Why A Winding Up Petition Is Not A Quick And Easy Means To Recover A Disputed Debt

Why A Winding Up Petition Is Not A Quick And Easy Means To Recover A Disputed Debt

The case of Morrison Water Services Ltd v Browning [2023] EWHC 2725 (Ch) highlighted why a Winding Up Petition is not a quick and easy means to recover a disputed debt. The applicant succeeded in obtaining an order restraining the winding up of the company by a former employee Mr Browning.

On 26 July 2023, Mr Browning issued a Statutory Demand regarding his employment settlement at Morrison Water Services Ltd (“MWS”). This culminated in MWS issuing an application under Rule 7.24 of the Insolvency (England and Wales) Rules 2016 for an order that Mr Browning be restrained from applying to wind up MWS because the alleged debt was disputed.

A Settlement Agreement was entered into between the two parties on 1 July 2022 following his redundancy. This was then reviewed by the Court which highlighted the dispute between the parties.

Rules When Considering A Creditor’s Status

The Court considered the creditor’s standing as follows:

In Angel Group v. British Gas [2012] EWHC 2702 Norris J summarised the principles to be applied by the Companies Court when considering the petitioning creditor’s status as creditor (with emphasis added for ease of reference):

“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] 1 WLR 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).”

The bar to demonstrating a dispute over a debt on substantial grounds is set low, as Etherton LJ (as he then was) observed in Tallington Lakes Ltd v. South Kesteven District Council [2012] EWCA Civ 443 at [22]:

“I have to emphasise, however, in this context that it is well established that the threshold for establishing that a debt is disputed on substantial grounds in the context of a winding-up petition is not a high one for restraining the presentation of the winding-up petition, and may be reached even if, on an application for summary judgment, the defence could be regarded “shadowy”.”

The Court noted that Mr Browning did not appear aware of these principles thinking that issuing a statutory demand and winding up petition was an easy way to recover the sums allegedly due to him.

Genuinely Disputed Debts

Although the Court after review of the Settlement Agreement reached between the two parties meant there was a disputed debt.

Deployment of winding up proceedings is not a mechanism to resolve debts genuinely disputed:

… Mr Browning appears to be in the position of a conventional claimant on a claim where the liability to pay is disputed and where the dispute is wholly unsuited to resolution in insolvency proceedings.

To quote Mr Daniel Alexander QC (sitting as a Deputy Judge of the Chancery Division) in Breyer Group Ltd v RBK Engineering Ltd [2017] EWHC 1206 (Ch) (again with emphasis added for ease of reference)

“48. 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. In that case, the applicant had not raised the potential defences at an earlier stage. Nonetheless an injunction was granted to restrain further proceedings on the petition.

49. 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.”