds. The threat of winding up should not loom over those who dispute liability on at least substantial grounds. Such disputes should be resolved elsewhere than in the Companies Court. See Re Coilcolor Ltd [2016] BPIR 1129.

[2] It is possible to extend the logic by saying that, a judgment is good until it is set aside on appeal, and that it is enforceable until then. The fact that the debtor has lodged an appeal against the judgment merely means that he still disputes the debt, but that itself is insufficient to disturb the finding that the debt exists.

[3] For what an ‘appeal’ is, see the personal insolvency cases of Barker v Baxendale-Walker [2018] EWHC 1681 (Ch) and Rehman v Boardman [2004] EWHC 505. In Rehman v Broadman, Lewison J (as he was) was faced with deciding whether an appeal was pending for the purpose of r.6.25(2) Insolvency Rules 1986 (now superseded by Insolvency Rules 2016) where an application had been made, but no permission to appeal had been granted, and the application for permission was out of time but no extension of time had yet been granted. Lewison J said, at paragraph 19:

‘Nor in my judgment is there any appeal pending against the judgement of Her Honour Judge Faber; all that has happened so far is that Mr Rehman has applied for permission to appeal out of time and for permission to appeal. Until such time as the Court of Appeal decides to extend time for the application and to grant permission to appeal there cannot, in my judgment, be said to be any appeal pending.

[4] In Re BLV Realty Organisation Designs Ltd [2010] EWHC 1791 (Ch), Roth J said, at paragraph 3:

‘Although there was no stay of the order for payment of the sum of £60,000 and, therefore, the debt was due and had not been paid in accordance with Norris J's order, I expressed concern at the last hearing about making a winding up order in respect of a debt, the validity of which was subject to a pending application before the Court of Appeal.’

[5] Separately, Roth J had dismissed a separate suggestion by the judgment debtor company that it be subject to a ‘freezing of dispositions’ (paragraph 8) instead of the provision of £60,000 as security, since that suggestion would be to seek ‘…to re-run in a different way the argument that was made at the hearing last time. However, the matter was fully argued then and, indeed, on the basis of the company's own proposal, it was the course of putting up security that the court adopted.’ (paragraph 8).  There were additional reasons given for not acceding to the suggestion to ‘freezing of dispositions’; see the law report for details. 

[6] For instance, on the N161 Appellant’s Notice, in section 10 (Part A) an application for a stay of execution can be made. This is in addition to any application to the first instance court an application for a stay of execution. See also Ellis v Scott (Practice Note) [1964] 1 WLR 976.

[7] CPR r.52.16 reads:

‘Unless—

(a) the appeal court or the lower court orders otherwise; or

(b) the appeal is from the Immigration and Asylum Chamber of the Upper Tribunal,

an appeal shall not operate as a stay of any order or decision of the lower court.’

[8] In the White Book 2018, in the commentary to CPR r.52.16, the authors comment ‘The rule stated in r.52.16 is to the effect that neither the commencement of an appeal nor the grant of permission to appeal shall operate as a stay of any order or decision of the lower court.

[9] Deputy Commissioner of Taxation (WA) v Mobile Homes of Australia Pty Ltd (186) 19 ATR 183; Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2007] NSWCA 57, 61 ACSR 441; Mikien Sdn Bhd v Woolley Development Sdn Bhd [2008] 1 MLJ 823; see also Bank Utama (M) Bhd v GKM Amal Bhd [2000] 5 MLJ 657. The first 2 cases are Australian cases, the last 2 are Malaysian cases.