Winding Up Petition Debt Disputed on Bona Fide and Substantial Grounds

Author: Simon Hill
In: Bulletin Published: Wednesday 28 February 2018

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Breyer Group Plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch) is a useful illustrative example of the Companies Court refusing to allow a winding up petition to continue where the status of the petitioning creditor as a creditor of the respondent company was disputed on bona fide and substantial grounds

To present and pursue a winding up petition for non-payment of a debt, the petitioning creditor must be a creditor of the respondent company for at least £750. It is an abuse of process otherwise. Where the petitioning creditor’s status as a creditor of the respondent company is challenged, the Companies Court may dismiss the petition, leaving the petitioning creditor to establish its status as a creditor by issuing ordinary civil proceedings (or initiating an adjudication clause) and obtaining a judgment debt there.

The Governing Principles

Norris J in Angel Group v. British Gas [2012] EWHC 2702 summarized the principles to be applied by the Companies Court when the petitioning creditor's status as creditor is challenged. At paragraph 22, Norris J said:

"The principles to be applied in the exercise of this jurisdiction are familiar and may be summarised as follows:-

a) A creditor's petition can only be presented by a creditor, and until a prospective petitioner is established as a creditor he is not entitled to present the petition and has no standing in the Companies Court: Mann v Goldstein [1968] 1WLR 1091;

b) The company may challenge the petitioner's standing as a creditor by advancing in good faith a substantial dispute as to the entirety of the petition debt (or at least so much as will bring the indisputable part below £750);

c) A dispute will not be "substantial" if it has really no rational prospect of success: in Re A Company No.0012209 [1992] 1WLR 351 at 354B.

d) A dispute will not be put forward in good faith if the company is merely seeking to take for itself credit which it is not allowed under the contract: ibid. at 354F.

e) There is thus no rule of practice that the petition will be struck out merely because the company alleges that the debt is disputed. The true rule is that it is not the practice of the Companies Court to allow a winding up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds, because the effect of presenting a winding up petition and advertising that petition is to put upon the company a pressure to pay (rather than to litigate) which is quite different in nature from the effect of an ordinary action: in Re A Company No.006685 [1997] BCC 830 at 832F.

f) But the court will not allow this rule of practice itself to work injustice and will be alert to the risk that an unwilling debtor is raising a cloud of objections on affidavit in order to claim that a dispute exists which cannot be determined without cross-examination (ibid. at 841C).

g) The court will therefore be prepared to consider the evidence in detail even if, in performing that task, the court may be engaged in much the same exercise as would be required of a court facing an application for summary judgment: ( ibid  at 837B)."

These 7 principles were quoted with approval in the recent case of Breyer Group Plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch) (‘Breyer Group’), a decision of Mr Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division.

Illustration of Principles Applied – Breyer Group

The facts of Breyer Group were complicated and involved legal and factual disputes between a contractor (the respondent company Breyer), its subcontractor (the petitioning creditor RBK) in respect to a building project.

The Deputy Judge recorded the (alleged) debts founding the winding up petition, at paragraph 42:

‘The winding up petition, dated 22 March 2017, claims that Breyer is indebted to RBK in the sum of £258,729.16 in respect of valuations for goods supplied and services rendered for electrical remedial works and other works and other associated charges supplied by the RBK to Breyer, at Breyer's request. It also claims that Breyer has admitted that it is insolvent, unable to pay its debts as they fall due and specifically that it has failed to pay installments due…’

Resisting the petition, and seeking its strike out, the respondent subcontractor Breyer argued that:

(a) it was not insolvent and that this was ‘…not a case of can’t pay, but won’t pay’. Breyer produced evidence to substantiate its solvency and had paid a sum equivalent to the whole disputed sum, into its solicitors client account when it became apparent the petition would not be voluntarily withdrawn; the Deputy Judge held, at paragraph 6, that it was ‘…clear that Breyer has at all material times had the financial means to pay the sum claimed in the petition.’

(b) the sum founding the petition was disputed on bona fide and substantial grounds. It defended on the basis that:

(i) The works undertaken by the petitioning creditor subcontractor RBK were defective, failed audits, were part of wider possible systemic failings in work. Further, there was evidence the certification of electrical work was unsatisfactory and falsified. Third party evidence was relied upon for the possibility of systemic failings and unsatisfactory certifications;

(ii) The exact contractual terms existing between the contractor Breyer and subcontractor RBK were unclear. There were genuine issues as to what timing regime was either agreed or was reasonable for the exchange of documents giving rise to an obligation to pay the applications for payment submitted by RBK.

(c) Breyer had a substantial counterclaim against RBK for the costs of:

(i) re-testing the electrical installations (a significant proportion of RBK’s work), a task that would consume vast amounts of the management time, generating a sum recoverable from RBK significantly in excess of the sum claimed by RBK in the petition. The Deputy Judge said, at paragraph 31 ‘…this is an area which requires thorough investigation. It does not bear the hall marks of an allegation simply cooked up to avoid payment.’;

(ii) remedying sample testing obligation breaches. There was a significant dispute as to whether samples were properly taken and supplied to an external testing facility for the purpose of testing boiler systems for safety and other purposes. RBK contended that it had undertook proper testing. On this, the Deputy Judge said, at paragraph 31, ‘…in my judgment, this too is an area where the facts remain, at this stage, unclear and may give rise to further claims which are difficult to quantify.

(d) Breyer's Pay Less Notice in response to the Period 10 application was within reasonable, or contractually applicable time (whichever time period applied - the Settlement Agreement reach by the parties, failed to identify which preceding contract continued to apply) and showed that nothing was owed. The Pay Less Notice was substantiated by a detailed analysis, including pointing out that a large portion of the electrical work was 'awaiting certificates'. On this, the Deputy Judge said, at paragraph 39, 'There is nothing, to my mind, that suggests that the Pay Less notice lacked bona fides or that the points advanced then as now by way of potential defence are not serious ones.'

Conclusions[1]

Determining the matter, the Deputy Judge said, at paragraphs 44 to 49:

‘Breyer is not unable to pay its debts…There is a range of reasonable potential defences to the claim…as well as significant potential counterclaims whose value remains to be quantified.

I have undertaken the reasonably comprehensive analysis of the materials required by Angel Group to determine whether there are serious, albeit not necessarily winning, points to be made by Breyer and have concluded that there are. I therefore accept …that the petition debt is disputed on bona fide and substantial grounds and that Breyer has a potential substantial cross-claim.

I am therefore not satisfied that, at the date of the petition, RBK was a creditor of Breyer and that it had standing to present this petition. To the contrary, RBK appears to be in the position of a conventional claimant on an invoice where the liability to pay the bill is disputed and where the dispute is wholly unsuited to resolution in insolvency proceedings.

The courts have recognized on numerous occasions that such proceedings are not the place for resolving genuinely disputed debt claims which the court cannot properly determine, either as to merits or as to quantum, at this stage. I have in mind, in particular, the summary of authorities reviewed in Re a Company No 006685 of 1996 [1997] BCC 830 Chadwick J and the judgment of the Court of Appeal in Wilson and Sharp Investments Ltd v. Harbour View Developments Ltd [2015] EWCA Civ 1030, which related to a contract which was, in some respects, similar to the present one but where the facts were less clearly in favour of the applicant than here….

Such petitions also have the potential to create injustice because a company against whom a winding up petition is sought may feel pressurized into paying simply to avoid the petition being advertised which may itself have a range of serious commercial consequences on banking and other contractual relationships. In that way, such proceedings can operate as a form of commercial oppression, where the very existence of proceedings can be the source of disproportionate injustice. While the court must be astute to avoid having the wool pulled over its eyes by a debtor trying to escape its obligations, it must be equally astute to avoiding injustice being caused by a potential creditor using insolvency proceedings to make it less likely that a justified defence or counterclaim will be pursued because the alleged debtor will be pressurized into paying the claim in full before that can be done.

While in some cases, a debtor's position may be self-evidently hopeless and it would be just to permit a petition to succeed, I do not think this is a case in that category…I have no hesitation in striking this petition out as an abuse of process.’

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW 

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


[1] The Judge also provided, at paragraph 2, what might be colloquially termed, an ‘Executive Summary’. In order to make his decision clear and accessible for Breyer’s business connections, who might be speculating about the outcome, the Deputy Judge helpfully summarized his conclusions, as follows:

‘a. Breyer is not unable to pay its debts. To the contrary, Breyer appears, on the evidence provided to the court, to be solvent with cash in hand and a substantial unused credit facility.

b. The reason Breyer has not paid the substantial sums claimed by RBK under a sub-contract for work carried out by it is that it claims to have arguable defences to RBK's claims as well as substantial cross-claims of its own. These defences and cross-claims are various and relate to

i. the terms on which the work was undertaken;

ii. the quality of work undertaken,

iii. the validity of certain certificates issued by RBK in respect of electrical work and the testing of certain apparatus.

These claims, some of which operate as defences and some of which are cross- claims, are fairly arguable, cannot be resolved by the court on this application and it is inappropriate to do so in insolvency proceedings. Some of the issues raised by Breyer are already the subject of investigation by third parties.

c. The proper place for the dispute between the parties is either Adjudication under the scheme established under the Scheme for Construction Contracts or ordinary proceedings. The dispute could be readily resolved in either forum.

d. For RBK to continue these insolvency proceedings would be oppressive and would constitute an abuse of process.

e. The petition to wind Breyer up will therefore be struck out.’