Issues for creditors: winding-up petitions

This article considers two recent cases of which creditors ought to be aware when considering whether to present a winding-up petition against a company, which may have a serious and genuine cross-claim extinguishing the petition debt.

In both In re Bayoil SA (The Times, 12th October 1998) and In re Richbell Information Services Inc. (The Times 21st January 1999) the Court considered whether or not it should exercise its discretion to make a winding-up order against a debtor company where the company had a genuine and serious cross-claim exceeding the petition debt.

In re Bayoil SA

The facts

Bayoil chartered a tanker from Seawind, which suffered an engine failure. Seawind claimed freight and diversion expenses and Bayoil counterclaimed for damages for breach of the charterparty. Seawind's P&I Club granted Bayoil security for its claims. The dispute was referred to arbitration and the arbitrator made an interim final award in Seawind’s favour for freight and the costs of the award, on the basis that freight had to be paid free of all deductions whatsoever. Seawind subsequently served a statutory demand based on the award for a sum of over US$1 million and then presented a winding-up petition against Bayoil. Bayoil did not dispute the debt but submitted that it had a genuine and serious cross-claim, which it had been unable to litigate, in the amount of almost US$6 million and that the petition ought to be dismissed or stayed pending determination of the cross-claim. The Judge accepted Bayoil’s cross-claim but felt able to exercise his discretion here to make the winding-up order against Bayoil.

The issue

Bayoil appealed and the issue on appeal was whether the Judge was right to exercise his discretion in this way or whether the exercise was governed by authority or practice requiring that a winding-up petition should, in the absence of special circumstances, be dismissed or stayed where the debtor company had a genuine and serious cross-claim exceeding the petition debt even where the petition debt was undisputed. (This is to be contrasted with the situation where the petition debt is disputed in good faith and on substantial grounds where the Court has no discretion and must dismiss the petition). The Court of Appeal held that where there was an undisputed debt but a genuine cross-claim, the petition ought to be dismissed unless there were special circumstances.

Seawind submitted that there were special circumstances in this case, such as the finality and unappealability of the interim arbitration award, the fact that no stay of the interim award had been sought or granted, the security for Bayoil's counterclaim granted by Seawind's P&I Club, the potential commercial insolvency of Bayoil and the fact that there was no real evidence that the award could be paid.

The Court held that these were not special circumstances and that as there was a genuine and serious cross-claim, which the company had been unable to litigate and which exceeded the petition debt, the Judge erred in exercising his discretion and accordingly the winding-up order should be discharged.

In re Richbell Information Services Inc.

The facts

Atlantic and General Investment Trust Limited ("AGIT") presented a winding-up petition against Richbell Information Services Inc. ("RIS"), a company incorporated in Delaware. The petition was based on a debt of US$48 million made up of capital and interest due under a loan note issued by RIS to AGIT. The loan note provided that AGIT would make the loan through its parent company RIT Capital Partners Plc (a publicly quoted English investment trust company) to RIS, which undertook to repay AGIT US$30 million together with interest thereon. The capital was to be repaid on or before December 31st 1997.

Issues

• The first issue was whether or not the Court had jurisdiction to wind-up RIS as a foreign company pursuant to Section 221 of the Insolvency Act 1986. As the loan note was governed by English law and contained a submission to the jurisdiction of the English Courts, the Court was satisfied that England was the most appropriate place for the winding-up to take place and that there were persons within the jurisdiction who would benefit from the making up of a winding-up order.

• The second, more important, issue was whether or not RIS had a genuine and serious cross-claim exceeding the amount of the petition debt and if this was the case, whether there were special circumstances to justify the Court disapplying the prima facie rule in Bayoil, to make the winding-up order against the company.

RIS’ cross-claim had been brought in New York alleging conspiracy, fraud, bad faith, breaches of contract and breaches of fiduciary duty. The English Court had to try to form a view on the merits of these complex proceedings, and decided that there was a genuine and serious cross-claim on the basis that outside investors appeared to be prepared to fund expensive litigation in New York.

The Court said that the following were examples of circumstances in which the Court might be justified in following the prima facie rule in Bayoil and not making a winding-up order:

• where it would be unfair to those creditors who did not actively support the petition and to shareholders to stop the company trading when there was a genuine dispute as to what, if anything, was owed to the petitioning creditor; or
• the petitioning creditor was using the winding-up procedure to stifle the company’s counterclaim on the basis that the liquidator would be left without funds to pursue that counterclaim against the petitioning creditor.

The Court held that neither of the above circumstances arose from the facts of this case because RIS was not a trading company, its remaining assets appeared to be inter-company debts and the company did not propose to continue any activity while its counterclaim was litigated in New York. In addition, a provision had already been made for the counterclaim to be pursued at no expense to the company.

Having determined that there were no reasons justifying the Court in deciding not to make the winding-up order, the Court looked at whether there were any special circumstances which enabled it to exercise its discretion in favour of the petitioning creditor and make the winding-up order. The Court cited the following circumstances as justifying its decision to make the winding-up order sought by ACIT:

• RIS had one bankrupt director and another with no interest in the matter other than his position as a director in RIS and other companies within the group. Accordingly, he had no interest in recovering the inter-company debts or pursuing the US$30 million which went into RIS’ solicitors’ account;
• the appointment of a liquidator would safeguard the interests of RIS and its creditors in relation to the New York proceedings and would protect one of the assets of RIS from manipulation by the persons running the litigation without having any effect on the conduct of the litigation itself, which was being conducted otherwise than at RIS’ expense;
• in terms of RIS’ creditors, the position with RIS was so unsatisfactory that there were special circumstances justifying the making of the winding-up order.

Conclusion

Petitioning creditors need to establish whether or not the debtor company could have a genuine and serious cross-claim exceeding their petition debt before presenting a winding-up petition even if the debt itself is undisputed. The Court's practice is to exercise its discretion not to make a winding-up order in these circumstances unless the petitioning creditor can show special circumstances why the Court should make the winding-up order. Following the Richbell case, it appears that the Courts have added another special circumstance to the Bayoil test and will make a winding-up order where they consider that the appointment of a liquidator will protect the interests of the company and its creditors.

This article was first published by Monitor Press in Corporate Briefing.