England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		9th April 2008

J U D G M E N T

The Application

1. MR JUSTICE MORGAN: This is an application by Easy Letting & Leasing Limited ("the Company") for an order restraining the advertisement of a winding-up petition presented by the petitioning creditor, Mrs Topdjian. The application also asks for an order restraining Mrs Topdjian from proceeding further with the petition and for the petition to be removed from the file of proceedings. In effect, I am asked to dismiss the petition. The Company says that the petition is an abuse of process.

The Petition

2. The petition to wind up the Company was presented on 19^th February 2008. It was presented on the ground that the Company was unable to pay its debts. Paragraph 5 of the petition reads as follows:

"The Company is indebted to the petitioner in the sum of £3,770.39 as follows:

1. £125.00 retained from the rent due for the period 20.10.07-19.11.07. This sum had already been deducted from the rent due for the period 20.9.07-19.10.07:

2. £1,200.00 for the rent due for the period 20.11.07-19.12.07:

3. £1,200.00 for the rent due for the period 20.12.07-19.01.08:

4. £1,200.00 for the rent due for the period 20.01.08-19.02.08: and

5. £45.39 Statutory Interest at the rate of 8% per annum, pursuant to section 35A of the Supreme Court Act 1981.

The Company was requested to make a payment but has failed to do so. Therefore, the Company is unable to pay its debts."

The evidence

3. The evidence in support of the application consists of a witness statement of Mr Papaloizou, a director of the Company. The evidence in opposition to the application consists of a witness statement of Mrs Topdjian. There is no witness statement in response to Mrs Topdjian's witness statement.

The law

4. There are two matters of principle raised by the facts of this case. The first is: what attitude should the court take to an argument that the alleged debt is bona fide disputed on substantial grounds? The second is: what attitude should the court take where the Company owes a sum of money, which it cannot properly dispute, but it has failed to pay having had an opportunity to pay?

The first question

5. As to the first question I can take the relevant principles from the judgment of Chadwick J in Re A Company [1997] BCC 830. At page 832 Chadwick J said:

"It is, in my view, important to re-emphasise that there is no rule of practice in this court that a petition will be struck out or dismissed merely because the company alleges that the debt is disputed. The true rule, which has existed for many years, is the rule of practice that this court will not allow a winding-up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds. It will not do so, as a matter of practice, because the effect of presenting a winding-up petition and advertising that petition is to put upon the company a pressure to pay (rather than to litigate) which is quite different in nature from the effect of an ordinary writ action. The pressure arises from the fact that once the existence of the petition is known amongst those having dealings with the company, they are likely to withdraw credit or refuse to continue to trade with the company on the ground that, if the company is wound up on the petition, their dealings with it will be subject to the provisions in s. 127 of the Insolvency Act 1986. In those circumstances it may well be commercially necessary for the company to pay a debt which is disputed on substantial grounds rather than to run the risk that the whole of the company's business will be destroyed.

The rule of practice that this court will not allow a winding-up petition to be used for the purpose of exerting that sort of pressure has been recognised for well over 50 years; but in all the statements of the rule it is made clear that it only applies where the court is satisfied that the dispute is founded on substantial grounds."

6. Chadwick J in that case then proceeded to review many of the cases which laid down and discussed or illustrated the principle which he had summarised. One of the cases he referred to in detail was Re Claybridge Shipping Company SA. That case was then reported as a note in the Commercial Law Reports, but has since been reported at [1997] BCLC 572. In the Claybridge case, Oliver LJ in particular discussed the practice of the courts in this respect and he described the extent to which the court might go in order to investigate whether the dispute as to the liability to pay was put forward in good faith and on substantial grounds.
7. In similar vein I was referred to a passage in the speech of Lord Brightman, giving the judgment of the Privy Council, in Brinns Limited v Offshore Oil [1985] 2 BCC 916 at 921. I need not read that passage into this judgment. It can be seen that the court has to decide and, equally, can decide, how to react in the circumstances of the case before it and as to whether it is appropriate to investigate in any detail and, if so, what detail, the dispute as to the alleged debt.

The second question

8. I now turn to the second question. I need for this purpose to refer to some of the provisions of the Insolvency Act 1986. Section 122(1)(f) reads as follows:

"A company may be wound up by the court if…the company is unable to pay its debts."

Section 123 has the heading: "Definition of inability to pay debts." Section 123(1) begins with the words "A company is deemed unable to pay its debts." There then follow some five paragraphs of that deeming provision. Paragraph (a) is, of course, the statutory demand procedure, which I need not read out. Paragraph (e) is in these terms:

"(e) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due."

Section 123(2) is a further deeming provision as to inability to pay debts which has regard to the balance sheet position of the company, and that provision is not directly material in the present case.

9. On the second question I was also referred to the well-known decision in Cornhill Insurance v Improvement Services [1986] 1 WLR 114 and the decision of the Court of Appeal in Taylors Industrial Flooring Limited v MH Car Tyre Manchester Limited [1990] BCLC 216. I have also considered the decision of Hoffmann J in Re A Company [1992] 1 WLR 351. This is, of course, an often cited decision in this context. At page 354 Hoffmann J usefully discusses the Cornhill Insurance decision. He refers to it as being a "somewhat unusual case", but he contrasts that decision with the following statement. He says at 354F:

"Equally it seems to me that if the court comes to the conclusion that a solvent company is not putting forward any defence in good faith and is merely seeking to take for itself credit which it is not allowed under the contract, then the court would not be inclined to restrain presentation of the petition. But if, as in this case, it appears that the defence has a prospect of success and the company is solvent, then I think that the court should give the company the benefit of the doubt and not do anything which would encourage the use of the Companies Court as an alternative to the…"

and he refers to the summary procedure under the Rules of the Supreme Court.

10. I think I can be permitted one further citation, this time the decision of Chadwick J again in Re a Company reported at [1996] 1 WLR 491. That was a case of a winding-up petition that had been dismissed and the court was asked to consider making an order for costs on the wasted costs basis against the solicitor for the petitioner. Chadwick J analysed the Cornhill Insurance case and the Taylors Industrial Flooring case at pages 502 to 503 of the report. I adopt what the learned judge said about those cases and I need not cite at any length from his judgment. I think I should, however, read a passage at 503C-E where he says:

"The Court of Appeal, in reversing the decision of Scott J., held that the reason put forward was so untenable that it could not be regarded as a substantial ground for disputing that the debts claimed in respect of the January and February invoices were not due for payment. In effect, the court held that the supposed dispute was not bona fide. Dillon L.J. explained the position, at p. 51: "Therefore the position was that the company had not paid a debt as it fell due and had no substantial ground for opposing it. Therefore there was evidence of insolvency." A feature of both the  Cornhill Insurance  case and the  Taylor's Industrial Flooring  case is that the company knew what it was being asked to pay and did not or could not, bona fide, dispute that the amount that it was being asked to pay was payable."

11. The first comment to make about these decisions is that it is quite clear that the deeming provision in paragraph (e) of section 123(1) is a true alternative to the statutory demand procedure in paragraph (a) of section 123(1) of the Insolvency Act 1986. As to paragraph (e) of section 23(1) I can say that, with respect, I entirely understand the reaction of Scott J to the statutory wording. He would have treated the non payment of the debt, which could not be disputed but which had in fact been disputed as part of the evidence, on the basis of which the court asked itself: "Is the company unable to pay its debts?" However, Scott J's approach was said to be wrong by the Court of Appeal in that case and I must, of course, follow the decision of the Court of Appeal. But it also seems to me that there must have been an opportunity for the company to pay and that the company has failed to pay the debt, which it cannot properly dispute. That requirement is, I think, to be found in the passage I have just read from Chadwick J's decision in Re A Company [1996] 1 WLR at 503E. Indeed, that requirement is illustrated by the facts of Re A Company itself. At page 503E-G Chadwick J explains how it was, on the facts of that case, that the company did not have an opportunity to pay and so the conclusion was that non payment in those circumstances did not provide the basis for saying that the company was unable to pay its debts as they fall due.
12. Having identified the correct approach in principle to the two questions raised on the facts of this case, I will now go to the facts and consider the proper response. As will be seen, although the Company says that there is a bona fide dispute on substantial grounds, I have not been prepared to accept that statement at face value, but I have looked into what is the basis of that dispute. I believe that I am at least entitled to take that approach on the basis of the authorities I have referred to.

The arrangement between the Company and Mrs Topdjian.

13. I need to describe the arrangement made between the Company and Mrs Topdjian. I begin with the written agreement dated 20^th January 2006. That agreement was not made with the Company but with a predecessor company called Thomas Property Services Limited. It is a relatively succinct agreement. It provides for the Company to seek tenants for a property owned by Mrs Topdjian. The intent was that the Company could grant tenancies of that property in the name of the Company. The Company had an absolute discretion as to whom the property might be let. During the period of any tenancy agreement the Company could manage the property on behalf of the owner and take such legal proceedings as the Company considered appropriate. The agreement was to last for one year. The most material term for present purposes is contained in clause 5, which reads:

"The Company will pay the agreed guaranteed sum of £12,000 per month for rent to the owner each and every month until some time as the agreement is terminated."

14. In around September 2006 Thomas Property Services Limited appeared to disappear from the scene and it was replaced by the Company. The circumstances are described in Mrs Topdjian's witness statement in these terms: She says:

"The renting relationship between me and the Applicant began on or about approximately 20^th September 2006, when it took over the business of TPSL. For all intents and purposes however, nothing really changed as the same directors, trading address and telephone numbers etc were utilised by the Applicant. Neither the Applicant nor its predecessor ever sought to terminate the Agreement. As such, its terms continued to be in effect and, for each month that the Property is rented and/or utilised by the Applicant, the sum of £1,200.00 is due and payable to me at the end of every month."

15. There is next to no evidence from the Company's side as to what happened at the initiation of the arrangements between this company and Mrs Topdjian. I should refer to paragraph 2 of the witness statement of Mr Papaloizou. He simply says:

"The Company took over the business of Thomas Property Services Limited on approximately 20^th September 2006."

He had earlier referred to the fact that there had been an agreement between Thomas Property Services Limited and Mrs Topdjian.

16. The agreement of 20^th January 2006 was expressed to last for a period of one year. What happened at the end of the year is again described by Mrs Topdjian in her witness statement. She says:

"However, nothing changed at the time of the agreement ending and the Applicant did not seek to agree new terms. The Applicant and I continued our dealings on the same terms as before. I note that Mr Papaloizou accepts that there was an unwritten agreement between the Applicant and me. For example, the key terms on notice periods and the agreed guaranteed rental sum of £1,200.00 remained the same."

17. On this material I have no hesitation or difficulty in finding that the arrangements between the parties from September 2006 were prima facie governed by the terms of the written agreement of 20^th January 2006. I will consider in a moment whether those contractual alterations were replaced by different contractual arrangements as a result of subsequent or other dealings between the parties, but before I do that I will consider what the agreement provides as to the time for payment by the Company to Mrs Topdjian.
18. I have already read clause 5 of the agreement. That clause refers to "per month" and to "each and every month". It seems to me that the "month" is either the month to the nineteenth day of each month or the calendar month. On the first reading, the payment of £1,200 is due not later than the end of the period ending on the nineteenth day of the month. On the second reading the payment of £1,200 was due by the end of the calendar month in which that nineteenth day appeared. I do not need to resolve that difference for the purposes of this application; nothing turns upon it.
19. However, having construed the agreement I now return to the question whether some other contractual arrangement was made between the Company and Mrs Topdjian.
20. The Company contends that the payment of £1,200 was due by the end of one month following the expiry of the month in which the relevant nineteenth day fell. Thus, if the relevant period for which the payment was being made ends on 19^th March, the payment is not to be made by 19^th March nor by 31^st March, but by 30^th April. The Company's contention is based on alleged conduct and an alleged course of dealing. It is clear from the payment record which I have been shown that the Company paid at different times, sometimes as late as the date it contends for, sometimes earlier, and indeed sometimes even later. I fear that I do not begin to find in the record of payments anything amounting to a contractual arrangement arrived at by conduct. All I find is evidence of late payment. I do not see how that record of payments supplanted the terms recorded in the written agreement. I do not see that Mrs Topdjian did anything to bind herself to accept payment on the date now contended for by the Company.
21. In the course of oral argument, counsel for the Company said that Mrs Topdjian would be estopped from requiring payment in accordance with her legal rights under the arrangement with the Company. Estoppel was not referred to in the evidence, nor in the skeleton arguments. There is no suggestion of a promise or representation by Mrs Topdjian not to enforce her legal rights. I suppose it might be argued that Mrs Topdjian had acquiesced in the late payment and ought to have given notice to the Company before requiring compliance with the strict legal obligations of the Company. But, on the facts, there is no case for such acquiescence after the autumn of 2007. The Company's witness did say that Mrs Topdjian never complained until February 2008. That statement was a bald and somewhat general assertion. Mrs Topdjian's witness statement catalogues in some detail her many complaints, which she says were simply fobbed off. There is no witness statement in response to hers. In view of the fact that the Company's witness statement is confined to a bald, general assertion and that the Company has chosen not to answer her quite specific evidence to the contrary, I hold that there is no proper basis for the Company to say that Mrs Topdjian acquiesced in the late payment and is estopped from requiring performance of the legal obligations on the Company.

The sums payable

22. I now return to the petition. The first figure is £125. That figure was deducted from the payment for the period 19^th November 2007. It should not have been deducted. Accordingly, the sum of £125 was due either on 19^th November or 30^th November 2007.
23. The next three figures in the petition are for £1,200 for each of three months. In accordance with my findings as to the arrangements between the parties, those sums were due either on the nineteenth of the month or the last day of the month, so the December payment was due on 19^th December or 31^st December; the January payment was due on 19^th January or 31^st January; the February payment was due on 19^th February or 29^th February 2008.
24. I next need to refer to the fact that the Company did tender to Mrs Topdjian (or her husband on her behalf) the sum of £845. The tender was on 11^th February 2008. The explanation for that figure, £845, is as follows. The Company accepted that it owed a sum of money, £1,200, for the rental period 19^th December 2007. It also accepted that it had to return £125 earlier deducted. They total £1,325. On the face of it the Company should therefore have tendered £1,325. I have already commented on what was actually due, but, on the basis of the Company's own case, the amount which they ought to have tendered would appear to have been £1,325. They did not tender £1,325. They deducted £480. That was said to be an adjustment fee, 10% over three months. £480 was actually calculated as £120 for four months. So the reference to three months was incorrect. But, more seriously, there was no basis in any contractual arrangement, nor, as I understand it, in any previous practice, for the Company unilaterally to hold on to £120 a month – 10% of the £1,200 figure. No attempt has been made to justify that deduction. Nonetheless, £845 was tendered. The tender was not conditional upon it being accepted in full and final settlement of any claim. It was open to Mrs Topdjian to accept the tender sum of £845 on account. I will therefore regard this tender as a valid tender on account of £845 and I will reflect that in my later reasoning relevant for this application.
25. Accordingly, on my findings so far, the sum due on the morning of 19^th February 2008 when the petition was presented was £2,525, of which £845 had been tendered. Having looked into the matter to the extent I have done, a course which I believe I am entitled to take, I hold that there was no bona fide dispute on substantial grounds as to a debt of at least £2,525, of which £845 had been tendered. Indeed, even if I am wrong about the date on which the £1,200 falls due each month, the sum due on the morning of 19^th February 2008 would have been £1,325, of which £845 had been tendered and £480 had been wrongly held back. I have already commented that there is no suggestion before me, nor indeed any at an earlier time, that the Company had a proper entitlement to hold back the £480.
26. That deals with all of the principal sums in the petition, save for the £1,200 said to be due for the period to 19^th February 2008. I am not going to deal with the question of interest that is claimed under the Supreme Court Act 1981, but I do need to deal with the last sum of £1,200.
27. Counsel for Mrs Topdjian submitted that this sum was within the definition of "debt" within Rule 13.12(3) of the Insolvency Rules 1986. However, that sum was not due or overdue on the morning of 19^th February 2008 as, on any view, it was not due until the end of that day and, on another view, it was not due until 29^th February 2008. I do not see, with or without the definition of "debt" in the Insolvency Rules, how it could be said that the non payment of that sum on a date before it was due to be paid was evidence of any kind that the Company was unable to pay it.

Conclusions as to this application

28. In the light of my findings, the following conclusions are justified. On the morning of 19^th February 2008 the Company owed Mrs Topdjian £2,525. It had owed that money since various dates, the latest of which would have been 31^st January 2008. The Company had tendered £845 on 11^th February 2008. The tender was not accepted because it was said that not enough had been tendered. On 12^th February 2008 solicitors for Mrs Topdjian had written to the Company demanding the sums which were in due course listed in the petition. The solicitors demanded payment. They asked for payment by 12 noon on 15^th February 2008, failing which a winding-up petition would be presented. Even on the Company's own case about the time for payment of the £1,200 per month, the Company had wrongly deducted £480 for the sums due to Mrs Topdjian and had no even faintly arguable case for so doing.
29. In accordance with the decision of the Court of Appeal in the Taylors Industrial Flooring case, the non payment of £2,525, save for a tender of £845, can be relied upon by Mrs Topdjian as evidence that the Company was unable to pay its debts when they fall due. Unlike the facts of Re A Company [1996] 1 WLR 491 the Company knew what was said to be due and had an opportunity to pay. It did not do so.
30. It follows, in my view, that the presentation of the petition was not an abuse of process. In my judgment, it would not be right to restrain the advertisement of the petition, nor further proceeding with the petition. Although I understand that the sums claimed in the petition have been paid since the presentation of the petition, Mrs Topdjian has incurred costs in respect of the petition and indeed in respect of this application by the Company. Those costs have not been paid by the Company, nor provided for. Mrs Topdjian should be allowed to proceed to advertise the petition to enable her to proceed on the petition, at least until she has paid the costs of the petition or the payment of costs is otherwise provided for to her reasonable satisfaction.
31. Accordingly, I dismiss the application.