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IN
THE SUPREME COURT OF JUDICATURE
CHANF
98/0187/3
COURT
OF APPEAL (CIVIL DIVISION)
ON
APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY
DIVISION
(His
Honour Judge Roger Cooke)
Royal
Courts of Justice
Strand,
London WC2
Friday,
31st July 1998
B
e f o r e :
LORD
JUSTICE NOURSE
LORD
JUSTICE WARD and
LORD
JUSTICE MANTELL
---------------------
IN
THE MATTER OF THE INSOLVENCY ACT 1986
SEAWIND
TANKERS CORPORATION
Petitioner/
ALIGN="LEFT"> -v-
ALIGN="LEFT">
Appellant --------------------
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Aided Transcript of the Palantype Notes of
180
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Shorthand Writers to the Court)
---------------------
MR
M TSELENTIS (MR M ASHCROFT 31.7.98)
(instructed by Messrs Stockler Charity, London EC4) appeared on behalf of the
Appellant
Respondent.
MR
J RUSSEN
(instructed by Messrs Holman Fenwick & Willan, London EC3) appeared on
behalf of the
Respondent Petitioner.
---------------------
J
U D G M E N T
(As
Approved by the Court)
Crown
Copyright
Friday,
31st July 1998
LORD
JUSTICE NOURSE:
This
appeal raises a question on the practice of the Companies Court. How ought it
to deal with a winding-up petition when the petitioner's debt is undisputed but
the company has a genuine and serious cross claim, which it has been unable to
litigate, in an amount exceeding the amount of the petitioner's debt? In order
to answer that question it is necessary to give close consideration to the
decisions of this court in
Re
Portman Provincial Cinemas, Ltd
(1964) 108 Sol. Jo. 581 and
Re
L H F Wools Ltd
[1970] Ch. 27.
Bayoil
SA ("the company") is a Swiss company and as such an unregistered company
within the meaning of section 220(1) of the Insolvency Act 1986. It has assets
and a place of business in England. By section 221(1) it may be wound up under
the Act. By a voyage charterparty dated 13th December 1996 the company
chartered from Seawind Tankers Corporation ("Seawind"), a Liberian company, a
tanker called the "LEONIDAS" for the purpose of carrying a cargo of light crude
oil from Al-Bakr in Iraq to the United States Gulf with an ETA of 8th February
1997. The ship
sailed from Al-Bakr on 19th December, but on 25th December its
starboard engine failed and had to be shut down, with the
result that it
thereafter proceeded at a significantly
reduced speed. The company was
informed of this on 27th December, with a new ETA in the United States Gulf of
3rd March. Subsequently, pursuant to an agreed variation of the charterparty,
the company gave directions for lightening and discharge in South Africa, where
the ship was arrested at
Saldanha Bay. By a letter dated 13th March 1997
Seawind's P&I club, in consideration for the ship's
release, granted the
company security for its claims in a sum not exceeding US $5,910,609 plus
interest and costs.
Pursuant
to a clause in the charterparty, the dispute was submitted to arbitration in
London, Seawind claiming freight and diversion expenses and the company
counterclaiming damages for breach of the charterparty, in particular for
misrepresentations and breaches of warranty as to the condition of the ship,
the absence of
recent breakdowns and its maintainable speed. On 15th August
1997 an interim final award was made in Seawind's favour in
respect of freight
and the costs of obtaining the award. The award was made in accordance with
the well established rule that freight must be paid free of all deductions of
whatsoever nature; see
The
Aries
[1977] 1 Lloyd's
Rep. 334. No stay of the award was sought or granted.
Conversely, the arbitrators declined to make an interim award in
respect of
diversion expenses, which are not governed by any such rule.
On
13th October 1997 Seawind served on the company a statutory demand in the
prescribed form
requiring payment, pursuant to the award, of the sums of US
$1,198,721.02 and £6,078.16 in
respect of freight and costs
respectively
together with interest. No part of either sum having been paid, on 4th
November 1997 Seawind presented a petition to the Companies Court seeking an
order that the company be wound up.
The
petition came on for an effective hearing before His Honour Judge Roger Cooke,
sitting as a judge of the Chancery Division, on 2nd February 1998. The company
did not dispute the debt on which the petition was based, but contended that it
ought to be stayed or dismissed on the ground that it had a genuine and serious
counterclaim, which it had been unable to litigate, in an amount (US
$5,931,524) exceeding the amount of the petitioner's debt. The judge, while
accepting the company's contention as to the status of its counterclaim, held
that he had a discretion which was at large and that it ought, in the
circumstances of the case, to be exercised by granting the order sought. The
company now appeals to this court.
The
question is whether the judge was right to hold that his discretion was at
large or whether its exercise was governed by authority which
requires the
petition, except in special circumstances, either to be dismissed outright or
to be stayed until after the cross claim has been determined. In order to
answer that question it is necessary to
refer first to the practice of the
Companies Court to dismiss a petition where the petition debt is disputed in
good faith and on substantial grounds. That practice, it appears, has been
established since the end of the last century. It was explained by Buckley LJ
in
Stonegate
Securities Ltd v Gregory
[1980] Ch. 576, 580, where, having adopted a passage in the judgment of
Ungoed-Thomas J in
Mann
v Goldstein
[1968] 1 WLR 1091, 1098, he
said:
"In
my opinion a petition founded on a debt which is disputed in good faith and on
substantial grounds is demurrable for the
reason that the petitioner is not a
creditor of the company within the meaning of section 224(1) at all, and the
question whether he is or is not a creditor of the company is not appropriate
for adjudication in winding-up proceedings."
Against
that background I come to
Re
Portman Provincial Cinemas, Ltd
,
which was a cross claim case. The
report in the Solicitors Journal (1964) 108
Sol. Jo. 581 is very brief. We have, however, been able to obtain a transcript
of the judgments from the Supreme Court Library. In that case the petition was
based on an undisputed debt of £40,831 owing in
respect of principal,
interest and costs secured by a mortgage. In May 1963 the creditor
("Baldwins") demanded payment from the company of that sum. In July 1963 the
company issued a writ against Baldwins claiming damages for breach of an oral
agreement alleged to have been made in or about November 1955. After the
pleadings in the action were closed, but before it could be tried, Baldwins
presented its petition. Plowman J dismissed it. On Baldwins' appeal to this
court, Lord Denning MR thought that the company's cross claim had no substance
at all. He would have allowed the appeal. Harman and Russell LJJ, on the
other hand, thought that it could not be
said that there was no substance in
the cross claim and accordingly dismissed the appeal.
The
importance of the case lies in the observations of Lord Denning MR and Harman
LJ as to the test to be applied. At the beginning of his judgment, the Master
of the Rolls
said:
"[The
company
says that] they have a cross claim which overtops the amount due to
Baldwins. The question is whether the debt of Portmans is a ´disputed'
debt. It would be, I think, if there was
real substance in the cross claim."
Having
stated the facts, he
said:
He
ended his judgment thus:
"I
think the Judge was right to
say that the matter ought to go to trial, and
therefore according to the modern practice, the petition should be dismissed,
and I would so hold."
Russell
LJ agreed with Harman LJ that the appeal should be dismissed. He did not make
an independent statement of the test to be applied and must be taken to have
agreed with that propounded by the other members of the court.
"A
winding-up petition is not a legitimate means of seeking to enforce payment of
a debt which is
bona
fide
disputed by the company. A petition presented ostensibly for a winding-up
order but
really to exercise pressure will be dismissed and under circumstances
may be stigmatised as a scandalous abuse of the process of the court. Some
years ago petitions founded on disputed debt were directed to stand over till
the debt was established by action. If, however, there was no
reason to
believe that the debt, if established, would not be paid, the petition was
dismissed. The modern practice has been to dismiss such petitions. But, of
course, if the debt is not disputed on some substantial ground, the court may
decide it on the petition and make the order."
Except
for the substitution of the words "At one time" for "Some years ago", that
passage has been
reproduced in virtually identical terms in every subsequent
edition of Buckley. It now appears in the 14th edition (1981) at p. 523. It
seems clear that "the modern practice" is cited only in
relation to disputed
debt cases.
The
13th edition of Buckley (1957), the edition which was current when
Re
Portman Provincial Cinemas, Ltd
and
Re
L H F Wools Ltd
were decided, made no
reference to any practice, ancient or modern, in
relation
to cross claim cases. From the terms in which Lord Denning MR and Harman LJ,
in particular the latter, expressed themselves in
Re
Portman Provincial Cinemas, Ltd
it seems that they assumed, perhaps wrongly, that the practice that had been
adopted in disputed debt cases had also been adopted in cross claim cases. Be
that as it may, the actual decision in that case is clear authority for the
proposition that the petition ought to be dismissed in cross claim cases,
except in special circumstances.
Mr
Tselentis, for the company, has submitted that that was how
Re
Portman Provincial Cinemas, Ltd
was viewed by this court in
Re
L H F Wools Ltd
[1970] Ch. 27, another cross claim case. There a Belgian bank sued the company
on a dishonoured bill of exchange and the company raised a counterclaim which,
though not a cause of action known to English law, was a good cause of action
under Belgian law. At the trial of the action the company abandoned its
counterclaim and submitted to judgment for the amount of the bill and interest,
the judge
refusing to grant a stay of execution. The bank presented a petition
to wind up the company, which had by then ceased trading and, apart from its
cause of action against the bank under Belgian law, had no assets. On the
hearing of the petition the company sought to have it adjourned or dismissed
but Plowman J made a winding-up order. The company's appeal to this court was
allowed, the order discharged and the petition stood over with liberty to
restore on two days' notice.
Plowman
J had found that the company's cross claim against the bank was a genuine and
serious cross claim which exceeded the amount of the petition debt. The
leading judgment in this court was delivered by Harman LJ. At p. 36 he
said:
"This
is the kind of case which is always troublesome and depends in the ultimate
resort on the discretionary views of the judge who tries it and, therefore, one
has to find, if this court is going to upset what he decided, that he exercised
his judgment on some wrong principle . . . The company appeals on the ground
that according to modern practice if there is a genuine cross claim, it is just
as if there was a disputed debt; and, as everybody knows, a disputed debt is
never good subject-matter for a petition."
"I
used much the
same language myself, and so did Russell LJ. The majority
decided in that case that, shadowy as the cross claim was and improbable as the
events
said to support it seemed to be, there was just enough to make the
principle work, namely, that it was right to have the matter tried out before
the axe fell."
Pausing
at that point, I think it clear that Harman LJ was there accepting that there
was by then a similar practice in both disputed debt and cross claim cases.
However, he then proceeded to consider the judge's exercise of discretion in
much greater detail than the practice might have
required. If you were to
read
the later part of his judgment in isolation, you might well conclude that he
regarded the judge's discretion as having been at large. That has enabled Mr
Russen, for Seawind, to argue that the discretion has not in
reality been
narrowed to the extent for which Mr Tselentis contends. Mr Russen seeks
further support for that view from the brief judgment of Danckwerts LJ at pp.
40-41. He also
relies on the judgment of Edmund-Davies LJ, who, having quoted
from the judgment of Lord Denning MR in
Ward
v James
[1996] 1 QB 274, 293-294,
said, at p. 42:
"Adopting
that principle, and speaking entirely for myself, I am a little nervous,
accordingly, about any decision which appears to lay down almost as a statement
or proposition of law that that discretion has to be exercised in any
particular direction. For my part, I would, therefore, desire to
reserve for
further consideration the obiter dictum of Lord Denning MR in
Re
Portman Provincial Cinemas, Ltd
to this effect:
´As
I understand the law on the matter it is this: if this is a genuine cross
claim with substance in it, then let it be tried out in the Queen's Bench
Division: this petition
must
be
rejected.' [Emphasis added by Edmund-Davies LJ.]
If
by those words he was in effect
saying that the discretion of a judge in those
circumstances must inevitably and invariably be exercised by
rejecting the
petition out of hand, it is an expression of opinion which I would
respectfully
desire to leave for further consideration when the question arises in a direct
form in a future case."
"That
the judge had erred in the exercise of his discretion because he had given
insufficient weight to (a) the modern practice that where a company had a
genuine and serious cross claim against the petitioning creditor which it had
not
reasonably been able to litigate, the petition should usually be dismissed
or stayed . . ."
"Where
on the hearing of a winding-up petition the court finds that the petitioner's
claim against the
respondent company is made out but that there is pending in
another court a counterclaim by the company, the court has a discretion whether
to dismiss the petition or make a winding-up order. In both
Re
Portman Provincial Cinemas, Ltd
and
Re L H F Wools Ltd
the Court of Appeal held that a winding-up order should not be made but in both
of those cases the circumstances were different from those in the present case
and the law as evinced by those decisions is certainly not that the existence
of a counterclaim means that prima facie the petition should be dismissed."
Those
observations were adopted and applied by Millett J in
Re
a company (No. 006273 of 1992)
[1993] BCLC 131.
It
is clear that neither Warner J nor Millett J had before him a transcript of the
judgments in
Re
Portman Provincial Cinemas, Ltd
.
So I do not think that weight can be given to their views on this question.
On the other side, we have been
referred to dicta in Commonwealth decisions
which give support to the existence of the practice in cross claim cases. Thus
in the Privy Council case of
Malayan
Plant (Pte.) Ltd v Moscow Narodny Bank Ltd
[1980] 2 Malayan Law Jo. 53 (a disputed debt case) Lord Edmund-Davies, in
delivering the judgment of the Board,
said at p. 55:
"There
is no distinction in principle between a cross claim of substance (such as in
the
Wools
case) and a serious dispute
regarding the indebtedness imputed against a
company, which has long been held to constitute a proper ground on which to
reject a winding-up petition."
Mr
Russen has submitted that the matters
relied on by the judge in exercising his
discretion did in any event amount to special circumstances. Shortly stated,
those matters were the finality and unappealability of the interim award, the
security for the company's counterclaim granted by Seawind's P&I club, the
judge's concern as to the potential commercial insolvency of the company and
the fact that there was no
real evidence that the award could be paid.
In
my judgment those matters do not amount to special circumstances. Indeed, with
the exception of the security for the company's counterclaim, they are likely
to be found in many cross claim cases. Mr Russen has also
relied on the fact
that no stay of the interim award was sought or granted. That adds nothing to
his other points. 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. All those
requirements
are
satisfied in this case.
I
would allow the appeal and discharge the winding-up order. Whether the
petition should be dismissed or stayed will be a question for discussion with
counsel after judgment.
LORD
JUSTICE WARD: I agree with all that my Lord has
said and I am tempted to
say
no more. In deference, however, to the fact that we are departing from the
judgment of an experienced company judge, in deference also to the excellent
arguments and submissions from Mr Tselentis and Mr Russen and in view of the
confusion which has arisen in the Companies Court, I will hesitantly explain
why I come to the
same conclusions.
First,
section 125 of the Insolvency Act 1986 dealing with "Powers of court on hearing
of petition" gives the court a wide discretion. Section 125(1) provides:
"On
hearing a winding-up petition the court may dismiss it, or adjourn the hearing
conditionally or unconditionally, or make an interim order, or any other order
that it thinks fit; ..."
"...
I am a little nervous, accordingly, about any decision which appears to lay
down almost as a statement or proposition of law that that discretion has to be
exercised in any particular direction."
The
guidance which may be given serves therefore to establish the principle by
which the discretion is generally to be exercised,
recognising, however, that
the rule is
always
subject to the exception that, in order not to fetter the discretion, special
circumstances, which the judge should explain if his exercise of discretion is
to be upheld on appeal, will always justify a departure from the rule.
Secondly,
I am
satisfied that, when subjecting
Re
Portman Provincial Cinemas Ltd
(Court of Appeal transcript, 7th July 1964) and
Re
L H F Wools Ltd
to close analysis, such as my Lord has subjected them to, there is authority of
this Court, from which we should not depart, that the practice is not to allow
the winding-up where there is a genuine cross claim except in special
circumstances.
"There
is no distinction in principle between a cross claim of substance (such as in
the
Wools
case) and a serious dispute
regarding the indebtedness imputed against a
company, which has long been held to constitute a proper ground on which to
reject a winding-up petition."
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.
Very
similar considerations inform the court's approach to the granting of a stay of
execution, where the court does not lightly deprive the successful litigant of
the fruits of his judgment, but will do so where an appeal would otherwise be
rendered nugatory. I appreciate that this analogy cannot be taken too far.
Winding up is not a form of execution, and stays may not be granted on a
judgment for a dishonoured cheque, which is treated as cash, just as freight
has a similar unique characterisation. Nonetheless, the principles underlying
that approach seem to me to be of
relevance when dealing with a company
winding-up.
To
that extent, I would allow the appeal.
LORD
JUSTICE MANTELL: For the
reasons given by my Lord, Lord Justice Nourse, I
would allow the appeal and discharge the winding-up order.
Order: appeal
allowed with costs here and below; winding-up order discharged; petition
dismissed.
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