Penwith District Council v VP Developments Ltd.

I have before me two cross-proceedings. One is a creditor’s winding up petition. It was presented on 21 September 2004 by Penwith District Council ("the Petitioner") against V P Developments Ltd ("the Company"). The Petitioners seeks a compulsory winding up order. The application is brought by the Company. It applies for the striking out or a stay of the Petition. The Petitioner is represented by Mr Jeremy Goldring and the Company is represented by Mr Hugh Sims.

The facts underlying the current dispute are spread over a number of years. The Company carried on business as a building contractor and maintenance specialist. In the late 1980s it entered into a number of building contracts with the Petitioner relating to a number of projects under which it carried out renovations and other building work to flats and houses owned by the Petitioner. After the works were completed, disputes arose between the parties. In substance the Company said that the calculations made by the Petitioner to determine what it owed the Company under these contracts were incorrect. As a result, the Company said that it had been significantly underpaid by the Petitioner. Each of the contracts between the Company and the Petitioner contained an arbitration clause. In late 1993 the Company commenced eight arbitrations. Those arbitrations and the amounts sought in them are as follows:

The progress of those arbitrations is a matter of some importance to the issues I have to decide. In the Penbeagle and Bodriggy arbitrations, on 28 May 1998 the Petitioner’s appeal to the High Court against the interim award of the Arbitrator on a preliminary issue succeeded. A costs order was made in the Petitioner’s favour in the sum of £21,000 plus interest at 8% per annum. The Arbitrator then dismissed the Company’s claims in the Penbeagle and Bodriggy arbitrations on 21 July 1999, and ordered the Company to pay the Petitioner’s costs. At the same time certain orders were made in the Lanuthnoe arbitration. I am told that the total value of the costs awarded in the Petitioner’s favour as a result of these orders are estimated to be in the region of £100,000-£150,000. Those costs have not yet been assessed and, according to the Petitioner, a division of costs between the three arbitrations will require detailed analysis. The Company’s claim in the Lanuthnoe arbitration is now dependent on a narrow ground. The Petitioner says that it is bound to fail. This is disputed by the Company. However, the Company has taken no further steps in this arbitration since 1999. In the Pendarves arbitration, costs have been awarded to the Petitioner and have been assessed. These costs represent the principal element in the Petition Debt. The Alverton B2(b) arbitration continues. On 2 September 1999, the Arbitrator ordered that security be provided by the Company in the Alverton A2(a) arbitration in the sum of £55,000 with costs to the Petitioner. The Company has failed to give the necessary security, with the result that that arbitration has been stayed. The Company has taken no further steps in it since 2 September 1999. As far as the 2 Jobbing Works Contracts are concerned, the Company has taken no steps since issuing Notices to Refer in March 1996. I understand that the Penbeagle arbitration was not a complete failure for the Company. An award of £700 was made in its favour but, notwithstanding this, in substance it lost, hence the costs order against it.

Based upon what has happened in the arbitrations to date, the Petitioner is a creditor of the Company in respect of various cost orders made on the 22 September 1998 and 28 October 1998. They are the Petition Debt. As at 29 November 2004 that debt, taking into account interest, stood at just over £96,000. Furthermore the Petitioner has the benefit of a High Court costs order in its favour dated 21 May 1999 which, together with interest, was worth just over £29,000 as at 29 November 2004. The latter sum is not referred to in the Petition, but the Petitioner says that it will apply, if necessary, to amend the Petition to rely on this additional sum. No such amendment would alter the outcome of this dispute one way or the other and no formal application to amend is before me.

In addition to these assessed sums, the Petitioner has the benefit of certain other unassessed cost orders made in its favour. The Petitioner asserts that as at 29 November 2004 they would have been worth approximately £154,000. I understand that the reason there has been no assessment is that the Company has paid no part of the assessed costs and is admittedly wholly insolvent. The Petitioner has taken the not unreasonable decision not to spend further sums on assessment when there is no realistic prospect of its recovering any part of the cost of the assessment exercise let alone the costs so assessed.

As I have said, there is no dispute that the Company is insolvent. In mid-1994, following a meeting of its then creditors, the Company entered into a CVA and a Supervisor was appointed. At the commencement of the CVA it was apparent that the Company was unable to pay its debts as and when they fell due. At that date the estimated deficiency to creditors, ignoring the value, if any, of the claims against the Petitioner, was £505,874. One of the purposes of the CVA was to allow the Company to pursue its claims against the Petitioner. It will be appreciated from what is set out above that at the time the Company assessed the latter claims to be worth nearly £600,000.

As at the date of the CVA, the Petitioner was a creditor of the Company for a sum which, I understand, was trivial. The various costs orders which are relied on to support the Petition only came into existence after the CVA.

It will be seen that the four biggest claims made by the Company are those in the Penbeagle, Bodriggy, Alverton B2(b) and Alverton A2(a) arbitrations. By far and away the largest is the Alverton B2(b) claim which is for more than 50% of the total value of all the claims together. The Alverton A2(a) claim was also very large. It was worth more than twice the combined value of the Penbeagle and Bodriggy arbitrations.

In the Alverton A2(a) arbitration the Petitioner applied for security for costs. As noted above, that application was successful and no security has been forthcoming. Thus the application for security succeeded in stopping that arbitration.

At about the same time as it applied for security in the latter arbitration, the Petitioner also applied for security in the Alverton B2(b) arbitration. In September an order for security in the sum of £60,000 was made by the arbitrator. However in this case the Company secured funding and, in early 2000, paid the security. In the result, that arbitration is continuing. The Company appears to have decided to concentrate all the resources it can muster in the pursuit of its biggest claim.

On 12 July 2000, the Company served Amended Points of Claim in the Alverton B2(b) arbitration. Unfortunately the arbitrator, Mr Fox-Andrews QC, became ill and died. A new arbitrator, Mr Ian Salisbury, was appointed in April 2003. Three things then happened. First, the Petitioner made an application for an increase in security of costs in that arbitration. That application was rejected by the arbitrator on 17 March 2004. Thus the Petitioner did not manage to achieve a stay of this arbitration. Second, the Petitioner having not yet served its defence, on 24 August 2004 it applied for an extension of time to do so. The arbitrator directed the Petitioner to serve its defence and the Scott Schedule by 31 December 2004. It was some 4 weeks after it had applied for this extension of time that the Petitioner presented this Petition. Third, at about the same time the Petitioner applied to the Bristol County Court for permission to enforce the award as if it were a judgment. No doubt defending that application put a further strain on the resources available to the Company. I was not told the purpose of that application.

The core disputes between the parties are as follows. First, the Petitioner says that if a creditor with standing to make the application wants to have a company wound up, and if the court is satisfied that the company is unable to pay its debts, a winding up order will follow unless there is some special reason why it should not (Re Lummus Agricultural Services [1999] BCC 953). That it says is the position here, there being no doubt as to the Company’s insolvency and its, the Petitioner’s, debt. Second, and in response to this, the Company says that the court will dismiss the Petition if it is an abuse of process. In particular, a petition will be an abuse of process if it is being sought so as to secure some collateral purpose, such as to stifle related proceedings (Re Majory [1955] Ch 600 and Malcolm Robert Ross (a Bankrupt)(No 2) [2000] BPIR 636). The Company says that applies here. During the many years of the Alverton B2(b) arbitration, the Petitioner has never alleged that the Company’s claim was other than serious and arguable. When the Petitioner failed in 2004 in its attempt to secure an increase in the order for security for costs, which would have stopped the arbitration, it decided to Petition as an alternative mechanism designed to achieve the same result. The Petitioner could have petitioned at any time from 1999 onwards. Its decision to petition now is only explicable on the basis that it is an attempt to stifle the Alverton B2(b) arbitration. Third, and in the alternative, the Company argues that it has a genuine and serious cross-claim, namely the claim in the Alverton B2(b) arbitration, which, if successful, will exceed the Petition Debt. If this is so, then the Petition should be dismissed (Re Bayoil SA [1999] 1 WLR 147). Fourth, the Petitioner argues that the Alverton B2(b) arbitration is not a relevant cross-claim and fifth, even if it is, there are special circumstances arising out of the existence of the CVA which justify ignoring it. I should mention that the Company also argues that the Petition Debt is challenged on genuine and serious grounds with the result that the Petitioner has no standing to present it. This is based upon an assertion that, as a result of various negotiations between the parties, the Petitioner has waived the debt or is estopped from relying on it. Mr Sims puts this as a distant long-stop argument. In view of my conclusions on other points, it is not necessary to consider it.

Although all of these points have been canvassed before me, the issue of cross-claim emerged as the most important one.

In Re Bayoil, Nourse LJ explained the difference between disputed debt cases and cross-claim cases as follows:

The formal difference between disputed debt and cross-claim cases should not hide their underlying common objective. This was explained by Ward LJ in Re Bayoil:

It is against this background that I consider the cross-claim arguments.

Although in its evidence the Petitioner suggests that there is nothing in the Alverton B2(b) arbitration, Mr Goldring does not assert that before me. He accepts that it should be considered serious and genuine. However he says that it is not to be taken into consideration because it is not really a cross-claim at all. This is because, for there to be a cross-claim properly so called, there must be mutuality (see Hurst v Bennett [2001] BCLC 290). He argues that there is no mutuality here because of the existence of the CVA. The cost orders relied on as the Petition Debt are orders made against the Company on its own behalf in favour of the Petitioner. He says, by contrast, that the claim in the Alverton B2(b) arbitration is held by the Company as trustee for the creditors in the CVA. (See In Re N T Gallaher & Son Ltd [2002] 1 WLR 2380). It has no beneficial interest in it. If Mr Goldring is right on this point, the result would be the same even if the order for costs in favour of the Petitioner had been made in the Alverton B2(b) arbitration. That order would still be against the Company rather than against the creditors in the CVA on whose behalf the Company is acting.

I do not accept Mr Goldring’s arguments for two reasons. First, I do not accept that there is a want of mutuality. As is explained in Derham, The Law of Set-off 3^rd Ed at 17.93:

Mr Goldring relies on the last sentence of this passage. However this takes him nowhere. The general rule is that the trustee has a right of indemnity in respect of liability properly incurred in the execution of the trust. That right may be curtailed by the terms of the trust instrument. However Mr Goldring can point to no such express or implied curtailment here. Mr Goldring does not assert that, in pursuing the arbitrations in relation to which the cost orders were made, the Company was acting otherwise than properly for and on behalf of the creditors in the CVA. In the result, the Company does have a personal interest both in the Petition Debt and the claim in the Alverton B2(b) arbitration. Its interest in the latter covers all of the Petition Debt.

Second, even if this is not right, the Company would be able to rely on an equitable set-off. This is explained in Derham at paragraph 17.90:

This passage is supported by the decision in Murphy v Zamonex Pty Ltd to which it refers. The facts in that case were as follows. The plaintiffs were the trustees of certain trusts. Burns Philp Trustee Co Ltd ("Burns Philp") was the former trustee. Burns Philp advanced certain moneys to the first defendant with guarantees provided by the second to seventh defendants. The plaintiffs sued for the outstanding debt and interest. The defendants mounted a cross-claim to the effect that Burns Philp was in breach of contract and certain fair trade legislation by refusing to make further advances under the loan facility. The court upheld the cross-claim against Burns Philp. The plaintiffs did not dispute that there would have been a set off had Burns Philp not been a trustee. However they argued:

The court expressed the relevant principles as follows:

The court then applied these principles to the facts of the case as follows:

This is consistent with the underlying principle of the cross-claim practice as explained by Ward LJ in Re Bayoil (see above).

It seems to me that Mr Goldring’s approach is too narrow. The relevant question is whether the cross-claim is closely related to the Petition Debt. If it is, the court will allow one to be set off against the other. On the assumption that the cross-claim is serious and substantial, it may have the practical effect of eliminating the Petition Debt.

In my view the costs orders made against the Company are closely related to the claims made by the Company in all the arbitrations including that in the Alverton B2(b) arbitration. It seems to me that, were the Company to secure an award in its favour in the latter, it is inevitable that the Petitioner would seek and obtain a direction that the existing orders for costs in its favour should be set off against it. I think it is highly likely that it would obtain such a direction.

In the light of this, it seems to me that it would be wrong to allow this Petition to proceed unless there are special circumstances. Mr Goldring asserts that there are such special circumstances here, namely the existence of the CVA. He says it is unfair that the Petitioner may be forced to pay up on any award made in the Alverton B2(b) arbitration when it will have no prospects of recovering anything from the CVA. It is, in substance, a post-CVA creditor and therefore it will make no recovery under the CVA. He adds that success in the Petition will result in the appointment of a liquidator, an independent officer of the court. He will be able to investigate the affairs of the Company and, in particular, will be able to determine whether or not any claim can be made against its directors.

I do not think that these come anywhere near being sufficiently special circumstances to justify allowing the Petition to proceed. As Nourse LJ pointed out in Re Bayoil, an order that a company be wound up is often its death knell. Mr Sims says that, were Mr Goldring’s arguments to succeed, the Company would be penalised in the most Draconian way for having entered into a CVA. As a matter of policy, that cannot be right. Furthermore, he points out that the suggestion that a liquidator could investigate whether the Company has claims against the directors is made now for the first time. There is no material which suggests any basis for thinking such claims exist. In the end, to allow this Petition to succeed now would be likely to terminate the Alverton B2(b) arbitration. Since, for the purpose of these proceedings, Mr Goldring accepts that that arbitration is serious and substantial, its termination may well be to the significant disadvantage of most of the creditors of the Company. In such circumstances some truly compelling consideration would need to be present before it would be proper to allow the Petition to proceed. There is no such consideration here.

In the circumstances I do not need to determine Mr Sims’ substantial argument that the pursuit of this Petition is an abuse of process. I will strike out the Petition.