England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CHANF 98/0187/3

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

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IN THE MATTER OF BAYOIL SA and

SEAWIND TANKERS CORPORATION Petitioner/

Respondent

-v-

BAYOIL SA Respondent/

Appellant

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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.

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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."

So the dismissal of the petition in such a case is not, at any rate initially, a matter for the discretion of the court. It is founded on the petitioner's inability to establish the locus standi to present a petition under what is now section 124(1) of the Insolvency Act 1986. The case of an undisputed debt with a genuine and serious cross claim is different, in that the dismissal or staying of the petition can only be a matter for the discretion of the court, albeit that its exercise may have been narrowed by authority. By way of shorthand, I will refer to the two categories of case as disputed debt and cross claim cases respectively.

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:

"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. But if there is no substance in the cross claim, then let the Court do justice to the petitioners in this case and not give heed to so insubstantial a cross claim. We were referred to Re Welsh Brick Industries Ltd [1946] 2 All ER 197, where, even though the defendant company had put in affidavits and got leave to defend under Order 14 (thus showing there was a triable issue), nevertheless the Court looked into the matter even so; and held there was no substance in the defence; and therefore it was not a ground for refusing a winding-up order."

Harman LJ said:

"Now the fact that there is a cross claim of that sort, not being a realised claim, is no answer in law to the petitioner's claim under the Act and it quite clearly appears from the case cited by my Lord of Re Welsh Brick Industries Ltd in 1946 that it is not a bar to a claim, but of course it is a matter for the discretion of the Judge. The Judge here rejected the petition on the modern practice. You do not now, as you used to do, stand over the petition to see if the action will succeed or no. If you find the action making the cross claim is on foot and it is a serious action, you reject the petition. The question is whether the Judge rightly exercised his discretion."

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.

It will be observed that Harman LJ twice referred to "the modern practice", and that he did so in reference to a cross claim case. While recognising that it was a matter for the discretion of the judge, he accepted the practice to be that the petition should be dismissed, except no doubt in special circumstances. Lord Denning MR's observations were to the same effect, with the immaterial difference that he referred to "the law" and not to the modern practice.

Both Lord Denning MR and Harman LJ cited the decision of this court in Re Welsh Brick Industries, Ltd [1946] 2 All ER 197, a disputed debt case where a winding-up order had been made by the county court judge. Notwithstanding that the company had been given unconditional leave to defend the petitioner's action in the King's Bench Division for recovery of the debt, it was held that the winding-up court was not precluded from going into the merits of the dispute for itself and the order made below was affirmed. In delivering the leading judgment, Lord Greene MR said that the relevant law and practice was stated with sufficient accuracy in Buckley on the Companies Acts, 11th ed. (1930), pp. 356 - 357 as follows:

"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."

Having said that the main support for that proposition was Re Portman Provincial Cinemas, Ltd and having referred to the difference of view on the facts, Harman LJ said that all the members of the court had agreed on what the law was. Then he quoted the second passage I have read from the judgment of Lord Denning MR and continued:

"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."

There is no reported decision since Re L H F Wools Ltd in which the practice in cross claim cases has been considered by this court. The headnote in that case, in paragraph (2) of the holding, at p. 28, reads:

"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 . . ."

Mr Russen has submitted that that is an incorrect statement of that part of the decision. I disagree. The correct view is that the practice in cross claim cases was established by the actual decision in Re Portman Provincial Cinemas, Ltd . In Re L H F Wools Ltd Harman LJ, with whose judgment Danckwerts LJ agreed, recognised and affirmed its existence. So too did Edmund-Davies LJ, his only reservation being that there was still a residual discretion in the court and that the petition ought not to be rejected out of hand. The reservation was clearly correct. It is met by the exception for special circumstances. The detailed consideration of the exercise of the judge's discretion can be explained by the court's decision to interfere with it in that case. The difficulty has, I think, been caused because a transcript of the judgments in Re Portman Provincial Cinemas, Ltd has not been available to the court in subsequent cases. It is only with that assistance that the judgments in Re L H F Wools Ltd can be put in context.

Reference must be made to two recent decisions at first instance in cross claim cases. In Re F S A Business Software Ltd [1990] BCLC 825, 831, Warner J, having expressed the view that the principle evinced by Re Portman Provincial Cinemas, Ltd and Re L H F Wools Ltd was reasonably clear, said:

"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."

In the present case Judge Roger Cooke, recognising the inadequacy of the report of Re Portman Provincial Cinemas, Ltd in the Solicitors Journal, suggested to counsel that it might be useful to try to get hold of a transcript of the judgments in that case. The attempts of counsel to do so were unsuccessful. So he also had to consider Re L H F Wools Ltd without that assistance. In the circumstances it is not surprising that he adopted the approach of Warner J in Re F S A Business Software Ltd . However, for the reasons stated, that approach was incorrect. Having held that the company had a genuine and serious counterclaim in the arbitration, which it had been unable to litigate, in an amount exceeding the amount of Seawind's debt, the judge ought to have asked himself whether there were special circumstances which made it inappropriate for the petition to be dismissed or stayed.

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; ..."

Like every wide discretion, this one conferred by the Act must be exercised judicially. It is not unusual, indeed it is salutary and proper, for the court, especially this Court, on occasions to give guidance to the judges as to how judicially they will ordinarily be expected to proceed. Consistency of approach leading to certainty in the litigation process is a virtue. Such guidance must not and cannot fetter the discretion. That was the concern of Edmund-Davies LJ in the passage already cited by my Lord from his judgment in Re L H F Wools Ltd [1970] Ch. 27, 42, where he said:

"... 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.

Thirdly, were the matter before me de novo, I would arrive at the same conclusion. The practice in the disputed debt case is well established. I appreciate that in that case the petition is dismissed because the petitioner cannot properly claim to be a creditor. That said, there seems to me to be little practical difference between the disputed debt and a cross claim which does not constitute a set-off properly so called. In this regard I am fortified by the opinion of Lord Edmund-Davies in Malayan Plant (Pte) Ltd v Moscow Narodny Bank Ltd [1980] 2 Malayan Law Jo. 53, 55, where his Lordship said:

"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.

For those reasons I come to the conclusion, as my Lord has done, that there is a practice that the company should not be wound up where there is a serious and genuine cross claim save in special circumstances. For the reasons he has given, and with which I so entirely agree that no more need be said, I have come to the conclusion that the learned judge wrongly approached this case and erred in principle. Exercising the discretion we now have, I agree with my Lord that, in the result, the winding-up order should not be made, and I too await the further submissions of counsel.

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.