| Date | 25 October 2006 |
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| Judgment | Medlock Products Limited v SCC Construction Limited, Bristol High Court, 13 July 2006, Seawind Tankers Corporation v Bayoil SA (1998), CA |
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| The Issue | The principal grounds upon which a petition presented to the High Court for winding up under section 124(1) of the Insolvency Act 1986 may be avoided. |
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| Implication |
A petition for the winding up of a company may be dismissed if the sum claimed is disputed, in which case the court has to use its discretion to decide whether it is a genuine dispute on substantial grounds, and/or a cross-claim is made in excess of the sum claimed, in which case the court must decide whether the cross-claim is genuine and serious or one of substance and one which the company has been unable to litigate. |
printA device commonly used by a creditor to secure payment of an outstanding debt is the issue of a statutory demand in accordance with section 123 (1) of the Insolvency Act 1986 (the Act). If the debt is not paid within three weeks or some arrangement is reached to the satisfaction of the creditor then the debtor will be deemed unable to pay its debts. This is one of a number of grounds set out in section 122 (1) of the Act, which enables the court to wind up a company. The procedure under section 124 (1) of the Act for winding up requires the service by a creditor of a petition for winding up to the High Court. In accordance with section 125 (1) of the Act: “On hearing a winding-up petition the court may dismiss it, or adjourn the hearing conditionally or unconditional, or make an interim order, or any other order that it thinks fit;”. This section of the Act therefore confers on the court a wide discretion as to how to deal with petitions for winding up, and perhaps not surprisingly there have been a number of cases in which the extent of this discretion has been considered. There are two common ways in which a company receiving a statutory demand may respond; the first is to deny that the sum claimed is due, i.e. by disputing the debt, and/or the second is to establish a cross-claim which extinguishes the debt. The question then is what will amount to a successful defence to a petition and how is the court likely to exercise its discretion? The case of Medlock Projects Limited v SCC Construction Limited (2006) concerned an application to the court by Medlock who was seeking either a restraint of advertisement or striking out of a petition for winding up of Medlock. SCC Construction was a sub-contractor to Medlock Projects and was engaged to carry out construction work including the installation of phone masts. In March 2006, Medlock had issued a withholding notice to SCC in respect of work at the Congleton contract. At the end of March a settlement agreement was reached between the parties that resulted in the termination of the contract, two further payments to SCC, and the release of SCC from any liability to correct patent or latent defects. Medlock made the first payment. SCC issued three invoices totalling circa £51k on 20 April 2006 in connection with three contracts, including the second sum due on the Congleton contract. These were not paid by Medlock and through its solicitors, SCC issued the court with a petition to wind up Medlock. Whilst SCC had given Medlock’s solicitors an opportunity to respond, they responded in writing after the agreed deadline for the service of the petition for winding up. The response from Medlock’s solicitors dealt in great detail with the various contracts in effect making claims to withhold monies under the various contracts for poor work, and alleging that the quantified losses outweighed the sums sought by SCC. Before the court, Medlock argued that the debts were bona fide disputed on substantial grounds; or alternatively that there are cross-claims which it had not yet been able to litigate and that those exceeded the amount of the petition debt. His Honour Judge Weeks QC confirmed that the principle that he had to follow was fairly clear from the authorities that followed Bay Oil v Seawind in relation to cross-claims [1998] BCC 908 or in relation to disputed claims Re A Company 685 of 1996 reported at [1997] BCC 830. He confirmed that the dispute had to be a genuine one on substantial grounds and the cross-claim has to be one which is a bona fide cross-claim which has a genuine prospect of success. The Bay Oil decision is an interesting court of appeal decision in which Lord justice Nourse reviewed the authorities concerning the court’s discretion in dealing with both types of defence discussed above, but primarily he addressed the situation where the liability for the claim is accepted by the petitionee but there is a cross-claim put in defence. The decision was a unanimous one. In support of his decision, Lord Justice Ward confirmed that “a winding-up order is a draconian order. If wrongly made, the company has little commercial prospect or reviving itself and recovering its former position. If there is any doubt about the claim or the cross claim, that seems to me to require that the court should proceed cautiously.” The first hurdle for the petitioner is that it must establish that it is owed the debt otherwise it will not be a creditor with the power to present the petition and the court will not have the power to wind up the debtor company. If the sum being claimed is disputed then the court will have to use its discretion to determine whether it is a genuine dispute (disputed in good faith), and on substantial grounds. Where the sum claimed is not disputed but a cross-claim is relied on as a defence to the petition then it was found in Bay Oil that for the petition to be dismissed: “the cross claim must be genuine and serious or . . . one of substance; that it must be one which the company has been unable to litigate, and that it must be in an amount exceeding the amount of the petitioner’s debt” unless there are special circumstances which make it inappropriate for the petition to be dismissed or stayed. In the Medlock case, perhaps unsurprisingly His Honour Judge Weeks decided that the settlement agreement that had been reached on the Congleton contract meant that the dispute as to the claim and cross-claim in relation to that contract had no genuine prospect of success. In relation to the other two contracts, he found that these contracts were caught by the Housing Grants, Construction and Regeneration Act 1996 and he relied on the absence of timely withholding notices to support his conclusion that the cross-claims were not substantial and serious claims which Medlock had in mind irrespective of the present winding-up proceedings. He therefore dismissed the application to strike out the petition.
CJ-0642
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