How And Why A Cross Claim Can Stop A Winding Up Petition

In the case of Re A Company [2024] EWHC 2656 (Ch) a cross claim of around £44 million enabled the applicant to injunct and stop the presentation of a winding up petition in respect of an undisputed debt of around £7 million.

The notable feature is of course the issue of whether a cross claim which is disputed should be able to fetter furtherance of a winding up petition over a debt that is not disputed. 

The answer to the point is that if the cross claim is not fanciful then because ordering Compulsory Liquidation would mean the end of the company and quite conceivably from that the end of the cross claim, the Court is going to be slow to permit the compulsory order to be made.

The cross claim related to potential exposure to claims arising from cladding.

How To Restrain Presentation Of A Winding Up Petition With A Cross Claim

To restrain the presentation of a winding up petition with a cross claim the following applies:

1. A bona fide cross claim can be deployed which exceeds the petition debt (less £750) even of the debt petitioned on is not disputed.
2. The ability of the petitioning creditor to levy execution does not grant him the right to winding up order up a company.

Why Would A Cross Claim Be Enough To Stop Winding Up

A cross claim can be considered enough to stop a winding up petition because unlike in the case of bankruptcy, a winding up order is the death of a company from which it will be largely unable to recover. In other words, if a company were to be wound up with a bona fide cross claim it could unfairly be forced out of business permanently.

Further, a liquidator (even one often harbouring an appetite to take claims forward notwithstanding the risks personally) may not be willing or able to progress claims as the directors could do. 

The Court referred to the following position from the case of Seawind Tankers Corporation v Bayoil SA [1998] EWCA Civ 1364:

The ability of a petitioning creditor to levy execution against the company does not entitle him to have it wound up. Moreover, an order that a company be wound up, unlike a bankruptcy order, is often a death knell. Nor can it be certain that a liquidator, even with security behind him, will prosecute the company’s claims with the diligence and efficiency of its directors. These, I believe, are considerations which go to justify the practice in cross claim cases. I emphasise that the cross claim must be genuine and serious or, if you prefer, 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.

The Court tends to wish to avoid decimating a trading business when it feels the right decision would be to let the company have the prospect of survival. This appears a fair and reasonable approach.

In essence, where the Court has real concerns that the cross claim has legs it will likely want it to be properly heard and a winding up petition hearing is not usually the place for such a trial of the cross claim:

In re Bayoil, Ward LJ added this (at page 156):

‘Fourthly, a winding up order is a draconian order. If wrongly made, the company has little commercial prospect of 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.’

What Is Required For A Genuine Cross Claim Dispute

The Court will want the cross claim to be evidenced and mere assertion will not be sufficient for an injunction to be ordered to stop a winding up petition.

There is a distinction between the need to be able to satisfy the court that there is a genuine cross claim and being able to deal with all the potential defences that could be raised. 

Risk Of Presentation Of A Winding Up Petition

The Court highlighted the risk of presenting a winding up petition instead of litigating the claims through the CPR Part 7 procedures of a full trial of the evidence:

Threatening to present a winding-up petition in respect of a debt, rather than pursuing the matter by Part 7 proceedings, always carries a degree of risk. Doing so when a cross-claim has been raised, in a manner which merely suggests, but fails to substantiate a defence to such a cross-claim, despite access to the relevant documentation, brings a greater degree of risk.