Grand Court Rejects Attempted Defence of Creditor’s Winding Up Petition Based on Alleged Cross-Claim

The Salient Facts

The petition was grounded upon the non-payment of US$1m plus default interest then due under a services agreement between the petitioning creditor and the company, including following service of (and the company having failed to satisfy) a statutory demand.

The company did not adduce any evidence disputing the debt on which the petition was based.  The company instead alleged that the petitioner had breached a term of the services agreement which required it to make all reasonable efforts to agree an amendment to that agreement, and that the amendment which ought to have been agreed would have provided the company with a discount exceeding the petition debt by US$1.2m, which the company had already paid.

The company thus contended that the petition debt would have been eliminated by that anticipated discount, and that the Court ought to give it the opportunity to litigate its cross-claim arising from the petitioner’s alleged breach of the services agreement.

The Cross-Claim Defence

The Chief Justice observed that it is uncontroversial that, where an alleged cross-claim is shown to be genuine and based on substantial grounds, the Court (by analogy with the approach taken to disputed debts) will dismiss the petition.  As the Grand Court had previously held in Quarry Products v Austin International Inc. [2000] CILR 265, there is no distinction in principle between a company having a cross-claim of substance and it raising a serious dispute as to the alleged indebtedness.

The Chief Justice drew further assistance from LDX Intl. Group LLP v. Misra Ventures Ltd [2018] EWHC 275 (Ch), in which the applicable principles were summarised as follows:

“In the absence of special circumstances, it will be appropriate to issue an injunction to prevent the presentation and advertisement of a winding up order where there is a genuine and serious cross-claim in an amount exceeding the petitioner’s debt. The cross-claim must be genuine and serious, or, in other words, one of substance: In re Bayoil at page 155.

If there is a genuine and serious cross-claim, the company should be allowed to establish its cross-claim in ordinary civil proceedings: the Companies Court is not the right court in which to engage in a detailed examination of claim and counterclaim: Dennis Rye at paragraph 19.

It is incumbent on the recipient of the statutory demand to demonstrate, with evidence, that the cross-claim is genuine and serious: Orion Media at paragraph 31.  Bare assertions will not suffice: there is a minimum evidential threshold: Re a Company at paragraph 33.

But it is not practical or appropriate to conduct a long and elaborate hearing, examining in minute detail the case made on each side. A lengthy hearing is likely to result in a wasteful duplication of court time: Tallington Lakes at paragraph 41.

If there is any doubt about the claim or the cross-claim, then the court should proceed cautiously. This is because a winding up order is a draconian order, which, if wrongly made, gives the company little commercial prospect of reviving itself: In re Bayoil, at page 156.

Petitioning creditors must take a realistic view of whether the company is likely to establish a genuine and substantial dispute: Tallington Lakes, at paragraph 41.

A company is not prevented from raising a cross-claim simply because it could have raised or litigated the claim earlier, or because it has delayed in bringing proceedings on the cross-claim. However, the court is entitled to take any delay into account in its assessment of whether the cross-claim is genuine and serious: Dennis Rye, at paragraph 19”.

The Decision to Wind Up

The Court in Global-IP observed that, on the evidence before it, the alleged breach of the services agreement had not been raised at various opportune stages over the preceding five and a half years, including when the company was making further undiscounted payments pursuant to the services agreement, nor was it raised when payment of the petition debt was demanded or even when the petition was ultimately presented.  Conversely, it was clear that the company had proceeded, at all material times, on the basis that the amendment was unlikely to be agreed, and only alleged such a breach in correspondence sent a matter of days before the petition was heard.  The Court considered that the ready inference to be drawn was that the putative cross-claim was not genuine.

Further and in any event, the Court went on to observe that the alleged obligation under the services agreement had a longstop date of 23 June 2018, and had therefore expired; but that there could not have been any such obligation, since it was merely an agreement to agree, which was incapable of having any contractual force.

Having regard to that factual matrix and the applicable principles summarised above, the Chief Justice concluded that there was no substance to the alleged cross-claim and (after dealing with a further dispute over the petitioner’s standing) proceeded to make the winding up order.

Further Observations

The judgment in Global-IP thus confirms that a creditor’s winding up petition may successfully be resisted where a genuine and serious cross-claim has been made out, but where a purported cross-claim is raised on the courthouse steps and is at odds with the parties’ dealings over an appreciable period of time, the Court is quite likely to infer that it is not genuine and is no more than a last ditch attempt to avoid a winding up.