Winding Up Petitions - Balancing Supporting and Opposing Creditors

Author: Simon Hill and Tom Marshall
In: Article Published: Sunday 01 August 2021

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Where a creditors winding up petition is presented and the petitioner seeks a winding up order under section 122(1)(f) of the Insolvency Act 1986[1], and the debtor/respondent company does not resist or its points of defence/opposition prove unmeritorious, the petitioner will be entitled to a winding up order as of right[2] (in latin, ex debito justitiae). However, this ‘as of right’ entitlement only relates to the relationship between the petitioner and the debtor/respondent (‘debtor’). Where the debtor has only one creditor, i.e. the petitioning creditor, there will be no other, wider interests, to consider[3](leaving aside the rare intrusion of contributories’ interests[4]). However, where the debtor has other creditors, those other creditors may wish[5] for their voices to be heard as to whether the Companies Court should, under section 125 of the Insolvency Act 1986: (i) make the winding up order; (ii) dismiss the petition; or (iii) make some other order, for instance, to adjourn/stay the winding up petition pending some other event (e.g. a vote on an creditors voluntary arrangement proposal).

Without attempting an exhaustive survey of all the authorities in this area, this article will consider: (1) the winding up process as a class remedy; (2) what parties have standing to tender evidence/make submissions when the winding up petition is heard; and (3) how the Companies Court, when deciding whether to make the winding up order[6], takes into account and balances the expressed views of: (i) unsecured supporting creditors (i.e. unsecured creditors supportive of a winding up order being made against the debtor) and (ii) unsecured opposing creditors (i.e. unsecured creditors opposed to a winding up order being made (immediately, or at all) against the debtor).

Winding Up Petitions and Bankruptcy Petitions
While this article will focus on corporate insolvency, the same issues arise in the law of personal insolvency (bankruptcy), and reference will be made to some personal insolvency cases. The differences between corporate insolvency and personal insolvency generally do not impact upon the law in this area. In Maud v Aabar Block Sarl [2016] BPIR 1486, Snowden J said, at paragraph 78:

‘Although there are some differences in the process, the essential collective nature of bankruptcy is no different to its corporate equivalent of compulsory winding up…’[7]

And at paragraph 82:

‘None of the parties in the instant case suggested to me that the approach of the court in a bankruptcy case should be any different to the approach in corporate insolvency summarised in In re Leigh Estate (UK) Ltd, and the registrar accepted that proposition in his judgment of December 2015. In my view he was obviously right to do so.’

These issues do arise more often though on winding up petitions than bankruptcy petitions. Indeed, in 2016, Snowden J said, at paragraph 82 ‘...it is notable that there are no reported bankruptcy cases in which the application of such principles has been explored.' [8]; however, since then, there has been Gertner v CFL Finance Ltd [2020] BPIR 752; [2020] EWHC 1241 (Ch) (‘Gertner’) and Re Armstrong [2021] EWHC 654 (Ch)[9].

Statutory Provisions
The foundation of the court's jurisdiction to deal with a winding up petition is to be found in section 125(1) of the Insolvency Act 1986, entitled 'powers of court on hearing of petition'. So far as presently relevant, that provides:

‘On hearing a winding up petition the court may dismiss it or adjourn the hearing conditionally or unconditionally or make an interim order or any other order it thinks fit ...’

Further, section 195 of the Insolvency Act 1986 is entitled ‘Court’s powers to ascertain wishes of creditors or contributories’, and contains matters the Court may (discretionary), or shall (mandatory). Section 195 provides:

‘(1)The court may–

(a) as to all matters relating to the winding up of a company, have regard to the wishes of the creditors or contributories (as proved to it by any sufficient evidence), and

(b) if it thinks fit, for the purpose of ascertaining those wishes, direct qualifying decision procedures to be instigated or the deemed consent procedure to be used in accordance with any directions given by the court, and appoint a person to report the result to the court.

(2) In the case of creditors, regard shall be had to the value of each creditor’s debt.

(3) In the case of contributories, regard shall be had to the number of votes conferred on each contributory.’

Petitioning Creditor entitled to Winding Up Order as of right
As alluded to in the introduction, a procedurally sound, properly pursued[10] s.122(1)(f) creditors winding up petition, founded upon an unsatisfied undisputed debt (of over £750[11]), not diminished/undercut by a countervailing counterclaim, set off or cross claim[12] (to net below £750), entitles the petitioner, as against the debtor, to a compulsory winding up order as of right[13]. But the right pursued within the winding up petition is a representative right, rather than merely being an individual right of the petitioner. As Buckley J in Re Crigglestone Coal Company Limited [1906] 2 Ch 327 ('Crigglestone') put it, at 331–332 ‘...the order which the petitioner seeks (sic) not an order for his benefit, but an order for the benefit of a class of which he is a member. The right ex debito justitiae is not his individual right, but his representative right'[14] and ‘...it is the right not of the individual, but of the class...'[15]

The process of obtaining a compulsory winding order, and the subsequent liquidation regime/procedure itself, are frequently referred to as a ‘class remedy’[16]. When the petitioner petitions, the petitioner is attempting to trigger a class remedy, the process of liquidation, over and against the debtor’s estate[17]. The logic is therefore that the interests of all those within that class should be considered when determining whether to grant that class remedy.

Interests of other Creditors Affected
Where the debtor has other unsecured creditors (including part secured creditors, to the extent they are unsecured[18]), each of those unsecured creditors will have an interest in whether or not the debtor is wound up/put into liquidation. This is because their ability to obtain a remedy (enforcement) upon their rights against the debtor will be radically affected by the debtor being put into liquidation. The effect of the winding up order will be to take away other enforcement options available to the debtor’s other creditors qua unsecured creditors. All the debtor’s creditors will, upon the winding up order being made, be confined to one collective enforcement process - one for the benefit of the whole class, namely, the general body of unsecured creditors[19]. The debtor’s assets will no longer be available to creditors claims in the normal ‘first come, first served’ or ‘race goes to the swiftest’ creditor legal environment. The debtor’s assets will thereafter only be available as part of a ‘pot’ for distribution in accordance with a prescribed statutory distribution scheme (class by class, intra each class pari passu)[20].

This was neatly summarised by Lord Hoffman in Wight v Eckhardt Marine GmbH [2004] 1 AC 147, where, after quoting Brightman LJ from Re Lines Bros Ltd [1982] 2 All ER 183[21], he said, at paragraph 27:

‘The winding up leaves the debts of the creditors untouched. It only affects the way in which they can be enforced. When the order is made, ordinary proceedings against the company are stayed (although the stay can be enforced only against creditors subject to the personal jurisdiction of the court). The creditors are confined to a collective enforcement procedure that results in pari passu distribution of the company's assets. The winding up does not either create new substantive rights in the creditors or destroy the old ones. Their debts, if they are owing, remain debts throughout.’[22] [bold added]

The Demaglass Exposition of the Principles
The decision of Neuberger J in Re Demaglass Holdings Ltd (Winding Up Petition: Application for Adjournment) [2001] 2 B.C.L.C. 633 (‘Demaglass’) provides both a useful foundational exposition of the law and a convenient place to start. In Demaglass, Neuberger J analysed ‘…where the court has had to consider whether or not to make a winding up order against the opposition of creditors, receivers appointed by secured creditors, or others.’ (at c.636) and made the following observations:

First, the foundation of the court's jurisdiction to deal with a winding up petition is to be found in section 125(1) of the 1986 Act…

Secondly, at least in the case of an opposed petition, the petitioning creditor has to establish the possibility of the prospect of some sort of benefit from a winding up...

Third, at least in the absence of a good reason a creditor of a company who has not been paid is entitled to a winding up order virtually as of right…

‘Fourthly, where, as here, the battle is between the creditors of the company, some in favour of a winding up order being made and others against, there is authority for the proposition that a winding up order will be made if the majority of creditors support the petitioner, and can only be refused if the majority support the opposition. In this connection see the discussion in the judgment of Brightman J in Re Southard & Company Limited [1979] 1 WLR 546 at 549–550. At 550C–D he said this:

“As has often been said, the decision in a case such as the present is a matter for the discretion of the judge. However, it is clear that the court ought not to deprive the petitioning creditor of his prima facie right to a winding up order unless there is an opposing majority and, if there is no voluntary liquidation in existence or in contemplation, unless there are good reasons for such opposition. I have been told that there is no reported case where the court has denied a creditor its prima facie right to a winding up order ex debito juditiae at the instance of a minority of opposing creditors” (emphasis added).

For my part, I would not accept that the mere fact that a majority of creditors support the making of a winding up order would be an absolute bar in all circumstances to the court refusing a winding up order. The wording of section 125(1) of the 1986 Act is such, and the nature of the winding up jurisdiction is such, that, as Brightman J himself recognised in the passage I have quoted, the discretion of the court is to be regarded as untrammelled by any absolute rule. Furthermore, in Re Palmer Marine Surveys Limited [1985] 1 BCC 99 557 at 562, Hoffmann J said this:

“Even if the creditors in favour of the continuation of the voluntary liquidation are a minority in value the court may refuse a compulsory order if there appears to be no advantage to creditors in making one.”

Nonetheless, I think it would require a wholly exceptional case before the court would deny a petitioning creditor a winding up order in circumstances where the majority of creditors supported the making of a winding up order. In this connection there is force in [counsel for the petitioner’s] reference to the provisions of section 195 of the Insolvency Act 1986, subsection (1) of which enables the court to “have regard to the wishes of creditors or contributories as to all matters relating to the winding up of a company” and indeed “to direct that meetings be called for the purpose of finding out their wishes”. In this connection I note with interest that section 195(2) is in these terms:

“In the case of creditors regard shall be had to the value of each creditor's debt.”

Fifth, when considering the views of the creditors on the question of whether to wind up a company or not:

(a) the court will give little, if any, weight to the views of the secured creditors, at least in so far as their debts are secured (see Bell Group Finance Limited v Bell Group Holdings Limited [1996] 1 BCLC 304). This is because the secured creditors are protected in any event, at least to the value of their security, and to that extent they have no interest in whether the company is wound up or not, save perhaps in unusual circumstances, for instance, if the value of the security would be affected by the making of a winding up order.

(b) The court will have greater regard to the views of independent creditors as opposed to creditors connected with the company (see Palmer Marine at [1985] BCC, 99, 562).

(c) The exercise of the court's discretion will not, as was pointed out by Brightman J in Southard, normally be dependent on mathematical niceties.

I should add that these points tend to underscore my view that the fact that the majority of creditors in value support the making of a winding up order is not necessarily decisive on the issue in every case.

Sixthly, as was emphasised by Brightman J in the passage I have quoted from Southard at [1979] 1 WLR 550D, it is not enough if the majority of creditors oppose the making of a winding up order in the normal case. The court must also be satisfied that they have good reason for refusing to wind up the company. The requirement of there being good reasons is emphasised by the decision of the Court of Appeal in Re P & J McRae Limited [1961] 1 WLR 239, especially per Willmer LJ at 235–236 in a passage which includes the following:

“I am certainly not prepared to accept the view that the bare fact of the opposing creditors being in a majority is of itself sufficient, still less conclusive. So to hold would be to leave the court with virtually no judicial function to perform and to take away from it the discretion which the words of the Act plainly confirm.”

Seventhly, where the court is satisfied that the opposition to the making of a winding up order is supported by a majority and is justified, but that the desire of the petitioning creditor to have a winding up order made is also justified, it has to carry out a balancing exercise. Once one gets to that point, it is impossible to lay down any general principles as to the correct approach. It must inevitably depend on all the circumstances of, and arguments in relation to, a particular case. However, I would suggest that the court should in every case of this sort bear in mind the principle expounded by Lord Cranworth and also ask itself whether there are any other procedures by which the petitioner or the opposers could be adequately protected rather than by having the petition respectively dismissed or granted.’[23]

Balancing Exercise - Re Maud
Snowden J in Re Maud [2020] EWHC 974 (Ch) (24.4.20) (‘Maud April 2020’), a bankruptcy case, recently considered the correct approach to this balancing exercise (petitioner vs opposing creditors vs supporting creditor). In Maud 2020, Snowden J had before him two bankruptcy petitions[24] (one presented by LIA and a second by Edgeworth), each petitioner seeking that Mr Maud be adjudicated bankrupt. Navarro, (ultimately) owned by Mr Maud’s wife and a creditor of Mr Maud through assignment, opposed such an adjudication. On the LIA petition, Snowden J identified, at paragraph 70, that one issue to be addressed was ‘The class question: what is the appropriate order to make having regard to the views of the general body of creditors?’

At paragraph 73, Snowden J in Maud April 2020 said:

‘The approach the court should take to the exercise of its discretion in considering the views of creditors was a matter of some contention between the parties. ... Edgeworth...contended that the court’s task is to assess the coherence and strength of the creditors’ views and not to reach its own view and impose that on creditors. [Counsel for LIA] emphasised that when weighing the views of creditors, the court should have regard to the circumstances and nature of their debts. In particular, he submitted, the views of connected creditors should ordinarily be given very little weight. In contrast, [Counsel for Navarro] took the position that where the views of both the creditors seeking an order and those opposing were rational, it was not inevitable that the view of the majority in value would prevail but the court has to form its own view on the position that a hypothetical rational creditor would take.’

Snowden J then[25a] said, at paragraphs 78 and 79:

‘In my judgment, ...the starting point for the court in determining whether to give effect to the right of the class ex debito justitiae to a bankruptcy order or a winding up order, is to look at the value of debts of the creditors on each side of a disagreement among the class. However, it is also clear that the court’s role in determining whether or not to give effect to the class remedy is not limited to a question of simple mathematics. The court will also look at the reasons advanced by the creditors on each side of the debate in order to assess whether those reasons are commercially rational and will have regard to other evidence to assess whether the weight and rationality of a particular creditor’s approach is diminished by any extraneous factors such as personal antipathy or affection on the part of the creditor for the debtor (or those connected with it in the case of a company).

I do not think, however, that there is support in the authorities for [Counsel for Navarro's] proposition that it is for the court to formulate some view of a hypothetical rational creditor who is a member of the class, or (which may amount to the same thing) to impose its own view of the commercial merits or the best interests of the class.’

Voices founded upon Commercially Rational Reasons or Extraneous Reasons/Factors
As indicated by Snowden J in Maud 2020, the weight to be given to a supporting or opposing creditor’s voice (express orally at court or in a witness statement[25b]), in the balancing exercise, will depend, in part, on whether those views are: (i) commercially rational; or (ii) based by extraneous factors (such as, personal antipathy or affection for the debtor). That is, the more commercially rational the reasons are, based on considerations common to the general body of creditors, the weighter those creditors’ voices will be. Conversely, creditors' voices will diminish in weight the more they are motivated by extraneous factors (i.e. factors/considerations not common to the general body of creditors). Extraneous factors may arise in the creditor because that creditor holds other roles, capacities, statuses, or interests, and so the creditors motivations are skewed away from purely ‘…acting in the interests of the class of unsecured creditors.’ (Re Leigh Estates (UK) Ltd [1994] B.C.C. 292 (‘Leigh Estates’), at 295), Such roles, capacities, statuses, or interests might be, say, a position as a shareholder, security holder or director[26]. Voices expressed in furtherance of the interests of other roles, capacities, statuses, or interests, so not common to the general body of creditors, will dilute the weight that can be given to such ‘voices’, in the balancing exercise, sometimes to the point of that that voice will be ignored[27].

Commercially Rational Reasons for Supporting or Opposing
It is possible to identify some examples of what might be considered commercially rational reasons for a creditor taking a particular position on whether or not a winding up order ought immediately to be made.

It might be rational for a creditor to oppose a winding up order on the basis that, in its view, the general body of unsecured creditors will have a better chance of getting paid (at all, or at least, paid more pence in the pound than liquidation will generate) if: (i) the debtor’s assets are not collectively ‘seized’ by a liquidator, but rather (2) the debtor is given time to rebuild and return to solvency (though exposed to the risk of individual creditors attempting to enforce during this time). Within this, it might be that the creditor takes the view that any liquidation will likely cause the available assets to be reduced. In Leigh Estates, the deputy High Court Judge said, at 296:

‘On the other side, the banks' reasons for opposing the petition, as expressed in the evidence, are precisely the same as the reasons one would expect to be advanced by entirely unsecured creditors opposing the petition, namely that a winding-up order is likely to cause the available assets to be reduced.’

Conversely, it may be a rational reason for supporting a winding up petition, that liquidation is seen as likely:

‘…to swell the estate of the company or otherwise to improve the lot of the unsecured creditors…’ (Leigh Estates - 295)

A ‘bad’ reason for supporting a winding up order can be seen in Leigh Estates, namely, ‘...to gain for themselves a preference over the secured and unsecured creditors alike’; that was to ‘...achieve a preferential status such as formerly attached to rates but which was removed by the Insolvency Act 1986’ (294)[28]. That is a reason based on extraneous factors - individual to that creditor - or at least not common to all. The deputy High Court Judge said, ‘It might reasonably be said that this attitude is not acting in the interests of the class of unsecured creditors.’ (295).

Further, it might be a 'bad' reason for a part secured/part unsecured creditor to oppose a winding up order, in order to protect the security they received from the company from challenge. Opposing a winding up order on that basis would not be for the benefit of the general body of creditors but for an extraneous purpose - to protect that particular creditor’s proprietary right of security. On this, the deputy High Court Judge in Leigh Estates said, at 295:

‘It ... becomes necessary to see why a winding-up order is sought and in particular whether it is sought in order to impugn the secured creditors' debt or security. If so, and if there appears to be some substance in the petitioner's claim, the court should put much less weight on the opposition of those whose debt or security is under attack.

If, as in the present case, no complaint is made about the secured creditors' debt or security I see no reason why the secured creditors should not be allowed to have, in respect of the unsecured portion of their debt, as loud a voice as other unsecured creditors; they have precisely the same interest in maximising the surplus (if any) available for unsecured creditors. The general rule must be subject to other exceptions, however: if the opposition is mounted in order to advance the secured creditors' position as such in a manner considered to be contrary to the interests of the unsecured creditors, the secured creditors should be ignored.[29]

No Weight attaching to Debtor Company’s Voice
One voice that will hold no weight in the balancing exercise, is that of the debtor company itself. Buckley J in Crigglestone said, at 331–332:

‘...It is a matter ... on which the debtor has no voice.[30]

Opposing Creditor seeking adjournment for CVA Proposals
A creditor might oppose a winding up order in all circumstances. But a creditor might also simply oppose an immediate winding up order, on the basis the petition should be stayed/adjourned so as to enable something to occur in the interim. This might be for normal procedural reasons, such as to file evidence or alike, or it might be for more substantive reasons. For instance:

(a) in Demaglass, a 10 week adjournment was sought ‘…on the ground that the administrative receivers appointed by a debenture holder wish to have that period to dispose of the company's stock more advantageously.[31]; or
(b) to enable company voluntary arrangement (CVA) proposals to be considered and voted on by the debtor's creditors. If approved, the CVA would govern and the winding up petition would be redundant.   

Opposing Creditor seeking adjournment for CVA Proposals
On this latter example - an creditor resisting an immediate winding up order in favour of a stay/adjournment to allow voluntary arrangement proposals to be voted on - there is the case of Gertner - a bankruptcy case but which is illuminating nevertheless. In Gertner, Marcus Smith J heard an appeal against Chief ICCJ Briggs’ decision (CFL Finance Ltd v Bass [2019] C.T.L.C. 229): (1) to refuse to stay a bankruptcy petition; and then (2) to make a bankruptcy order against the debtor. It was contended before Marcus Smith J on the appeal, that the bankruptcy petition should have been stayed to permit the debtor’s (second) IVA proposal (‘Second Proposal’) to be considered by the debtor’s creditors at a creditors’ meeting.

Before Chief ICCJ Briggs, the opposing creditor had been Laser Trust, a non-associated (for the purposes of s.435 of the Insolvency Act 1986) unsecured creditor holding over 90% of the debtor’s debt by value. Laser Trust had stated before Chief ICCJ Briggs that Laser Trust intended to vote in favour of the debtor’s Second Proposal. With such a commanding position (over 90% of the debt and being non-associated), it was apparent that if time was permitted, and Laser Trust did so vote in favour of the Second Proposal, then the Second Proposal would be approved under the test in Insolvency Rules 2016, r.15.34[32]. However, Chief ICCJ Briggs took into account other factors and refused to stay.

Marcus Smith J allowed the appeal, set aside the bankruptcy order, and imposed a stay on the bankruptcy petition pending the outcome of the vote on the Second Proposal. Marcus Smith J emphasized the inevitability of the Second Proposal being approved, in such circumstances, and held, at paragraph 93:

‘(5)....Where it is clear that this will be the outcome, it is not for the judge to stand in the way of the approval unless (by reason of the good faith principle) that approval would be tainted.

(6) According to the statutory scheme laid out in the Insolvency Act and the Rules, it is for the majority of unsecured creditors, as defined by that scheme, to determine whether the debtor's proposal should be approved or not.’

In other words, with Parliament having placed into the hands of the creditors the decision whether or not to approve the Second Proposal, it was not for, in effect, the Court to decide it for them. Factors for or against approving the Second Proposal were for the creditors to balance, and were therefore irrelevant to the question of imposing a stay, unless they were relevant to the 'good faith' principle (discussed below). At paragraph 93(6), Marcus Smith J said:

‘Where it is clear that such approval (sic) be given (as was the case here, and as the Judge clearly appreciated), it is not for the Judge to second-guess that approval by making value judgments as to the level of the dividend, the benefits of a more detailed investigation of the debtor's affairs, the fact that the creditor is an assignee of an earlier creditor who breached the good faith rule, the fact that that creditor has given an unsatisfactory account of its circumstances, or has alternative means of satisfying the debt that is owed to it unless these factors may permissibly be taken into account under the statutory scheme laid out in IA1986 and IR2016. In this case, at least, that means that unless the good faith rule would be engaged if Laser Trust voted in favour of the Second Proposal, the Judge was obliged in the exercise of his discretion to stay the proceedings on CFL's petition.’ [bold added]

Turning to the voluntary arrangement proposal ‘good faith’ principle, Marcus Smith J said that ‘[a]pproving creditors must act in the interests of the class of unsecured creditors...;’[33] (paragraph 94(2)). However, on the facts of Gertner, Marcus Smith J could discern no circumstances surrounding Laser Trust which brought Laser Trust ‘...within the ambit of the good faith rule…’ (paragraph 95(4)). He found that there was ‘...no basis for any suggestion that the good faith rule would cause Laser Trust's approval (which is determinative) to be tainted…’ (paragraph 96). Consequently, a stay should have been ordered.

Where Debtor Company already in Voluntary Liquidation
Where the company facing the creditors winding up petition is already in voluntary liquidation, the petitioning creditor will still have a prime facie right to a compulsory winding up order. In Re Southard [1979] 1 WLR 546 (affirmed by the Court of Appeal [1979] 1 WLR 1198), Brightman J said, at 501, ‘...an unpaid creditor has a prima facie right to a winding up order, even if a voluntary liquidation is on foot.[34] On such a petition, seemingly, the balancing exercise to be applied is similar to where the company is not already in voluntary liquidation[35].

Company Contributories and Strangers
This article has focused on supporting or opposing creditors, but it would be helpful to briefly mention the position as to contributories.

A contributory will generally have no tangible interest, and so no standing, to be heard on a creditors winding up petition. This is because, where the debtor company is insolvent, the contributory stands to receive nothing from his shares in the debtor company. Unless the contributory can show the debtor company is solvent[36], he cannot show he holds a genuine interest in the result[37]. However exceptionally and for good reason, the Court might hear from a contributory. In Charit-Email Technology Partnership LLP v Vermillion International Investments Ltd [2009] B.P.I.R. 762, Sir Andrew Morritt C said, at paragraph 12:

‘It has been the established practice for many years under successive Companies and Insolvency Acts for the court in all matters relating to the winding up of companies to have regard to the wishes of the creditors and contributories (see section 195, Insolvency Act 1986). In the case of a petition for the winding up of a company limited by shares, all of which are paid up, it is the established practice of the court to require a contributory to show that he has a tangible interest, in the sense that if wound up there would be surplus assets available for distribution to the members (see In re Rica Gold Washing Company (1879) 11 ChD 36, and In re Chesterfield Catering Co Ltd [1977] Ch 373 at pages 379-381). In the case of a creditor's petition, it is unlikely that a contributory could show any such interest but (exceptionally and for good reason) the court has been prepared to hear what he had to say (see, for example, Re Bradford Navigation [1875] CA 600 and In re Camburn Petroleum Products Ltd [1980] 1 WLR 86.’[38]

Further, it is not an immutable principle that a non-creditor/non-contributory to the company will not be permitted to make submissions to the Court[39].

Costs against an unsuccessful opposing creditor
Where a winding up order is opposed by a creditor, unsuccessfully, there may be a claim for costs against that creditor. Whether any costs order is made will depend on what is just, in all the circumstances, as per Re Professional Computer Group Ltd [2008] EWHC 1541 (Ch) (Morgan J).

Conclusion
A creditors winding up petition seeking a winding up order under s.122(1)(f) is a petition seeking a class remedy for the benefit of the debtor company’s general body of unsecured creditors; it is not just for the benefit of the petitioning creditor. An eligible petitioner properly pursuing a creditors winding up petition has, as between it and the debtor company, a right to a winding up order, but, where there are other unsecured creditors of the debtor company, that right is tempered by the interests of the debtor company’s general body of unsecured creditors, as a whole. The debtor company’s other unsecured creditors can express their views on whether they support or oppose the making of a winding up order, either immediately or at all. Where there are opposing creditors (whether the case also involves supporting creditors or not), the Court will have to assess all the wider voices, supportive as well as opposing, as part of a balancing exercise. The weight to be given to each ‘voice’ will depend on the relative value of the debt and the reasons for the position taken. The weight to be attached to a voice will be heavily influenced by whether the view is expressed for:

(a) commercially rational reasons purely in furtherance of the (common) interests of the general body of unsecured creditors as a whole, or

(b) reasons/motivations based on extraneous factors not shared by all those within the general body of unsecured creditors - such as where a creditor takes a position in order to protect/bolster some other interest/role/capacity/status or asset they also hold, which will be affected by the petition outcome, though such a position is detrimental to the interests of the general body of unsecured creditors. Voices falling within (b) will have little or no weight in the balancing exercise.

In addition, in this balancing exercise, the debtor/company itself will have no voice on the matter.

What the outcome of this balancing exercise will be, will depend on the Court’s evaluative judgment of the competing voices. 

SIMON HILL AND TOM MARSHALL © 2021

Simon Hill is a barrister at 33 Bedford Row

Tom Marshall is a solicitor at Debenhams Ottaway LLP

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] Creditor winding up petitions are presented pursuant to section 124 of the Insolvency Act 1986

[2] In Re Demaglass Holdings Ltd (Winding Up Petition: Application for Adjournment) [2001] 2 B.C.L.C. 633, Neuberger J said:

‘...at least in the absence of a good reason a creditor of a company who has not been paid is entitled to a winding up order virtually as of right. Thus in a classic statement made in Bove v The Hope Life Insurance and Guarantee Company (1865) 11 HLC, the Lord Chancellor said this at 402:

“It is not a discretion with the court when a debt is established and not satisfied to say whether the company should be wound up or not, that is to say, if there be a valid debt established, valid both at law and equity. One does not like to say positively no case could occur in which it would be right to refuse it but ordinarily speaking it is the duty of the court to direct the winding up.”

Neuberger J seems here to be referring to Lord Cranworth's judgment in Bowes v The Directors, etc. of The Hope Life Insurance and Guarantee Company (also known as Bowes v Hope Life Assurance and Guarantee Co) (1865) XI House of Lords Cases (Clark's) 389; 11 E.R. 1383.

In Re West Hartlepool Ironworks Company (1874-75) L.R. 10 Ch. App. 618, before discussing if other creditors opposed, Mellish LJ said:

‘... a creditor of a company who cannot get paid his debt after having served his proper summons is entitled ex debito justitiæ as between him and the company to an order for winding up…’

In Robertson v Wojakovski [2020] EWHC 2737 (Ch), a bankruptcy case, Zacaroli J recorded, at paragraph 8, that a debtor's counsel had '...accepted that a petitioning creditor who is owed an undisputed debt which remains unpaid is entitled ex debito justitiae to a bankruptcy order.'

[3] Where the winding up petition is unopposed, it maybe that there is no requirement to show that the compulsory winding up will produce some sort of benefit. In Re Demaglass Holdings Ltd (Winding Up Petition: Application for Adjournment) [2001] 2 B.C.L.C. 633, Neuberger J said:

‘...at least in the case of an opposed petition, the petitioning creditor has to establish the possibility of the prospect of some sort of benefit from a winding up. The test, however appears to be a low one. In Re Crigglestone Coal Company Limited [1906] 2 Ch 327 Collins, MR, appears to have thought that the petitioner need only show a reasonable possibility of some advantage (see 333A). The other two members of the Court of Appeal seem to have considered that the test was even lower than that. Romer LJ at 338 observed that he could not say that the prospect was “hopeless”. At 339 CozensHardy LJ said the evidence against the petitioners “did not support the contention that there is no possibility” of a dividend being paid to the unsecured creditors.’

Wider public interest is not generally considered.

[4] The rare situation where a contributory claims an interest is dealt with in this article, just prior to the conclusion.

[5] Procedurally, those wishing to be heard must comply with Insolvency Rules 2016, r.7.14. Those persons entitled to and intending to appear on the hearing of the petition must give notice of their intention to appear. It should be given to the petitioner (or the petitioner’s solicitors, as applicable), to reach the addressee not later than 4 pm on the business day before the hearing. Where a person fails to give such notice, that person is not entitled to be heard in Court, unless the Court grants that person permission.

[6] The foundation of the court's jurisdiction to deal with a winding up petition is to be found in section 125(1) of the Insolvency Act 1986. That provides as follows:

‘On hearing a winding up petition the court may dismiss it or adjourn the hearing conditionally or unconditionally or make an interim order or any other order it thinks fit but the court shall not refuse to make a winding up order on the ground only that the company's assets have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets.’

See the passages from Re Demaglass Holdings Ltd (Winding Up Petition: Application for Adjournment) [2001] 2 B.C.L.C. 633, quoted later in this article.

[7] Snowden J in Maud v Aabar Block Sarl [2016] BPIR 1486 supported this proposition in paragraph 78, by referring to Lord Hoffman in Cambridge Gas v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508 (‘Cambridge Gas’). In Cambridge Gas, Lord Hoffman said, at paragraphs 14-15:

‘The purpose of bankruptcy proceedings, on the other hand, is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established. That mechanism may vary in its details. For example, in personal bankruptcy in England, the assets of the bankrupt are vested in a trustee for realisation and distribution to creditors. So the mechanism operates by divesting the bankrupt of his property. In corporate insolvency, on the other hand, the insolvent company continues to be owner of its property but holds it in trust for the creditors in accordance with the provisions of the Insolvency Act 1986 : see Ayerst v C & K (Construction) Ltd [1976] AC 167. In the case of personal bankruptcy, the bankrupt may afterwards be discharged from liability for his pre bankruptcy debts. In the case of corporate insolvency, there is no provision for discharge. The company remains liable but when all its assets have been distributed, there is nothing more against which the liability can be enforced: see Wight v Eckhardt Marine GmbH [2004] 1 AC 147, 155–156. At that point, the company is usually dissolved.

But these are matters of detail. The important point is that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them. Of course, as Brightman LJ pointed out in In re Lines Bros Ltd [1983] Ch 1, 20, it may incidentally be necessary in the course of bankruptcy proceedings to establish rights which are challenged: proofs of debt may be rejected; or there may be a dispute over whether or not a particular item of property belonged to the debtor and is available for distribution. There are procedures by which these questions may be tried summarily within the bankruptcy proceedings or directed to be determined by ordinary action. But these again are incidental procedural matters and not central to the purpose of the proceedings.’

For an early statement on this, see Re James Millward & Co Ltd [1940] Ch. 333, where Scott LJ held that a creditor pursuing a creditors winding up petition against a company already in voluntary liquidation, was entitled to a compulsory winding up order, ex debito justitiæ, without having to show prejudice from the voluntary winding up order. At 334:

‘... just as a judgment creditor serving a bankruptcy notice is entitled to have an order made by the bankruptcy court. The same principle underlies both, and gives to the creditor the same kind of remedy by way of a particular form of judicial execution, whether the debtor is an individual person or a company.’

In a similar vein, in Wicks v Russell [2008] EWHC 2713, HHJ Purle (sitting as an Additional Judge of the High Court) heard an application to annul a insolvency administration order (similar to a bankruptcy order, but over deceased’s insolvent estates - see Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999)) under section 282(1)(a) of the Insolvency Act 1986 (section 282(1)(a) being that the Court may annul an IAO on the ground that it should not have been made). After having found that the IAO petitioner was not a creditor and not entitled therefore to have petitioned for the IAO, the Court had to consider whether it should, in its discretion, accede to the annulment application. The Additional Judge of the High Court said, at paragraphs 26 to 29: 

‘I undoubtedly do have a discretion under section 282, as the word "may" confirms. The circumstance that the original order was made on the application of someone having no standing to petition is no doubt something which I should have serious regard to. Nevertheless, bankruptcy is a class remedy and it behoves me to have regard also to the interests of the creditors as a body.

In Guinan III v Caldwell Associates Ltd [2004] BPIR 531, Neuberger J (as he then was) had this to say on the question of the exercise of the discretion under section 282:

"As I have mentioned, there is a discretion even if there is an arguable case, but it seems to me that unless there are special circumstances such as other creditors who have undoubted debts, or clear other evidence of insolvency, or facts such as were before the Court of Appeal in Askew v Peter Dominic Ltd [1997] BPIR 163, namely that the debt in question was not challenged, then it seems to me, save in exceptional circumstances, that it must be right not to uphold a bankruptcy order."

Here there are in my judgment special circumstances, namely the undoubted insolvency of [the deceased], and the loss of a potential remedy if the IAO is now annulled. Whilst Neuberger J's comments were made in the context of a disputed debt, the position so far as discretion is concerned is no different where what is challenged is the standing of the original petitioner. Indeed, it may well be that, in the case of a deceased debtor, who will not suffer the disabilities and stigma of bankruptcy during his lifetime, the circumstances for the exercise of the discretion to annul are (where insolvency is established) even more circumscribed than in the case of a living debtor.

Mr Whitaker says that the creditors have until recently been entirely supine and, even now, only one outside creditor with a genuine claim has bothered to prove. I do not think that is decisive. It may well be that other creditors, once it is known (if that becomes the case) that there are assets available for distribution, will show an interest. The fact that they have not bothered to throw good money after bad up till now is no reason for depriving them collectively of the class remedy of bankruptcy to which they are entitled.’

The Additional Judge of the High Court declined to annul the IAO.

[8] Snowden J in Maud v Aabar Block Sarl [2016] BPIR 1486, speculated as the the reason for this, at paragraph 82, that:

‘The reason for this is probably that in contrast to the requirement for a winding up petition to be advertised before hearing, there is no requirement that a bankruptcy petition be advertised, and hence the overwhelming majority of bankruptcy petitions are opposed only by the debtor, and other creditors do not appear. It is, however, perfectly plain that other creditors are entitled to appear and be heard on a bankruptcy petition, not least because the Insolvency Rules 1986 (SI 1986/1925) contain provisions for the giving of notice by creditors intending to appear and for the petitioning creditor to prepare a list of those who have given notice that they intend to appear, indicating whether they intend to support or to oppose the petition: see rules 6.23 and 6.24 of the Insolvency Rules 1986.’

[9] In Re Armstrong [2021] EWHC 654, ICCJ Barber made a bankruptcy order against the debtor. While the full judgment repays reading, a flavour of what she said can be gleaned from her conclusion at paragraph 68:

‘The petition debt is undisputed. All creditors who gave notice of intention to appear on the petition were given an opportunity to file evidence, attend the hearing and address the court. I have considered their written evidence and their oral submissions. There are no opposing creditors. No supporting creditor spoke in favour of an adjournment. All supporting creditors who expressed a view supported the making of a bankruptcy order immediately. I was taken to no credible evidence suggesting a better outcome for creditors if a bankruptcy order is not made. The evidence which I have read suggests that the creditors as a whole are likely to benefit from the making of an immediate bankruptcy order and the investigation of the debtor's past dealings which will follow. The debtor has been afforded ample opportunities to pay off the petition debt and has failed to do so. I was taken to no credible evidence of a reasonable prospect that the petition debt will be paid in full within a reasonable time..’

[10] The only proper purpose for which a petition can be presented is for the proper administration of the company’s assets for the benefit of all relevant classes. In Re a company [1983] BCLC 492, Harman J said, at 495:

“The question.. is not ‘does the petitioner genuinely wish to wind up this company’...It would be hard for me to find that this petitioner, which has taken all regular steps to prosecute its petition and which plainly has reasons to desire the winding-up of this company, since that must put beyond much cavil the future of the company’s lease, does not in truth desire to wind up the company. In my judgement the true question is ‘for what purpose does the petitioner wish to wind up this company’. A judge has to decide whether the petition is for the benefit of the class of which the petitioner forms a part or is for some purpose of his own. If the latter, then it is not properly bought.

If the petitioner can show that he and his class stand together and will benefit or suffer rateably, then his ill motive is nothing to the point. But here it is plain that no such even-handedness exists. If the petition is properly bought, then the petitioner stands to get a valuable asset for itself and the rest of the class of creditors are likely to get nothing”.

Lord Wilson giving the advice of the Privy Council in Ebbvale v Hosking [2013] UKPC 1 quoted the above (amongst other parts) with apparent approval.

In Re Maud [2020] EWHC 974 (Ch), the 'April Judgment', Snowden J said, at paragraphs 137 to 141:

‘137.  As I held in the First Judgment, the basic principles of law which apply to the question of whether a bankruptcy petition is an abuse of process are those set out by Rose J in paragraph [29] of her judgment refusing to set aside Edgeworth's statutory demand,

"29.  In the light of these authorities I conclude that the pursuit of insolvency proceedings in respect of a debt which is otherwise undisputed will amount to an abuse in two situations. The first is where the petitioner does not really want to obtain the liquidation or bankruptcy of the company or individual at all, but issues or threatens to issue the proceedings to put pressure on the target to take some other action which the target is otherwise unwilling to take. The second is where the petitioner does want to achieve the relief sought but he is not acting in the interests of the class of creditors of which he is one or where the success of his petition will operate to the disadvantage of the body of creditors."

139.  As I indicated in my First Judgment, however, Rose J's statement of the second situation requires two points of further explanation. The first is that it will be an abuse of process if, even though the petitioner wants a bankruptcy order to be made, recovering its debt through the bankruptcy process is no part of its purpose. The example of that type of abuse in the authorities is the Irish case of McGinn v Beagan [1962] IR 364 which concerned the long-running personal feud between the town clerk of the Castleblayney Urban District Council and a town councillor. The town clerk took an assignment of debts owed by the councillor, and petitioned for his bankruptcy. The judge found, as a fact, that the town clerk did not have the purpose of recovering any money, but was motivated by the sole purpose of making the councillor bankrupt and unseating him from the town council.

140.  As I indicated in my First Judgment, however, McGinn v Beagan was highly unusual because there was an express finding that the petitioner was not using the bankruptcy process to find assets which could be made available for creditors or to get payment. I expressed the view that in a commercial setting it is likely to be difficult to establish on the facts that a petitioner is not seeking to receive some payment on the debt which he is owed.

141.  The second point which I explained in my First Judgment is that a petition will not be an abuse of process if, in addition to wishing to receive a dividend on his debt in the bankruptcy together with other creditors, the petitioner has a collateral purpose which is not shared with the other creditors, but which will not cause them any detriment if achieved. In essence that is the position which Rose J reached at the hearing before her when she concluded that Mr. Maud had not established that triggering the pre-emption provisions in relation to Mr. Maud's Ramblas shares would result in loss to his creditors, because a fair price would be paid for them under the mechanism in Ramblas' Articles of Association.’

In Re Maud [2020] EWHC 1469 (Ch), Snowden J considered whether he should reconsider the analysis in his April Judgment ‘…in light of the new materials placed before me relating to the Interest Claim’ ( paragraph 27), at paragraphs 30-31 (subparagraph numbers are (1) 2. 2. 2. in original - oddly):

‘To the contrary, Mr. Wigley’s skeleton argument for the 2019 Hearing expressly adopted my analysis of law from my earlier judgments (the Appeal Judgment and the June 2018 Judgment) and submitted that the correct approach in law was as follows,

“(1) a petitioner abuses “the process of the court in seeking a bankruptcy order or a winding-up order for a purpose which is contrary or alien to the nature of the class remedy that he is purporting to invoke” (para 115 of the Appeal Judgment);

2. a petition will not be an abuse of process, however, if in addition to wishing to receive a dividend on his debt in the bankruptcy together with other creditors, the petitioner has a collateral purpose which is not shared with the other creditors but which will not cause them any detriment if achieved (see para 82 of the June 2018 Judgment);

2. however, if a creditor has such a collateral purpose which would operate to the detriment of the class, he cannot save his petition by protesting that he would still wish to receive a dividend upon his debt in the bankruptcy, because the effect of his achieving his collateral purpose would be to reduce that dividend for all creditors (see para 83 of the June 2018 Judgment); and

2. a petition would be an abuse of process if it was being pursued, not to recover the petition debt at all, but solely for an extraneous purpose, even though that did not harm the interests of creditors (see para 84 of the June 2018 Judgment).”

31. That approach was consistent with the analysis of the authorities by Rose J when refusing to set aside Edgeworth’s statutory demand (for which Mr. Maud was refused permission to appeal by Gloster LJ). It was also essentially the test that I applied in my Judgment: see paragraphs 137-141.’

Snowden J concluded, at paragraph 39, that there was no ‘...realistic prospect of a successful appeal on the basis that I applied the wrong legal test in determining whether the Edgeworth Petition was an abuse of process.’

In PGH Investments Ltd v Ewing [2021] EWHC 533 (Ch), Deputy ICCJ Passfield found, obiter, that there was no collateral purpose warranting the petition be dismissed, at paragraphs 79 to 83.

For a wider view of misusing proceeds for aims it was not designed for, see Asif v Ditta [2021] EWCA Crim 1091, from paragraph 71. The discussion relates to bringing a private prosecution to obtain compensation, circumventing the normal civil route, with its issue fee, security for costs against claimant provisions, and other provisions. The Court of Appeal helds it was right to stay the criminal proceedings.

[11] There is no minimum amount which a creditor must be owed to allow the presentation of a petition (as distinct from the service of a statutory demand, which must be for more than £750 s.123(1)(a) of the Insolvency Act 1980 - though of course in corporate insolvency it is not essential for a statutory demand to be served). However, it is a rule of practice that the sum must be above £750. In Corporate Insolvency: Law and Practice, 5th Ed. Bailey and Groves, the authors note, paragraph 14.13 - footnote 1 ‘Though rarely encountered the court can order a winding up order notwithstanding the petition is based on a debt of less than £750: Re World International Bank Ltd [1909] WN 148.’

[12] In Lockley v National Blood Transfusion Service [1992] 1 WLR 492, Scott LJ (with which the other two Lords Justices agreed) said, at 495:

'...it is necessary, in my opinion, to tread once again the well travelled path that separates set-off from mere cross-claim. The leading authority is still Hanak v. Green [1958] 2 Q.B. 9 , 24A, where Morris L.J. referred to set-off “which, as a matter of equity, can be relied on by way of defence. But this does not mean that all crossclaims may be relied on as defences to claims.” And he said, at p. 25:

“a cross-claim can be regarded as a set-off… if it would have been regarded by a court of equity as the basis for equitable set-off or for giving protection on equitable grounds to a defendant.”

Sellers L.J. said, at p. 29, that “If there is a set-off at all each claim goes against the other and either extinguishes it or reduces it.”

For present purposes, the importance of the distinction between set-off and other cross-claims is that set-off operates, as Sellers L.J. pointed out, to reduce or extinguish the other party's claim. It operates as a defence. A mere cross-claim does not.

...

The operation of a set-off does not place the person whose chose in action is thereby reduced or extinguished under any obligation to pay. It simply reduces or extinguishes the amount that the other party has to pay.'

[13] The classic statement of the law is that of Buckley J in In re Crigglestone Coal Co Ltd [1906] 2 Ch 327, 331–332:

'I will state shortly what I take to be the law. First, as between the creditor and the company, who are his debtors, the unpaid creditor who shews insolvency is entitled ex debito justitiae (as it is generally termed) to a winding up order—that is to say, to an order by virtue of which the creditor, by the hands of a liquidator, is entitled to seize the assets of his debtor and administer them for the payment of himself and other creditors …'

[14] This comes from a larger passage from Buckley J in Re Crigglestone Coal Co Ltd [1906] 2 Ch 327, 331–332:

'I will state shortly what I take to be the law. First, as between the creditor and the company, who are his debtors, the unpaid creditor who shews insolvency is entitled ex debito justitiae (as it is generally termed) to a winding up order—that is to say, to an order by virtue of which the creditor, by the hands of a liquidator, is entitled to seize the assets of his debtor and administer them for the payment of himself and other creditors … But then comes another consideration, viz, that the order which the petitioner seeks not an order for his benefit, but an order for the benefit of a class of which he is a member. The right ex debito justitiae is not his individual right, but his representative right. If a majority of the class are opposed to his view, and consider that they have a better chance of getting payment by abstaining from seizing the assets, then, upon general grounds and upon section 91 of the Companies Act 1862 , the court gives effect to such right as the majority of the class desire to exercise. This is no exception. It is a recognition of the right, but affirms that it is the right not of the individual, but of the class; that it is for the majority to seek or to decline the order as best serves the interest of their class. It is a matter upon which the majority of the unsecured creditors are entitled to prevail, but on which the debtor has no voice.'

The part about other creditors interests is actually obiter, as noted by Wilmer LJ in In re P & J Macrae Ltd [1961] 1 WLR 229, at 232, but Buckley J’s ‘… insistence on the creditor's right being a class right, have been generally accepted as an authoritative statement…’. Referring to CrigglestoneWilmer LJ said, in In re P & J Macrae Ltd [1961] 1 WLR 229, at 232:

'It is to be remarked that in that case there was no question of opposition to the petition on the part of other unsecured creditors, the issue being between the petitioning creditor on the one hand and the company and the debenture holders on the other. What was said by Buckley J. as to the right of other unsecured creditors was, therefore, obiter, and this point was not dealt with by the Court of Appeal to which the case subsequently went. But the remarks of Buckley J., and particularly his insistence on the creditor's right being a class right, have been generally accepted as an authoritative statement, and, indeed, have not been challenged before us on behalf of the petitioning creditors in the present case.'

This was noted, with apparent approval, by Snowden J in Maud v Aabar Block Sarl [2016] BPIR 1486, at paragraph 79.

[15] In In re Leigh Estates (UK) Ltd [1994] BCC 292, Mr Richard Sykes QC, sitting as a deputy High Court judge, summarised the principles, at 294:

“The following matters are clear: Although a petitioning creditor may, as between himself and the company, be entitled to a winding up order ex debito justitiae, his remedy is a ‘class right’...’

It is probably not correct to refer to it as a ‘class interest’. In Re Southard [1979] 1 W.L.R. 1198, Buckley LJ repeated what counsel for the petitioning creditor had said, without seemingly objecting to it, at 1202:

‘The petitioning creditor and the creditors of the company who are in equal degree with the petitioner have in some cases been described as having a class interest in this respect, but [counsel for the petitioning creditor] says that it is not right to describe it as a class interest, because they are not truly a class; each of them has an individual right of a similar kind and the court has to pay regard to the views and the wishes of all the persons who are creditors of the company in the same degree as the petitioner.’

See also, in Sell Your Car With Us Ltd v Sareen [2019] BCC 1211, where ICCJ Burton said, at paragraph 52:

‘...winding-up proceedings are a class remedy…’

In Robertson v Wojakovski [2020] EWHC 2737 (Ch), a bankruptcy case, Zacaroli J stressed that bankruptcy was a class remedy. In Promontoria (Pine) Designated Activity Co v Hancock [2021] EWHC 259 (Ch), Snowden J said at paragraph 11 ‘...the bankruptcy process is a class remedy for unsecured creditors.’

[16] In Coilcolour Ltd v Camtrex Ltd [2015] EWHC 3203 (‘Coilcolour’), Hildyard J said, at paragraph 32:

‘The Companies Court has repeatedly made clear that where the standing of the petitioner, and thus its right to invoke what is a class remedy on behalf of all creditors, is in doubt, it is the court's settled practice to dismiss the petition.’

Later, Hildyard J said in Coilcolour, at paragraph 62:

‘...a winding-up petition should not be resorted to in such circumstances by those whose objective is not in truth the class remedy which a successful winding-up petition provides…’

The Insolvency Act 1986, section 130(4) reads:

‘An order for winding up a company operates in favour of all the creditors and of all contributories of the company as if made on the joint petition of a creditor and of a contributory.’

In Sun Legend v Ho [2013] BPIR 532, a bankruptcy case, DJ Mugrave said, at paragraph 28 'The bankruptcy jurisdiction since 1986 is a separate jurisdiction involving a class remedy.'

[17] In Bucher v Talbot [2004] 2 AC 298; [2004] 2 WLR 582 (‘Bucher’), Lord Hoffman said, at 589:

‘The winding up of a company is a form of collective execution by all of its creditors against all its available assets. The resolution or order for winding up divests the company of the beneficial interest in its assets. They become a fund which the company thereafter holds in trust to discharge its liabilities. But the trust only applies to the company’s property. It does not affect the proprietary interest of others.’

For completeness, part of Bucher was reversed by Parliament by the introduction of section 176ZA of the Insolvency Act 1986. Parliament intervened to set down that liquidation expenses have priority over both: (i) preferential creditors; and (ii) floating charge holder claims The quoted passage however will not be affected by this Parliamentary intervention.

[18] Part secured/part unsecured creditors are, to the extent of the unsecured part of the debt, in the same position as creditors without any security over the debtor company assets, when it comes to having a voice in this balancing exercise.

In Re Leigh Estates (UK) Ltd [1994] B.C.C. 292, Richard Sykes QC (sitting as a deputy High Court judge), considered ‘…the weight to be attributed to the unsecured portion of debts which, as events have turned out, are not fully secured.’, on the basis that there was no preceding authority on the point, at 295:

‘Looking at the matter as one of principle, I consider that if the court is satisfied that secured creditors have a shortfall as regards their security it should treat those creditors as falling within the class of unsecured creditors to the extent of the shortfall.’

Earlier, the deputy High Court Judge in Leigh Estates had said, at 294:

‘The insolvency regime recognises the ability of creditors who are secured but whose security is deficient to participate in the liquidation, in respect of the shortfall, as unsecured creditors: Insolvency Rules 1986, r. 4.75(1)(g), 4.67(4), 4.88, 4.95–4.99.’

The deputy High Court in Leigh Estates also said, at 295:

‘In the present case the likelihood of unsecured creditors having anything at all is remote in the extreme. Since parliament has ordained by s. 125(1) of the Insolvency Act 1986 that this is not of itself a reason for refusing a winding-up order, I must, I think, proceed on the same basis as if there was to be a surplus for unsecured creditors. Certainly s. 125(1) does not require me to ignore the voices of those who oppose the petition.’

As for fully secured creditors - subject to the special rules concerning floating charges (see sections 176A and 175(2)(b) of the Insolvency Act 1986), creditors who are fully secured are largely unaffected by the liquidation process. They can rely upon their proprietary right against the property subject to their security, subject to being granted permission to commence proceedings by the court. The subject property is considered (until the debt is satisfied) to be the secured creditor’s property, and so outside the assets in the Company’s insolvent estate. In Re David Lloyd & Co (1877) 6 Ch.D 339, at 344-345, James LJ said that the legislative provisions:

‘...were intended, not for the purpose of harassing, or impeding, or injuring third persons, but for the purpose of preserving the limited assets of the company ... in the best way for distribution among all the persons who have claims upon them. There being only a small fund or a limited fund to be divided among a great number of persons, it would be monstrous that one or more of them should be harassing the company with actions and incurring costs which would increase the claims against the company and diminish the assets which ought to be divided among all the creditors. But that has really nothing to do with the case of a man who for the present purpose is to be considered as entirely outside the company, who is merely seeking to enforce a claim, not against the company, but to his own property. The position of a mortgagee under such circumstances is, to my mind, exactly similar to that of a man who said, “You the company have got property which you have taken from me; you are in possession of my property by way of trespass, and I want to get it back again.”.... The mortgagee says, “There is some property upon which I have a certain specific charge, and I want to realize that charge. I have nothing to do with the distribution of your property among your creditors, this is my property.” Why a mortgagee should be prevented from doing that I cannot understand. Power was given to the Court to interfere with actions by restraining them or not allowing them to proceed, but this power was given because it was understood that the Court would exercise it with a due regard to the rights of third persons, persons who were not members of the company, and who had not to come in and claim to share in the distribution of the company's assets among the creditors, and who were not therefore quasi parties to the winding-up proceedings. The Court would have due regard to the rights of independent persons. A mortgagee is, to my mind, such an independent person, and his rights ought not to be interfered with because his mortgagors have chosen to become insolvent and to have a winding-up.’

This is subject to the liquidator’s right to look to the proceeds of such assets for recoupment of expenses properly incurred by him in preserving or realising them.

[19] In Re Lines Bros Ltd [1982] 2 All ER 183,  Brightman LJ in the Court of Appeal said, at 194-195:

‘The liquidation of an insolvent company is a process of collective enforcement of debts for the benefit of the general body of creditors.’

As an aside, while this quote makes the point, it appears in a wider quote which is also generally illuminating. The full quote from Brightman LJ in Re Lines Bros Ltd [1982] 2 All ER 183, at 194 - 195, is:

‘If the creditor petitions to wind up a company, or claims in a liquidation initiated by others, he is not engaged in proceedings to establish the company's liability or the quantum of the liability (although liability and quantum may be put in issue) but to enforce the liability. Indeed, he is precluded from initiating or supporting a winding-up petition if his status as a creditor is bona fide disputed by the company. The liquidation of an insolvent company is a process of collective enforcement of debts for the benefit of the general body of creditors. Although it is not a process of execution, because it is not for the benefit of a particular creditor, it is nevertheless akin to execution because its purpose is to enforce, on a pari passu basis, the payment of the admitted or proved debts of the company. When, therefore, a company goes into liquidation a process is initiated which, for all creditors, is similar to the process which is initiated, for one creditor, by execution.’

In The Joint Administrators of LB Holdings Intermediate 2 Limited v The Joint Administrators of Lehman Brothers International [2017] UKSC 38, Lord Sumption states, at paragraph 198:

‘English corporate insolvency law has from its inception adopted the principle which had always been fundamental to bankruptcy that liquidation was a mode of collective enforcement of debts, which operated procedurally and administratively rather than substantively and did not itself extinguish the creditors' liabilities’

before noting passages from Lord Hoffmann in Wight v Eckhardt Marine GmbH [2004] 1 AC 147, paragraphs 21, 26-27.

In Ridgeway Motors (Isleworth) Ltd v ALTS Ltd [2005] 1 WLR 2871, Mummery LJ said, at paragraph 29:

‘I agree …that: (a) a winding up petition is, in a general sense, a "proceeding in a court of law"; and (b) it is not proper to characterise it as the individual execution of a judgment obtained by a creditor of the company…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.’

It should be noted here that the word 'enforcement' has different meanings in different parts of the law. It can catch out the unwary. Technically, winding up petitions and bankruptcy petitions are not 'enforcement' when the foundation of the petition is a foreign judgment. In Sun Legend v Ho [2013] BPIR 532, DJ Musgrave said, at paragraph 28:

'I also accept the submission that a bankruptcy petition does not constitute enforcement of the Hong Kong judgment.'

[20] By way of non-exhaustive summary, this is that, the Insolvency Act 1986 divides ‘payable’, ‘provable’ and ‘non-proveable’ debts into defined classes of creditor, and then sets down the order these classes receive payment. All claims within a particular class must be treated the same, unless the creditor agreed/agrees to receive less favorable treatment. Each class or group must be paid in full before the liquidator moves on to the next class.

In Stichting Shell Pensioenfonds v Krys [2014] UKPC 41 [2015] 2 WLR 289 at paragraph 24, the Privy Council referred to “the broader public interest” in the ability of a court to conduct an orderly winding up of a company’s affairs. It stated that:

‘the alternative is a free-for-all in which the distribution of assets depends on the adventitious location of assets and the race to grab them is to the swiftest, and the best informed, best resourced or best lawyered.’

[21] Lord Hoffman in Wight v Eckhardt Marine GmbH [2004] 1 AC 147, said, at paragraph 26:

‘… It is first necessary to remember that a winding up order is not the equivalent of a judgment against the company which converts the creditor's claim into something juridically different, like a judgment debt. Winding up is, as Brightman LJ said in In re Lines Bros Ltd [1983] Ch 1, 20, 'a process of collective enforcement of debts'. The creditor who petitions for a winding up is 'not engaged in proceedings to establish the company's liability or the quantum of the liability (although liability and quantum may be put in issue) but to enforce the liability'

[22] In personal insolvency law, section 285 of the Insolvency Act 1986 applies to unsecured provable debts. That section is entitled ‘Restriction on proceedings and remedies’ and subsection (3) provides:

‘After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall

(a) have any remedy against the property or person of the bankrupt in respect of that debt, or

(b) before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt

except with the leave of the court and on such terms as the court may impose.

This is subject to sections 346 (enforcement procedures) and 347 (limited right to distress).’

In Heath v Tang [1993] 1 WLR 1421, Hoffman LJ considered the effect of a bankruptcy order, and said:

‘...section 285(3) deprives the plaintiff of any remedy against the bankrupt's person or property and confines him to his right to prove.’

[23] A less in depth but shorter summary was given in Re Leigh Estates (UK) Ltd [1994] BCC 292, where, Mr Richard Sykes QC, sitting as a deputy High Court judge, summarised the principles, at p 294:

“The following matters are clear: Although a petitioning creditor may, as between himself and the company, be entitled to a winding up order ex debito justitiae, his remedy is a ‘class right’, so that, where creditors oppose the making of an order, the court must come to a conclusion in its discretion after considering the arguments of the creditors in support of and opposing the petition: see In re Crigglestone Coal Company Ltd [1906] 2 Ch 327, in particular the statements of principle of Buckley J at first instance, and section 195 of the Insolvency Act 1986 … It is plain from the well known authorities on the subject that, where there are some creditors supporting and others opposing a winding up petition it is for the court to decide as a matter of judicial discretion, what weight to attribute to the voices on each side of the contest …”

The above passage by the deputy High Court Judge in Re Leigh Estates (UK) Ltd [1994] BCC 292 was approved by Marcus Smith J in Gertner v CFL Finance Ltd [2020] EWHC 1241 (Ch) at paragraph 81. Further, Marcus Smith J approved, at paragraph 81, Chief ICC Judge Briggs’ summary of the discretion, in Chief ICC Judge’s judgment (CFL Finance Ltd v Bass [2019] C.T.L.C. 229), paragraphs 114-119. Chief ICC Judge Briggs said, under the heading ‘Discretion principle’, at paragraphs 114 to 119 (271):

'114. There is agreement that the court as a discretion to exercise at the hearing of a bankruptcy petition. The parties disagree as to how the discretion should be exercised, and what should or should not be taken into account. [Counsel for the debtor] argue that the Court should give priority to the wishes of the largest creditor who opposes bankruptcy. The opposing creditor is independent, there is no challenge that it has taken an assignment of the Kaupthing debt and paid good consideration for it. The wishes of the opposing creditor are not, it is argued, based on sentimentality but on commercial reality. There is a greater chance of a return, albeit a modest return, through the vehicle of a voluntary arrangement.

115. The discretion is provided by section 266(3) of the Insolvency Act 1986 which provides:

"The Court has a general power, if it appears to it appropriate to do so on the grounds that there has been a contravention of the rules or for any other reason, to dismiss a bankruptcy petition or to stay proceedings on such a petition; and where it stays proceedings on a petition, it may do so on such terms and conditions as it thinks fit."

116. In Aabar Block Sarl v Maud [2018] EWHC 1414 (Ch) Mr Justice Snowden was asked to determine, in the context of a bankruptcy petition and on complicated facts, whether to make a bankruptcy order in circumstances where two petitioning creditors were relying on a joint debt but they disagreed as the making of such an order. Snowden J held that if the debt was joint, both creditors had to agree before the Court would make an order. If by resisting an order for bankruptcy one party was acting in breach of duties, the Court would not stand-by but would make an order. In the course of his judgment the learned judge referred to Re Leigh Estates (UK) Limited [1994] BCC 292. At page 294, where Mr. Sykes QC said,

"Although a petitioning creditor may, as between himself and the company, be entitled to a winding-up order ex debito justitiae , his remedy is a 'class right', so that, where creditors oppose the making of an order, the court must come to a conclusion in its discretion after considering the arguments of the creditors in support of and opposing the petition: see Re Crigglestone Coal Company Limited [1906] 2 Ch 327 , in particular the statements of principle of Buckley J at first instance, and s. 195 of the Insolvency Act 1986

It is plain from the well-known authorities on the subject that, where there are some creditors supporting and others opposing a winding-up petition it is for the court to decide as a matter of judicial discretion, what weight to attribute to the voices on each side of the contest…" *271

117. In summarising an earlier judgment on the same matter, in which Snowden J granted an appeal against a decision to make a bankruptcy order, he said [at para 45-46]

"Thirdly, I explained by reference to Sekhon v Edginton [2015] 1 WLR 4435 that the court's own discretion to adjourn a bankruptcy petition in relation to an undisputed debt where the debtor asked for time to pay would only be exercised in the debtor's favour if the debtor could produce credible evidence that there was a reasonable prospect that the petition debt would be paid in full within a reasonable time. However, I held that this type of discretionary decision for the court in the exercise of its case management powers was not a substitute for the consideration by the court of the separate question of the views of the members of the class in a case in which the petition was opposed by other creditors. Finally, I referred to a number of cases which appear to indicate that the court might, in exceptional circumstances, exercise its general discretion to decline to make a bankruptcy order or a winding-up order if it is satisfied that the order would serve no useful purpose because there would be no assets available in the insolvent estate for creditors. That was the main point of decision in Crigglestone Coal and also appears to have been the basis for the dismissal of the bankruptcy petition in Re Malcolm Robert Ross (a Bankrupt) (No 2) [2000] BPIR 636. I concluded, however, that a debtor faces a heavy burden in persuading the court not to make an order on that basis: see e.g. re Field (a debtor) [1978] Ch 371 at 375, and Shepherd v Legal Services Commission [2003] BCC 728 ".

118. In my judgment these observations may in part be applied to the exercise of discretion to make a bankruptcy order, alternatively to adjourn for the purpose of convening a meeting of creditors to vote on proposals for a voluntary arrangement. First among the principles is that the proceedings are a class action. And where there are creditors opposing a bankruptcy order it is for the court to decide as a matter of judicial discretion, what weight to attribute to their voices and those of the petitioning creditor. I have been taken to re P & J Macrae Limited [1961] 1 WLR 229 which is more apposite. It concerned a petition based on a judgment that was opposed by a majority in number and value of the creditors. But no evidence was filed as to the grounds of opposition. Upjohn LJ observed (page 238):

"Although the statute provides that it is the wishes of the creditors to which the court may have regard, it is quite clear that, as the statute gives a complete discretion, the weight to be given to those wishes in determining whether a winding up order ought to be made varies according to 'the number and value of the creditors expressing wishes, and the nature and quality of their debts. I certainly do not accept for one moment the proposition that it is merely a matter of counting heads and that a majority of 51 per cent, opposing a petition will outweigh the views of the 49 per cent, who support the petition. In such a case where the wishes of the creditors are so evenly balanced (and there is no reason to distinguish between creditors as mentioned below) the weight to be given to the majority view is obviously negligible. No judge, in my judgment, could possibly be criticised if, in the absence of other relevant circumstances, he chooses to exercise his discretion by giving effect to the prima facie right of the petitioning creditor to a winding up order. At the other end of the scale there is the case where an overwhelming proportion of the creditors in number and value oppose the petitioner who is virtually alone. In that case clearly the weight to be given to those creditors, unless there is some reason for disregarding them, must be very great, and in the ordinary case in the absence of special circumstances will be decisive. All one can say as between those two limits is that the weight to be given to the wishes of the opposing creditors must necessarily depend on all the circumstances of the case , but other things being equal, will increase in the mind of the judge as the majority of opposing creditors increases

….In my view Buckley J. cannot have intended to mean that the voice of the majority of creditors was decisive on whether a winding-up order should be made . I think he meant that, when weighing all the circumstances in deciding whether to wind up the company, the voice of the creditors must either ultimately be for or against, and that is in the ordinary case determined by the majority ; but the power of the voice must necessarily depend on all the circumstances. If he meant more his words were obiter and I would respectfully not agree with them. But it is not merely a matter of calculating percentages in value . Apart altogether from prospective or contingent creditors whose position may be difficult to assess, a judge may properly take the view that greater weight should be given to the wishes of a large number of small creditors against the wishes of one or two very large creditors, even though the latter are larger in amount in the aggregate. Then there may be differences in the quality of the creditors . The circumstances may be such that the court is rightly suspicious of the opposing creditors and of the motives which are actuating them. In such a case the court may desire to have evidence before it of their reasons for opposing. It must be a question of discretion in each case whether creditors should be asked to file evidence to support the views they have expressed or not. I do not think it is possible to lay down any prima facie rule one way or the other. The judge may prefer to convene a meeting to ascertain their wishes "

119. In my judgment these authorities provide useful guidance. The Court should take into account (i) the class remedy nature of insolvency (ii) if a meeting of creditors is held, whether it is likely that a majority by reference to the value of votes will pass the proposals (iii) the proposal in the context of the claims to identify if a commercial return would be provided to creditors and (iv) all the circumstances of the case. This is not intended to be an exhaustive list. In Re Bayoil SA [1999] 1 WLR 909, 911 Lord Justice Ward warned against laying "down almost as a statement or proposition of law that discretion has to be exercised in any particular direction", and any guidance should not fetter discretion. I am mindful that although discretion must be exercised judicially, its very existence means that the rules should be flexible: Southard and Co Limited [1979] 1 WLR 1198, 1204-5 per Buckley LJ. Although these cases concern winding up such an approach is consistent with the language of section 266(3) of the Insolvency Act 1986. The factors I set out above, and in particular factors (i), (ii) and (iii) are matters which are routinely taken into account as a matter of practice in the Companies Court, where a debtor company seeks to adjourn a winding up petition for the purpose of putting proposals to creditors. Factor (iv) is founded on authority: re P&J Macrae ( supra ) and Re Langley Mill Steel and Iron Works Co (1871) LR 12 Eq 26 pp 29-30.’

Chief ICC Judge Briggs summarised paragraphs 114-119, at paragraph 142, as:

‘When exercising discretion to adjourn a hearing of a bankruptcy petition, the Court should take into account (i) the class remedy nature of insolvency (ii) if a meeting of creditors is held, whether it is likely that a majority by reference to the value of votes will pass the proposals (iii) the proposal in the context of the claims to identify if a commercial return would be provided to creditors and (iv) all the circumstances of the case.’

Marcus Smith J allowed an appeal to Chief ICC Judge Briggs' decision, but the appeal was to a later stage of Chief ICC Judge Briggs' reasoning - see the discussion of Marcus Smith J's decision under the heading 'Opposing Creditor seeking adjournment for CVA Proposals' in the main body of the article. 

The decision of the Court of Appeal in Gertner v CFL Finance Ltd [2021] B.P.I.R. 487 is not relevant to this article.

Separately, the reference to Lord Cranworth is to his judgment in Bowes v Directors of Hope Life and Insurance Guarantee Co (1865) 11 HL Cas 389; [1861-73] All ER Rep Ext 1443, where he said:

‘One does not like to say positively that no case could occur in which it would be right to refuse it but, ordinarily speaking, it is the duty of the court to direct the winding up’

[24] There were two bankruptcy petitions against Mr Maud. This is unusual. In Re Maud [2020] EWHC 974 (Ch) (‘Maud April 2020’), Snowden J acknowledged this, stating at paragraph 69:

‘I am in the unusual position of having two bankruptcy petitions before me simultaneously.’

In Re Maud [2020] EWHC 1469 (Ch) (8.6.20), Snowden J at paragraph 98 said:

‘It should also be observed that it is most unusual for there to be two bankruptcy (or winding up) petitions pending simultaneously in respect of the same debtor. Consistent with the principle that a bankruptcy petition is a class remedy, the legislation, rules and court practice are generally based upon the notion that there should only be one petition against a debtor at any one time. Bankruptcy petitions can be presented by one or more creditors under section 264(1)(a) of the 1986 Act, and they are required to be presented in a particular court by Insolvency Rule 10.11 so that an attempt to present a second petition should be detected. Further, although there is no requirement for advertisement of a bankruptcy petition in the same way as for a creditor’s winding up petition, the rules provide for other creditors to give notice of an intention to appear to support (or oppose) an existing petition. There are also provisions for a supporting creditor to be substituted for the original petitioner under Insolvency Rule 10.27 (e.g. if the original petitioner wishes to withdraw the petition) or for a change of carriage of the petition under Insolvency Rule 10.29 (e.g. if the original petitioner neglects to prosecute the petition).’

In corporate insolvency, the current Practice Direction (Insolvency Proceedings) [2018] Bus LR 2358, at paragraph 9.2, directs that:

“Before presenting a winding up petition, the creditor must conduct a search to ensure that no petition is pending. Save in exceptional circumstances a second winding up petition should not be presented whilst a prior petition is pending. A petitioner who presents a petition while another petition is pending does so at risk as to costs.”

[25a] In Re Maud [2020] EWHC 974 (Ch) (24.4.20), to determine the correct approach, Snowden J referred to a number of authorities. At paragraphs 74 to 76, Snowden J said:

'I was taken to a number of authorities in addition to re Leigh Estates and Re Crigglestone Coal Company, of which the most useful were Re P&J Macrae Ltd. [1961] 1 WLR 229, Re Southard & Co Ltd. [1979] 1 All ER 582 and Re Demaglass Holdings Ltd. [2001] 2 BCLC 633 .

In Re P&J Macrae, at page 235, Wilmer LJ emphasised the need not just to count numbers, but to consider the reason for a majority of creditors taking their position to oppose a petition supported by the minority:

“It seems to me that before a majority of the creditors can claim to override the wishes of the minority, they must at least show some good reason for their attitude.”

Re Southard Brightman J said at page 586 B-D:

“My proper course is to have regard to the value of the debts of the creditors supporting and opposing a winding up order, and the nature of those debts, to the reasons given by the minority for desiring the court to override the wishes of the majority and, since the majority have given reasons, to examine those reasons.”

Snowden J then quoted from Re Demaglass Holdings Ltd (Winding Up Petition: Application for Adjournment) [2001] 2 B.C.L.C. 633, at paragraph 77.

[25b] The rules do not expressly provide for supporting/opposing creditors to file witness statements in advance of the hearing, but Re Armstrong [2021] EWHC 654 is an illistration of directions for evidence being made. ICCJ Barber said, at paragraph 68:

‘The petition debt is undisputed. All creditors who gave notice of intention to appear on the petition were given an opportunity to file evidence, attend the hearing and address the court. I have considered their written evidence and their oral submissions.

[26] See Re Ithaca Shipping Co Ltd (1950) 84 Lloyd's Rep. 507

[27] In Re Southard [1979] 1 WLR 1198, Buckley LJ said, at 1205:

‘Where a creditor has, or may have, reasons for wishing a particular course which are distinct from those considerations which are common to the general body of creditors of which he is one, the court may have to consider, and I think should consider, what weight should be given to those reasons having regard to that particular relationship between the petitioner and the company.’

Buckley LJ, at 1206, saw nothing wrong with Brightman J taking into account, when deciding whether to make a winding up order, so called 7 ‘independent creditors’ voices, weighed against called 2 ‘domestic creditors’ (i.e. creditors with family links to the company) voices.

The position has developed to the point where, in Gertner v CFL Finance Ltd [2020] B.P.I.R. 752; [2020] EWHC 1241 (Ch), at paragraph 93(4), Marcus Smith J said, with apparent approval, ‘[the deputy High Court Judge in Leigh Estates] articulated the manner in which the court will consider the voice of a creditor seeking the bankruptcy of a debtor for reasons contrary to the interests of the class: that voice will be disregarded.’

[28] In Re Leigh Estates (UK) Ltd [1994] B.C.C. 292 (‘Leigh Estates’), the Billing Authority held a liability order against a company. It sought a winding up order on the basis (left undetermined by the Companies Court) that thereafter, for subsequent business rates, the administrative receivers ‘or possibly the banks will become liable for the rates charged on the premises.’ (at 293). The Court noted that, when such business rates were paid, the payer receiver would be entitled to reimbursement ‘…either as receivers’ costs or as part of the secured debt and hence in priority to unsecured creditors.’ Further, that by this, the Billing Authority ‘…will, as a result of a winding up order being made, achieve a preferential status such as formerly attached to rates but which was removed by the Insolvency Act 1986.’ (at 294)

The deputy High Court Judge in Leigh Estates said, at 295:

‘If I assume that the Common Council are correct in their claim that, following a winding-up order, they are entitled to recover rates from the receivers or the debenture-holders I find that their reason for seeking to wind up the company is not to swell the estate of the company or otherwise to improve the lot of the unsecured creditors but rather to gain for themselves a preference over the secured and unsecured creditors alike. It might reasonably be said that this attitude is not acting in the interests of the class of unsecured creditors. It is clear that in other ‘class’ situations the voice of one who votes against the interests of the class is disregarded: see e.g. Re Alabama, New Orleans, Texas & Pacific Junction Railway Co [1891] 1 Ch 213 , Re Holders Investment Trust [1971] 1 WLR 583. Similarly, it seems to me, I should disregard the voice of the Common Council.’

The petition in Leigh Estates was dismissed

[29] See also, Bell Group Finance (Pty) Ltd (In Liquidation) v Bell Group (UK) Holdings Ltd [1996] 1 BCLC 304.

Additionally, in Leigh Estates, the deputy High Court Judge said, at 295:

‘There are a number of cases in which the court has refused to give weight to the debts owed to other companies in the same group as the company itself. In the present case the likelihood is that the persons with an economic interest in the debts owed to other group companies are the banks which are of course direct creditors of the company for £386m. In the circumstances I do not regard their voice as being any louder if I add to that amount another £152m, in which they are interested through other companies.’

[30] In Re Leigh Estates (UK) Ltd [1994] B.C.C. 292, on the facts, the deputy High Court Judge said, at 295:

‘The one voice to which weight is not normally attached in the case of a winding-up petition by a creditor is that of the company itself. I propose to attach no extra weight to that of the company, represented by the administrative receivers, in the present case.’

In the recent personal insolvency case of Re Maud [2020] EWHC 974 (Ch), on the objective of the court in considering the interests of creditors as a class, Snowden J quoted the above from Leigh Estates, and re-iterated that ‘…this is a question on which Mr Maud, as the debtor, has no voice.’ (paragraph 72)

The above is focusd on the final outcome of the petition - dismissal or winding up order. The debtor company will have a voice to seek an adjourment of the petitoin to allow CVA proposals to be put to its creditors. The Companies Court will commonly adjourn a winding up petition where the debtor company says it is trying to organise CVA proposals to be put to its creditors. Some time will be provided. The Companies Court may run out of patience though if CVA proposals are not organised and put, with a reasonable period of time.

[31] In Re Demaglass Holdings Ltd (Winding Up Petition: Application for Adjournment) [2001] 2 B.C.L.C. 633, it was administrative receivers for the debenture holder who sought the 10 week adjournment (unusually). The situation was that of where ‘…a party wishes to have some sort of breathing space before the winding up order is made.’ The applicants sought an adjournment to the winding up petition for 10 weeks, acknowledging that, ‘…it is virtually certain that if the matter is stood over, then, when the petition is relisted for hearing in 10 weeks, the making of a winding up order is virtually a foregone conclusion.’ The 10 week adjournment was sought ‘…on the ground that the administrative receivers appointed by a debenture holder wish to have that period to dispose of the company's stock more advantageously.’

[32] The Insolvency Rules 2016, r.15.34(6) provides:

"In a case relating to a proposed IVA -

(a) a decision approving a proposal or a modification is made when three-quarters or more (in value) of those responding vote in favour of it;

(b) a decision is not made if more than half of the total value of creditors who are not associates of the debtor vote against it."

[33] On whether there is one class of unsecured creditors or more, Marcus Smith J in Gertner v CFL Finance Ltd  [2020] B.P.I.R. 752; [2020] EWHC 1241 (Ch), said, at paragraph 93(4):

‘It is dangerous to place too much weight or emphasis on different “classes” of unsecured creditor. Unlike (for example) schemes of arrangement, where it is necessary to consider whether different classes of interest need to be represented at different meetings, we are here concerned with a single class, the question being whether the vote of one particular member of the class should be accorded less or no weight.’

[34] It is instructive to quote some passages from Brightman J in Re Southard [1979] 1 WLR 546 (affirmed on appeal [1979] 1 W.L.R. 1198), where there were opposing creditors. Brightman J, said at 549-500:

‘The question really amounts to this: how decisive are the wishes of the majority in value of the creditors where they seek a winding up by the court, and the minority seek a continuation of a voluntary liquidation? This point does not appear to be directly covered by reported authority.

...

In In re J. D. Swain Ltd. [1965] 1 W.L.R. 909 the choice was between compulsory liquidation or continued voluntary liquidation. The majority of creditors opposed the petition which was dismissed at first instance by Pennycuick J. and also on appeal. The decision is accurately recorded in the headnote as follows:

“(1) that whether or not it was proper to make an order for the compulsory winding up of an insolvent company was a matter entirely within the discretion of the judge...

(2) That where there was no voluntary liquidation in progress and the majority of creditors opposed an order for compulsory winding up, the court would ordinarily require them to buttress their opposition with valid reasons, but that where the majority of creditors wished to continue an existing voluntary liquidation, the court would ordinarily require the petitioning creditor to show some special reason or circumstance for having a compulsory liquidation; that in the present case since the majority of creditors wished to continue an existing liquidation and since the petitioning creditor had not shown any special reason or circumstance for having a compulsory liquidation, the petition would be dismissed.”

... the decision in a case such as the present is a matter for the discretion of the judge. However, it is clear that the court ought not to deprive a petitioning creditor of his prima facie right to a winding up order unless there is an opposing majority and, if there is no voluntary liquidation in existence or in contemplation, unless there are good reasons for such opposition…’

Later on 550, Brightman J said:

It would, I think, be wrong for me to seek to lay down any rules as to how the court should exercise its discretion. My proper course is to have regard to the value of the debts of the creditors supporting and opposing a winding up order, and the nature of those debts; to the reasons given by the minority for desiring the court to override the the wishes of the majority, and, since the majority have given reasons, to examine those reasons.’

It is illuminating to see how Brightman J then weighed and balanced the voices of the supportive creditors, opposing creditors, and petitioner, at 551-552:

‘I have to exercise a discretion in reaching my decision. I bear very much in mind that, in terms of value, the creditors seeking a winding up order vastly exceed the opposing creditors. This is not decisive but it is important. I also bear in mind that an unpaid creditor has a prima facie right to a winding up order, even if a voluntary liquidation is on foot. On the other hand, I bear in mind the following factors against a compulsory liquidation:

(1) The petitioning and supporting creditors object to a voluntary liquidation on two grounds only: (a) that the assets of the company will be realised more expeditiously; and (b) that the assets of the company will be realised more economically, if there is a compulsory liquidation. As regards speed, there is no evidence whatever before me to support the proposition that the official receiver will be quicker than [CVL liquidators]. I am not impressed by the suggestion that the official receiver will be cheaper…

(2) The petition is presented and supported only by creditors who belong to the same group of companies as the company in liquidation. Their wishes do not carry with me a weight commensurate with the size of the alleged indebtedness. The company is a subsidiary of the petitioning creditor…in the absence of evidence to the contrary I must assume that the petitioning creditor had it in its power to control the activities of the company which is now bankrupt. I therefore take the view that the size of the indebtedness of the company to the petitioning creditor and the supporting creditor, all of which have operated under the same aegis, ought not to carry decisive weight.

Section 346 of the Companies Act 1948 authorises me, and in practical terms virtually requires me, to have regard to the value of the debts owed to the respective creditors. But it does not debar me from also having regard to the number of creditors ranged against the petition, even though their debts are relatively small. So I bear in mind that there are in this case seven totally independent creditors who opt for a continued voluntary liquidation compared with the two “domestic” creditors who opt, on slender grounds in my view, for a compulsory liquidation.

(4) If a compulsory liquidation is so much more advantageous than a voluntary liquidation, I ask myself this question: how did it come about that the petitioning creditor, who owned all the shares in the bankrupt company, originally put it into voluntary liquidation instead of seeking a compulsory order? That question is not answered.’

On the facts, Brightman J, at 553, exercised his discretion to dismiss the compulsory winding up petition. He said ‘I ought to prefer the views of the minority to the wishes of the majority.’

In the Court of Appeal in Re Southard [1979] 1 W.L.R. 1198, the appeal was dismissed. Bridge LJ said, at 1208:

‘To my mind, one proposition is clear in principle and is not refuted by any authority to which we have been referred. The proposition is this: in a dispute between creditors with reference to a proposed compulsory winding up, the voice of the majority in value is certainly a factor to be considered; but whether that voice is raised in opposition to, or in support of, the making of a compulsory winding up order, it cannot per se, and independently of other considerations, be decisive of the issue. To hold otherwise would be to impose a wholly unwarranted fetter on the discretion which the statute confers.’

Templeman LJ said, at 1209 to 1211, ‘The guidance is summed up in extracts from the judgment of Upjohn L.J. in In re P. & J. Macrae [1961] 1 W.L.R. 229’ before setting out extracts. He then added, at 1211:

‘...where the choice before the court is between a compulsory winding up and a voluntary winding up, the judge, after hearing the reasons of the majority and the reasons advanced by the minority, must decide whether the interests of the unsecured creditors, and in particular the interests of the independent opposing creditors, and thus the interests of the public, are likely to be better served by making a compulsory winding up order or not.’

[35] Section 116 of the Insolvency Act 1986 states:

The voluntary winding up of a company does not bar the right of any creditor or contributory to have it wound up by the court'

It is unusual for a company already in voluntary liquidation, to face a creditors winding up petition. As for examples, in addition to In Re Southard [1979] 1 WLR 546 (affirmed by the Court of Appeal [1979] 1 WLR 1198, there is Re James Millward & Co Ltd [1940] Ch. 333 (‘James Millward’). In James Millward, Scott LJ explained, at 334, that, in such a situation, upon proving his judgment debt and that it was unsatisfied, and that the petitioner desires a compulsory winding up order, a petitioning creditor is entitled ex debito justitiae to the order. No additional requirement existed of showing that prejudice will result to him if the voluntary liquidation was allowed to continue. In James Millward, the compulsory winding up petition was opposed only by the company itself (something that should not occur nowadays as liquidators are suppose to take a neutral position in such winding up proceedings - their role being, as David Richards LJ in Fakhry v Pagden [2020] EWCA Civ 1207, stated, at paragraph 40,  ‘...confined to providing information to the court’. See also Medisco Equipment [1983] BCLC 305). 

The Court faced with a creditor’s winding up petition does have a wider discretion when the company is already in voluntary liquidation. Where the voluntary liquidation holds the support of the majority of creditors, the petitioning creditor will need to show a special reason why a compulsory winding up order should be made - Re Zirceram Ltd [2000] 1 BCLC 751. What advantage is to be gained through compulsory liquidation which won’t be gained by the present voluntary liquidation?

Where a compulsory winding up order is made against a company in voluntary liquidation, the voluntary liquidation liquidator vacates office - IR 2016, r.6.31, which reads:

‘Where the liquidator vacates office in consequence of the court making a winding-up order against the company, rule 6.33 applies in relation to the application to the Secretary of State for release of the liquidator.’

Further, see the reasoning of Brightman J in Re Southard [1979] 1 WLR 546 in footnote 34 above. 

[36] On a contributory showing solvency, the authors of Corporate Insolvency Law and Practice 5th Ed. 2017 (Bailey & Groves) state, at 25.1 - F2:

‘A contributory may also oppose a petition to wind up, but to do so he must show that there is a substantial prospect of assets becoming available to him in the liquidation’

For this proposition, the authors rely upon In re Rica Gold Washing Company (1879) 11 ChD 36 and Re Chesterfield Catering Co Ltd [1977] Ch. 373. See footnote 38.

[37] In Re Rodencroft Ltd (also known as Allso v Secretary of State for Trade and Industry) [2004] 1 W.L.R. 1566 (‘Rodencroft’), Evans-Lombe J heard an appeal against a winding up order made on Secretary of State's petition under section 124A on just and equitable grounds. A contributory of one company had sought to appear to resist one of the Secretary of State’s petitions, but the registrar had refused to hear from the contributory, on the basis he had no standing.  Evans-Lombe J said, at paragraph 21:

‘It is not a surprise that there are few examples of cases where contributories have sought to appear on creditor's petitions. They will generally have no interest to do so where they accept that their company is insolvent. Where the company is solvent but a creditor has presented a petition, the company will either pay the debt or contest the petition on the ground that there is a bona fide dispute as to the existence of the petitioning debt…. the petitioner ...should not be put to the cost of a contested petition where the only opposition is from a contributory who cannot demonstrate that the company is solvent so that he has a genuine interest in the result.’

Arguably, this is obiter but it is still persuasive.

Note this is not a hard and fast rule. A Court might hear from a contributory on creditors winding up petition where the contributory cannot prove the company’s solvency, where the case is exceptional and good reason is shown.

[38] The breadth of this statement covers a contributory seeking to be heard on a creditor’s winding up petition, though many of the authorities in Sir Andrew Morritt C’s paragraph 12 of Charit-Email Technology Partnership LLP v Vermillion International Investments Ltd [2009] BPIR 762 relate to contributories petitioning rather than supporting or opposing a petition.

In In re Rica Gold Washing Company (1879) 11 ChD 36 (‘Rica Gold’), the contributory was the petitioner. Jessel MR said, at 42-43:

‘Now I will say a word or two on the law as regards the position of a Petitioner holding fully paid-up shares. He is not liable to contribute anything towards the assets of the company, and if he has any interest at all, it must be that after full payment of all the debts and liabilities of the company there will remain a surplus divisible among the shareholders of sufficient value to authorize him to present a petition. That being his position, and the rule being that the Petitioner must succeed upon allegations which are proved, of course the Petitioner must shew the Court by sufficient allegation that he has a sufficient interest to entitle him to ask for the winding-up of the company. I say “a sufficient interest,” for the mere allegation of a surplus or of a probable surplus will not be sufficient. He must shew what I may call a tangible interest. I am not going to lay down any rule as to what that must be, but if he shewed only that there was such a surplus as, on being fairly divided, irrespective of the coats of the winding-up, would give him £5, I should say that would not be sufficient to induce the Court to interfere in his behalf.’

In Re Chesterfield Catering Co Ltd [1977] Ch. 373, Oliver J quoted the Jessel MR passage from Rica Gold (lightly longer than quoted above) and said, at 379-380:

‘What was required for a fully paid shareholder to petition was, Jessel M.R. said, at p. 43: "... a sufficient interest to entitle him to ask for the winding up of the company.... He must show what I may call a tangible interest." He then went on to stress that he was not going to lay down any rule as to what that tangible interest must be, and gave as an example of what was not a sufficient interest a negligible surplus on the distribution. I do not, however, think that it can be quite accurate to say that the tangible interest of the fully paid shareholder must necessarily and in all cases be restricted to the existence or the prospective existence of a surplus...

in referring to "a sufficient interest" Jessel M.R. meant an interest by virtue of the petitioner's membership. In order to establish his locus standi to petition a fully paid shareholder must, as it seems to me, show that he will, as a member of the company, achieve some advantage, or avoid or minimise some disadvantage, which would accrue to him by virtue of his membership of the company. For instance, a member of a company might have a strong interest in terminating its life because he was engaged in a competing business or because he was engaged in litigation with the company, but I do not think that that was the sort of interest that Jessel M.R. had in mind.’

See also Re Greenhaven Motors Ltd [1997] BCC 547, CA

[39] See PricewaterhouseCoopers v Saad Investments Co Ltd (In Official Liquidation) [2014] UKPC 35; Times, 20 December 2016, a privy council case