Background
A winding up order will not be made against a company if the debt is genuinely disputed, see for example Re LHF Wools Ltd [1970] Ch. 27. However, in Re a Company No. 006685 of 1996 [1997] B.C.C. 830 the Court held that a petition will not be struck out or dismissed merely because the company alleges that the debt is disputed. The Court must be satisfied there is a genuine dispute founded on substantial grounds. If the debt is disputed the Court will strike out the petition leaving the question of the validity of the debt to be determined in other proceedings.
However, in Tallington Lakes Limited -v- South Kesteven District Council [2012] EWCA civ 443, Etherton LJ provided guidance in relation to an application to restrain the presentation of a winding up petition, stating that "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"."
Key Facts
On 2 October 2015 Cod Hyde Limited ("COD Hyde" or "the Employer") and Space Change Management Limited ("Space" or "the Contractor") entered into a bespoke JCT Design and Build Contract ("the Contract"), a construction contract within the meaning of the Housing Grants, Construction and Regeneration Act 1966. The Contract included clauses relating to the issue, by the Contractor, of applications for interim payment, the procedures to be followed by the Employer in the event that an interim payment amount is disputed, the date by which the interim payment must be paid and the procedures for termination of the Contract, by either party, in the event on non-payment (by the Employer) or default (by the Contractor).
Space issued COD Hyde with separate applications for interim payments on 29 October 2015 (application number 6), 30 November 2015 (application number 7) and on 18 December 2015 (application number 8) totalling £613,377.66, none of which were paid by COD Hyde.
On 29 January 2016 Space wrote a letter to COD Hyde headed "Notice of Default and Notice of Suspension" giving notice of COD Hyde's failure to pay and of Space's intention to suspend the performance of obligations arising under the Contract. The letter requested payment of the outstanding balance within 7 days, failing which the Contract would be suspended. On 9 February 2016 Space wrote to COD Hyde stating that the suspension was in effect and enclosed a statutory demand claiming the sum of £649,659.27 including interest.
On 15 February 2016 COD Hyde wrote to Space's agent rejecting the demand for payment "on the basis of the sums included being in dispute at this time". The letter also referred to errors in arriving at the amount claimed in the statutory demand. This error was acknowledged resulting in a revised claim of £628,689.27. On 29 February 2016 COD Hyde wrote to Space putting them on notice of default as a result of Space "suspending works without reasonable notice" and the Contractor's "failure to proceed regularly and diligently with performance of obligations". On 7 March 2016, COD Hyde's solicitors wrote to Space's solicitors stating that "the threat to present a winding up petition is misplaced because the alleged debt to which the SD relates is disputed" which, the solicitors state "is abundantly clear because there is a dispute about whether the Contract has been terminated and if so by whom". On 15 March 2016 COD Hyde advised Space that the Contract had been terminated.
The on-going dispute between the two parties led to an application being made by COD Hyde to restrain the presentation of a winding up petition against it. That application was heard on 7 April 2016, the same day that Space entered into administration.
Space argued that as COD Hyde had not adhered to the procedures set out in the Contract, it had an unanswerable claim for the amounts set out in the interim applications. COD Hyde on the other hand argued that there was a dispute sufficient to justify an injunction restraining presentation of a petition.
Judgment
Following an exhaustive analysis of the facts, the Court found that whilst Space had followed the procedures laid down by the Contract, COD Hyde had not. In relation to two of Space's applications for interim payment, being number 6 dated 29 October 2015 and number 7 dated 30 November 2015, the Court found that COD Hyde's Payment Notices were both issued outside the time limit laid down in the Contract.
Mr Justice Warren held that "It is said that there is a dispute about the progress of the works which the Contractor [Space] has failed diligently to pursue. I have no detail in relation to that. There are only the most general assertions in the letter dated 7 March 2016...." and "... even if those assertions could be substantiated, the fact is that no default notices were ever served in respect of them and they afford no answer to the claims under the interim applications which were not answered by valid Payment Notices or Pay Less Notices". Mr Justice Warren went on to state that "Finally the Employer [COD Hyde] asserts that it has a counterclaim which will exceed the amount of the SD (as corrected on the figures). There is simply no evidence before me that that is so".
Mr Justice Warren refused to grant the injunction sought and dismissed the application stating that "In all of the circumstances, I do not consider, on the material before me, that there is even a shadowy claim (see Etherton LJ in Tallington Lakes Ltd v South Kesteven District Council [2012] EWCA 443 at [22]) concerning the liability of the Employer [COD Hyde] to make the interim payments claimed ... I do not consider either that there is even a shadowy claim that the Contractor [Space] was not entitled to suspend work and ultimately terminate the Contract; the Contract was validly, in my view, terminated by the Contractor before the Employer purported to terminate it".
Conclusion
Although the general position currently is that the Courts tend to favour the debtor company when it comes to exercising its discretion to restrain the presentation of a winding up petition, this case gives some hope to petitioning creditors that the tide may be turning as the Court analysed in detail the grounds of the dispute and the counter-claim. Perhaps though, it is a decision which turns on its facts which involved a detailed contractual dispute resolution procedure which was not complied with and may not have more a general application.
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