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Home / News and Insights / Insights / Winding up in the face of a disputed debt

It is a long-established principle that winding-up proceedings should not be commenced where the petition debt is disputed on substantial grounds. Indeed, the court is opposed to allowing the insolvency regime to be used as a method of debt collection in such circumstances. Should a case of such nature appear before the court, it is usual practice for the petition to be struck out.

Nevertheless, as held by Lord Brightman in Brinds Ltd v Offshore Oil NL [1986] 2 BCC 98,

‘it is a matter for the discretion of the judge whether a winding-up order should be made on a disputed debt, and it is also a matter of discretion whether he decides the substantive question of debt or no debt’.

Indeed, this case demonstrates that the aforementioned principle is simply a rule of practice – not one of law – and thus, the court may depart from convention, if so desired.

There are a handful of reported cases where the court has elected to make a winding up order despite a genuine dispute as to the underlying debt. The recurring theme within those authorities is the existence of what the court deem to be ‘exceptional circumstances’. Helpfully, there is guidance on how the court determines the existence of exceptional circumstances by reference to the three questions set out in Re GBI Investments Ltd [2010] EWHC 37:

  1. if the company is not wound up and the winding-up petition is dismissed, does the petitioning creditor have an adequate alternative remedy?
  2. if the court was to disregard the petition debt, would the company be solvent?
  3. if the court was to wind-up the company, what prejudice would be caused to the company?

The concept of ‘exceptional circumstances’ was recently the subject of obiter discussion in the case of Chetan Khera v Palladian Capital Limited and Palladian (Penfold) Limited [2024] EWHC 1009 (Ch) which came before ICC Judge Greenwood on 18 January 2024. Herein, both petitions were disputed, the latter on the basis of an allege derivative claim against the petitioner, the value of which was said to exceed the debt owed.

Relying on Re GBI Investments, the petitioner argued that even if the alleged claim was genuine and substantial, the court should still make the winding up order. The petitioner submitted that:

  1. the company was insolvent and even if successful in the alleged derivative action, would remain insolvent.
  2. the company was no longer trading; the only matter that remained was for its affairs to be wound down. However, the company’s board was in deadlock and had been for a considerable amount of time. Further, due to its insolvent state, the petitioner was unable to pursue a winding up in his capacity as contributory.
  3. there was a clear advantage in appointing an independent office holder to investigate and act in respect of the company (not least in respect of a potential and large-scale preference claim to a connected party which would otherwise fall outside the relevant period).

Ultimately the court found the alleged derivative claim to be neither genuine nor substantial and thus, there was no requirement to exercise discretion on the making of the winding up order. However, it appears ICC Judge Greenwood would have been persuaded to employ such exceptional jurisdiction, noting in response to the petitioner’s submissions:

‘I do agree that by reference to the circumstances overall, liquidation is a plainly sensible and appropriate outcome, and not one which I am reluctant to order.’

Summary

The commentary in Khera, although limited, supports the general theme for reported cases exploring the applicability of ‘exceptional circumstances’ in the face of a disputed winding up.

Pursuant to such precedent, it would appear that the court is typically willing to make a winding up order in such circumstances where either injustice to the petitioner would otherwise result, the petitioner would be deprived of remedy and / or there is some other sufficient reason the petition should proceed.

Our restructuring and insolvency team can advise on all aspects of winding up, from the perspective of either the petitioner and / or the debtor. If you are looking to wind up a company or, have an outstanding petition against you and would like advice on your position, please contact a member of our restructuring and insolvency team.

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