WINDING UP PETITIONS FOUNDED ON A BONA FIDE DISPUTED DEBT

Date01 December 1998
Published date01 December 1998
I. INTRODUCTION

Where a winding up petition has been presented against a company and one or more of the statutory grounds for a winding up order1 has been established, the court has a discretion whether to order the company to be wound up. However, where a creditor of a company presents a winding up petition on the basis of his unpaid debt, it is well-settled that the court will usually exercise that discretion in favour of making a winding up order, since it regards the unpaid creditor as being entitled to a winding up order ex debito justitiae.2 The creditor is prima facie not obliged to give time to enable the company to pay.3 Also, equity will not intervene to prevent a winding up order being made on the ground that there was genuine hardship on the company, unless the conduct of the petition is so oppressive as to make the presentation of the petition an abuse of process.4 Neither is it relevant that the petitioner’s treatment of the company has been harsh and grievous,5 or that he has the right to pursue other remedies.6

In certain cases, however, the unpaid creditor’s prima facie right to a winding up order may be displaced and the court may dismiss or stay the petition. Examples of such special circumstances are where the majority of the creditors of the company oppose a winding up order, and where the company is already in voluntary winding up. These situations do not give rise to much conceptual difficulty, as in each case it is essentially a question of the exercise of the court’s discretion taking into account all the relevant circumstances. The same cannot be said of another popular defence to a creditor’s winding up petition — so frequently encountered that it has been described as the classic ground of objection to a winding up petition7 — that the petition is founded on a debt the existence of which is bona fide disputed.

This rule that winding up proceedings should not be founded on a debt which is bona fide disputed presents a number of conceptual and practical difficulties, despite the innumerable opportunities the courts have had to consider it. This article examines the substantial amount of jurisprudence that has accumulated with respect to the nature and operation of the rule and the various inconsistencies therein. In particular, consideration will be directed at the application of the rule to the hearing of the petition, the grant of injunctive and striking out relief against winding up proceedings, and the raising of bona fide counterclaims of substance by the company against the petitioner.

II. THE BASES FOR THE RULE

It is very well-established that it is an abuse of process to petition to wind up a company upon the basis of a bona fide disputed debt, as a winding up petition is not a legitimate means to enforce payment of a bona fide disputed debt.8 Three reasons for this are usually cited. Firstly,

the procedure on a winding up petition is ill-equipped to deal with disputes of fact, since normally there are no pleadings or discovery and oral evidence is not received;9 as such, the winding up process for insolvency should be reserved for those who have established their claims either by admission or process of law10 and should not be used to try a common law action.11

Secondly, the presentation of a winding up petition puts very great pressure on the company and it is not right for that pressure to be used in order to induce the company to abandon a fairly arguable defence.12 The presentation of a winding up petition may cause serious damage to a company; the advertisement of the petition is highly damaging to the company’s reputation while the embargo on dispositions of the company’s property13 may freeze its bank account.14 Public knowledge of the presentation of a winding up petition may cause irreparable damage to a company through the loss of commercial reputation,15 and there may also be repercussions for the company with its bankers and mortgagees under

the terms of security documents.16 Further, security documents usually provide that a floating charge will crystallise upon the presentation of a winding up petition, notwithstanding that the petition is subsequently dismissed.17 It is therefore an abuse of process to use the winding up procedure, involving as it does the advertising of the petition with the likely consequences of serious commercial damage to the company, as a means of obtaining payment of a genuinely disputed debt.18

Thirdly, it has been held by a long line of authority that a petitioner who relies on a bona fide disputed debt is not a ‘creditor’ within the meaning of section 253(1)(b) CA and has no locus standi to present the petition.19 It is thus an abuse of process for such a person to bring the winding up proceedings. There is now some doubt as to whether this proposition remains authoritative. In the recently reported decision of the English Court of Appeal in Re Clay bridge Shipping Co SA,20 Lord Denning declared, without reference to previous authorities, that a person was a ‘creditor’ for the purposes of section 253(1)(b) CA as long as he had a good arguable case that a debt of sufficient amount was owing to him by

the company.21 This is, of course, lower than the standard of having to show the absence of a bona fide disputed debt.22 If this is correct, then the rule that a winding up petition founded on a bona fide disputed debt will not be allowed to proceed has nothing to do with the lack of locus standi. However, it is submitted, for reasons given below, that Lord Denning’s statement is incorrect.

III. THE HEARING OF THE PETITION
1. The general rule

The general rule is that no winding up order will be made on a debt which is bona fide disputed.23 It is not entirely certain, however, whether the usual course for the court is to dismiss the petition altogether, or that the court may, in an appropriate case, order a stay of the petition pending the resolution of the dispute in other proceedings. Some authorities take the view that the petition will not be stood over in order that the disputed issues may be resolved in other proceedings but will be dismissed.24 However, the more flexible and preferable view is that the court may exercise its discretion to stay the petition pending the resolution

of the dispute in other proceedings.25 The relevance of the distinction is that, in the case of a stay, the date of the commencement of winding up remains operative; thus, the winding up is still on foot and dispositions of the company’s property may be declared void under section 259 CA.26 Presumably, the statutory restrictions on legal and enforcement proceedings against the company imposed by sections 258 and 260 would also remain operative.

2. The overriding discretion of the court to determine the dispute

Where the court hearing a petition finds that the petitioner’s debt is bona fide disputed, it will, only as a matter of practice, dismiss or stay the petition. The court has an overriding discretion to proceed to adjudicate the dispute upon all the evidence before it and, if it finds that the dispute is not well-founded, make a winding up order. This principle is well-established in Australia27 and New Zealand.28 It has also been settled in those jurisdictions that the discretion of the court to determine the dispute is to be exercised judicially and is not open to review unless it is exercised on some wrong principle or the lower court relied on an irrelevant fact or omitted to consider a relevant fact or was wholly wrong.29 Further, if

the discretion is exercised and the dispute determined, there will be an issue estoppel as to the matter.30 However, it is exceptional for the court to exercise the discretion.31

At one time, the English approach, which apparently did not recognise the existence of such a jurisdiction, was thought to be more unbending32 than the Australian and New Zealand approach. This is probably no longer true. In Re Claybridge Shipping Co SA,33 Oliver LJ thought that the court has the right to determine disputes in winding up proceedings in an appropriate case, and this view was accepted in Alipour v Ary34 and Re a Company.35 Nevertheless, there remains a discernible difference in so far as the considerations governing the exercise of the court’s discretion to adjudicate on the dispute are concerned. It seems that the Australian and New Zealand courts are more influenced by considerations of practicality, convenience and economy while the English courts emphasise the importance of ensuring that no injustice is caused to the petitioner.

It has been said in Australia that the overriding discretion of the court to determine the dispute is more consistent with the modern notions of seeking the most economic and efficient use of judicial time than a more rigid approach which would mandate in every case of a disputed debt the splitting off of the dispute however easily determined and the stay or dismissal of winding up proceedings pending its determination.36 Accordingly, in Australia and New Zealand, the court may proceed to determine the dispute if the dispute has been fully investigated by it and all the relevant material has been placed before it,37 or if the issue raised

is a short point which may be conveniently decided on the hearing of the petition.38 It further appears that the court may be more ready to resolve a bona fide dispute involving a question of law rather than fact. It has been said that a winding up petition may be used to establish a debt if the debt can be established by the resolution of a question of law suitable for determination on the hearing of a winding up petition.39 For example, if the only point of dispute relates to the proper construction of a document, the court may resolve the issue in the winding up proceedings.40

In contrast, the English position as laid down by the Court of Appeal in Alipour is that the court may adjudicate on the dispute if the petitioner...

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