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Back to Basics: How NOT to Resist a Winding up Petition
As many readers of the Insolvency and Restructuring team’s E-Briefs will be aware, winding up petitions once issued by a Court can be prevented from continuing by the company obtaining an injunction restraining the continuation of the winding petition process (in other words, having a hearing as to whether or not the winding up petition is valid and a winding up order should be made). The classic ground for such an application is that there is a substantial and genuine dispute between the parties making it inappropriate for the Court to consider the winding up petition. Such an application immediately makes the petition a high stakes game. If the company is
unsuccessful, the petition is likely to proceed and result in a winding up order. If the company obtains the injunction, the person who issued the petition in the first place becomes liable for the significant legal costs attached to obtaining the injunction. They are also precluded from continuing from the petition and would have to bring their claim in the Civil Court in the time honoured slow fashion of such claims.
The case of Angel Group Limited v British Gas Trading [2012] EWHC 2702 (Ch) demonstrates rather nicely the risk of the game.
Angel Group Limited owned and leased thousands of properties which were supplied with electricity and gas by British Gas. The complexities of the contractual relationship between British Gas and Angel Group Limited are not terribly useful to those not involved in the case, but suffice to say British Gas took the view that Angel Group Limited owed a considerable sum to it in relation to the supply of gas and electricity and on 3rd September 2012 presented a petition for the winding up of the company claiming it owed the sum of £619,733.60. The minimum amount that can be the subject of a winding up petition is £750. Angel applied for an injunction preventing British Gas from continuing with the petition on the eerily familiar grounds that there was a substantial and genuine dispute between the parties because in essence British Gas were "shambolic" in respect of their billing, and were using either inaccurate tariffs, the wrong VAT rate, or basing the bills on estimates and that as a result it was utterly impossible to know without undertaking a complex review of the bills and the facts of the situation whether British Gas in fact owed Angel money or vice versa.
The Judge in the High Court considering this case reminded himself of the basic rules regarding such applications. To present a creditors petition for winding up, you must be a creditor. The company can 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 as much as will bring the amount due below £750. A dispute is not substantial unless it has a rational prospect of success and will not be put forward in good faith if the company seeking to take a credit which is not permitted under a contract. A petition will not be struck out simply because there is
an allegation of a dispute. However, a Court will not permit a winding up petition to be used to place pressure on a party to pay if there is indeed a substantial dispute raised in good faith.
The Judge took the view that he was obliged in order to consider the matter to consider as much detail as was made available to him in detail and effectively undertake a mini trial regarding whether what was due to British Gas existed at all, and if so, was it above £750.
The company raised the argument that the petition should be struck out as an abusive of process as British Gas was continuing to supply gas and electricity to the company and therefore the amount stated in the petition must clearly be wrong as it took no account of the ongoing relationship. The Judge dealt with that argument fairly swiftly on the basis that it was inevitable that there would be a differentiation between the figures at the time of the issuing of the winding up petition and the hearing by the Court, and it was not an abuse of the Court’s process. The second argument raised by the company was that the issues were simply too complicated. The Judge was again swift to reject this argument and said that "no encouragement should be given to debts to raise a cloud of objections on affidavit in the hope that the Companies Court will simply say that the issues are all too complicated: indeed anything that the law can do to discourage such behaviour should be done." The company then argued that the petition should not be permitted to proceed on the basis that British Gas was exaggerating deliberately the alleged debt in an attempt to put the maximum possible pressure on the company. British Gas made the point
that it was continuing to supply the
remaining properties owned by the company and that whilst adjustments were inevitable as part of the billing process, in the view if British Gas it was not subjecting the company to improper pressure. The Judge agreed.
More interestingly, the company then argued that unless British Gas could specify an exact sum that was due from the Company then an injunction to restrain the petition must be granted. The Judge was crystal clear in rejecting this line of argument. The Judge made the point that the Court at this stage is not concerned in determining what could be proved in an actual winding up. It simply deals with whether or not the petitioner is undisputedly a creditor for a sum exceeding £750. As a result, the Judge then undertook on a broad brush basis consideration as to what could potentially be deducted from the petition sum if the arguments raised by the company as to why the bills were incorrect were later substantiated. Having gone through that process, the Judge found that in excess of £100,000 was due to British Gas, which in anybody’s opinion exceeded £750. The Judge also took the view that it was likely that the company was
systematically not paying its bills in accordance with the contract of supply and conducted its affairs in a way to maintain a sufficient volume of disputes to make it impossible for a creditor to petition against it for liquidation. The Judge did not brand this "commercial stratagem" as bad faith, but took the view that the company knew "exactly what game it has been playing" and therefore complaining that British Gas was unfairly exerting pressure by presenting a winding up petition had no real weight. As a result of the Judge’s conclusions, he
ruled that British Gas was a creditor of the company for in excess of £750 and therefore the petition would be allowed to proceed. It is good to see the High Court continuing with its robust approach to winding up petitions and whether or not there is a substantial defence raised in good faith by a company, particularly in such times where suppliers are finding it increasingly difficult to get paid either on time or at all by companies who allege possibly spurious reasons why payment is either not going to be forthcoming in full or at all. Though on the other hand, many will sympathise with the description of British Gas as
"shambolic"….
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Please contact Claire Sharp on 0117 9453 044 or [email protected]
This E-Brief is not intended to provide detailed legal advice and should not be relied upon in place of legal advice.
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