LSI 2013 Ltd v The Solar Panel Company (UK) Ltd

This is my extemporary judgment on an appeal by the respondent company, LSI 2013 Ltd, from a winding up order made by Deputy District Judge Batstone sitting in the Bristol District Registry of the Companies Court of the Chancery Division. His decision was made on 18 July 2013. Permission to appeal was given by Peter Smith J on 9 October 2013. At the same time, Peter Smith J made an order staying the winding up order until the appeal was disposed of. He further directed that the appeal should be expedited.

When giving permission to appeal, Peter Smith J said that he did so with some hesitation but that it seemed to him, on the evidence as explained in the skeleton argument on behalf of the appellant company, that there was an argument that had a real prospect of success that the Deputy District Judge had failed to consider the matters which the appellant had put in to dispute its liability on the petition. Those matters were said to be more than fanciful and to have had a real prospect of success.

The petition was presented on 10 May 2013. The petition debt was said to be £266,554.65, being the account balance after trading between the petitioning creditor, The Solar Panel Company (UK) Ltd, and the respondent company, LSI 2013 Ltd, formerly known as Loft Space Insulation Ltd.

The details of the petition debt were set out in a trading account between the petitioner and the company. There were a number of invoices, numbered 7 through to 24 and 26, 204 and 205, said to date from 22 June 2012 to 21 January 2013. The total of those invoices, including VAT, was said to be £1,908,695.52. There was then a credit for payments received by the petitioner from the company in the sum of £1,621,064.40, which was said to result in a balance due from the company to the petitioner of £266,554.45.

The petition was originally returnable on 6 June 2013. On that day it came before District Judge Watkins who adjourned the petition to 18 July 2013. On that day, the petition came back for hearing before Deputy District Judge Batstone. He heard representations from counsel for both the petitioning creditor, in the person of Mr Simon Passfield, and the company, in the person of Mr Charlie Newington-Bridges, both of counsel. (The approved transcript of the Deputy District Judge’s judgment appears to have counsel the wrong way round.) For the reasons set out in the Deputy District Judge’s extemporary judgment (the transcript of which extends to only six paragraphs over two pages) the Deputy District Judge made the winding up order that he did.

The appellant’s notice was filed on 7 August 2013 at the Rolls Building and, as I have mentioned, permission to appeal was given by Peter Smith J on 9 October 2013, when he also stayed the winding up order until the appeal was disposed of. On the appeal, the appellant company is represented by Mr Geoffrey Zelin of counsel, who has produced a replacement skeleton argument, having had the benefit of sight of the approved transcript of the judgment of the Deputy District Judge. Mr Zelin, of course, did not appear in the lower court. There is also a respondent's skeleton argument from Mr Passfield dated 6 January 2014. Mr Passfield did have the opportunity of appearing in the lower court.

The grounds of the appeal are summarised in paragraph 2 of Mr Zelin’s latest skeleton. He says that the Deputy District Judge was wrong to make a winding up order where the petition debt was genuinely disputed on substantial grounds. In doing so, he had been wrong to treat the petitioning creditor as a contingent creditor. Even if, on the Deputy Districts Judge’s reasoning, there had been a contingent debt and the petitioner was a contingent creditor, that debt had been for a nominal sum of £1, and it was inappropriate to make a winding up order on a nominal debt.

Happily, but perhaps predictably, there is no dispute as to the applicable legal principles. For the respondent petitioner, Mr Passfield accepts that if a petition is founded on a debt which is genuinely disputed on substantial grounds, the petitioner is not a creditor of the company for the purpose of presenting and pursuing a winding up petition. Equally, Mr Passfield accepts that on the hearing of an allegedly disputed debt petition, the court is normally only concerned to determine whether a dispute on substantial grounds exists, and not to decide any such dispute. In this regard, the burden is on the debtor to satisfy the court that the debt is genuinely disputed on substantial grounds. It is not sufficient merely for the company to allege that the debt is disputed.

The reasons for that were set out in the judgment of the Court of Appeal (delivered by David Richards J) in the recent case of Tallington Lakes Ltd v Ancasta International Boat Sales Ltd [2012] EWCA Civ 1712 at paragraphs 4 and 5 and at paragraphs 38 through to 42. That authority was not cited in argument before me; but it contains nothing controversial, and it is consistent with the authorities that were before the court.

What Mr Passfield says is that in the present case, immediately prior to the hearing before the Deputy District Judge, the appellant had adduced witness evidence which, it is said, raised a cloud of objections to the petition, and it had then sought an adjournment, with the appropriate direction for service of evidence by the respondent creditor, in order to determine whether or not those objections were genuine and substantial, and thus whether or not the respondent creditor had the necessary standing to present a winding up petition in respect of the appellant company, which could take place at a more lengthy hearing.

Mr Passfield says that he submitted to the Deputy District Judge that it was unnecessary for him to determine that question because the appellant company had expressly acknowledged the status of the respondent petitioner as a contingent creditor in a proposal for a company voluntary arrangement that had been put in evidence as part of the exhibit to the witness statement of Mr Andrew James Jordan, a director of the company, dated 11 July 2013, and filed in opposition to the winding up petition.

Before the Deputy District Judge, Mr Passfield relied upon the designation of the petitioning creditor, The Solar Panel Company (UK) Ltd, and also of a supporting creditor, GB Energy Renewables Ltd, as contingent creditors in appendix 5 (the detailed creditors list) to that CVA proposal. Although each of the petitioning and supporting creditors was shown as a contingent creditor in the sum of only £1, Mr Passfield points to the fact that that is the valuation to be attached to a contingent claim by Insolvency Rule 1.17(3) unless the chairman of the creditors’ meeting agrees to put a higher value upon it.

Mr Passfield contrasts that provision of the Insolvency Rules with Insolvency Rule 1.17A(4), which applies where the debt of a creditor is disputed. That sub-rule provides that, if the chairman of the creditors’ meeting is in doubt whether a claim should be admitted or rejected, he is required to mark it as objected to and allow votes to be cast in respect of it, subject to such votes being subsequently declared invalid on appeal to the court if the objection to the claim is sustained.

Mr Passfield acknowledges the appellant’s argument that the respondent was listed as a contingent creditor in the CVA proposal because its debt was contingent on the determination of the petition. What he says is that that argument was rightly rejected by the Deputy District Judge, who concluded, as he was entitled to do, that the draftsman of the CVA proposal, a qualified insolvency practitioner, would have appreciated the significance of listing the petitioning creditor as a contingent creditor when preparing the CVA proposal. In the circumstances, he invites the appeal court to be satisfied that the Deputy District Judge did not err in holding that the respondent was a creditor of the appellant for the purposes of the Insolvency Act.

Mr Zelin submits that, on the unchallenged evidence before the District Judge contained within Mr Jordan’s witness statement, the petition debt was disputed. He acknowledges that Mr Jordan had admitted (at paragraph 6 of his witness statement) that the company was unable to pay its debts as they fell due, and thus was insolvent on a cash flow, although not a balance sheet, basis. But Mr Jordan had gone on (in the same paragraph) to make it clear that the company denied being indebted to the petitioner, and therefore disputed the petitioner’s status and standing to bring the petition. The petition was said to be based on invoices said to be partly outstanding; but Mr Jordan objected that no such final invoices had been presented to the company, and the petition was therefore said to be a nonsense.

At paragraphs 17 through to 23, Mr Jordan had proceeded to relate the basis for the dispute. At paragraph 17 he disputed that the invoices numbered 204 and 205, in the respective sums of £134,069.95 and £153,762.76 respectively, were invoices for which the company was liable. He said that the invoices were referable to supplies not by the petitioning creditor, but by the supporting creditor, GB Energy. In any event, the amounts stated on the face of the corresponding actual invoices were £96,463.62 and £123,802.33, and not the amounts stated in the schedule to the petition. Moreover, they were in respect of carbon which had never been traded by the company, but had been returned to GB Energy, and, therefore, the company had no obligation to pay the invoice sums. But even if it did, the obligation was one to GB Energy, and not to the petitioner.

For those reasons, the petition debt was said to be over-stated by something in the order of £67,000. Even if the true invoiced amounts were properly due and owing to the petitioner, for reasons set out at paragraph 19, two of the other invoices (numbers 14 and 16) had been over-stated in the petition by some £3,700 and £3,500 respectively. On that basis, it is said that the petition debt was over-stated by reference to the actual invoices by something in the order of £74,000.

Moreover, according to paragraph 21 of Mr Jordan’s witness statement, the actual payments by the company to the petitioner totalled £1,774,171.28, and not the amount for which credit had been given in the schedule to the petition of £1,621,064.40. Thus, the company was said to be entitled to an additional credit of some £153,000. In fact (at paragraph 22) Mr Jordan goes on to say that, having calculated the actual amount which the company considers that it was liable to pay the petitioner for work carried out on its behalf, the total amount which should have been invoiced was not the amount stated in the petition but the much lesser sum of £1,628,748.82, which is £145,442.46 less than the amount which the petitioner had actually paid to the company. Thus it was said that there had been an over-payment of that amount. In addition, the petitioner was said to owe the company for stock in the further amount of £111,378.02. Therefore it was said (in paragraph 23) that, rather than the company owing the petitioner anything, the petitioner actually owed the company some £256,800-odd.

Mr Zelin objects that the Deputy District Judge never addressed those paragraphs of Mr Jordan’s witness statement in his judgment. What the Deputy District Judge did (at paragraph 2) was to refer to the admission in Mr Jordan’s witness statement (at paragraph 6) that the company was unable to pay its debts as they fell due. He then went on (at paragraph 3 of his judgment) to refer to paragraph 14 of the witness statement. There Mr Jordan said that he was very clear that the company’s obligation to pay its subcontractors, including both the petitioning creditor and the supporting creditor, had only arisen when properties had been traded and the company itself had received payment. It is clear that Mr Passfield relied upon that statement as giving rise to a contingent claim in favour of both the petitioning and supporting creditors.

At paragraph 4 of the judgment, the Deputy District Judge went on to refer to the acknowledgment within the CVA proposal of the status of both the petitioning and supporting creditors as contingent creditors. He said that it was clear in his judgment that the petitioning creditor was correctly identified as a contingent creditor. He also referred to Mr Passfield’s distinction between a contingent creditor and one whose debt is disputed.

At paragraph 5, the District Judge referred to section 124(1) of the Insolvency Act 1986, under which one of the persons entitled to present a winding up petition is a contingent creditor. He then referred to the fact that a winding up order may be made under section 123(1)(e), where a company cannot pay its debts; and the Deputy District Judge made the point that that was admitted by Mr Jordan in paragraph 6 of his witness statement.

The Deputy District Judge therefore said that the petitioning creditor was a contingent creditor, and therefore fell within the class of persons entitled to present a petition. At paragraph 6, the Deputy District Judge referred to the points made by counsel then appearing for the respondent company in opposition. The first was that counsel’s instructions were that the petitioning creditor had been listed as a contingent creditor because the debt had been contingent on the outcome of those proceedings. The Deputy District Judge rejected that submission. He preferred the submission of Mr Passfield that the person who had drawn up the CVA proposals would have known what the difference was between a contingent creditor and a disputed debt, and that that person had listed a contingent creditor as such, and, as such, he was the one entitled to present a petition.

Secondly, counsel then appearing for the respondent company had pointed out two uncertainties: (a) whether the debt was owing; and (b) if it was owing, what it was. He recorded counsel’s submission that there was a significant dispute which should be put off for a half day’s hearing. In the judgment of the Deputy District Judge, that submission was to be rejected as well. The grounds for presenting the petition were that the company was unable to pay its debts. That had been accepted by Mr Jordan. In those circumstances, he accepted Mr Passfield’s submissions and made the winding up order.

Mr Zelin submits that the Deputy District Judge thereby tell into error. He says that the Deputy District Judge ignored the facts, first that the CVA proposal was a draft document only, and, secondly, that in any event, paragraph 10.12.1 of the CVA proposal stated in terms that the details of the creditors’ claims had been taken from the books and records of the company or from statements supplied by creditors; and that inclusion in the list of creditors of a claim did not in any way constitute agreement by the company that the amount stated was due to any creditor: it was for the supervisor to adjudicate upon claims should the CVA be approved. Moreover, when one goes to the notes for creditors applicable to contingent creditors, it was said that contingent creditors were a class of creditor that typically provided services or financial products to the company (which could include assets under HP, lease purchases, lease contracts, and the liability that might arise if such contracts were terminated). The creditors listed as such would normally be paid under the terms of those contracts. The amount shown was said to represent the total claim that each creditor might have in a terminal insolvency, such as liquidation. That was to be contrasted with the position of the contingent connected creditors addressed at the following page of appendix 5 to the CVA proposal, where it was made clear that the amount of £1 each shown for those contingent connected creditors did not represent the total claim that each such creditor might have in a terminal insolvency such as liquidation.

Mr Passfield had relied before me upon the £1 attributed to the value of each of the contingent connected creditors, but, in my judgment, given the contrast between the descriptions attaching to each of the two classes of contingent creditors, Mr Passfield can derive no real assistance from the £1 value attached to each of the contingent connected creditors’ claims.

Mr Zelin submits that there is no case in which a petition based upon a debt that is wholly disputed has been allowed to proceed, or has not been dismissed, on the ground that the petitioner is a contingent creditor. He submits that the Deputy District Judge fell into the error of treating the petitioning and supporting creditors as contingent creditors when, in fact, they were creditors whose asserted debts were disputed. This was not a contingent debt case, but a disputed debt case. The Deputy District Judge had fallen into error in treating a disputed debt, or a debt subject to a cross-claim, as though the claimant were a contingent creditor.

In his submissions, Mr Passfield emphasised that the company had accepted the status of both the petitioning and supporting creditors as contingent creditors in the CVA proposal. He submitted that the company could place no reliance upon its asserted cross-claim because the existence of a cross-claim was relevant only to the issue of proof of insolvency. That was a matter that was admitted here. Here the real issue was one of the standing to present and pursue a winding up petition. He submits that the Deputy District Judge had not treated a disputed creditor as though he were a contingent creditor. He had found it to be unnecessary to determine whether the debt asserted in the petition was indeed disputed. Nor had he needed to determine the level of the debt. Here insolvency had been admitted. Here the company, through the CVA proposal, had admitted the status of both the petitioning and supporting creditors as contingent creditors. Therefore the two essential preconditions to the making of a winding up order were satisfied: (1) insolvency and (2) status. There was no error on the part of the Deputy District Judge. The appeal should therefore be dismissed.

If, however, the appeal from the winding up order were, contrary to Mr Passfield’s submissions, to be allowed, the court should remit the petition to the Bristol District Registry, with directions for the service of rebuttal evidence by the petitioning creditor. Mr Passfield submitted that that was the course which counsel then appearing for the respondent company had urged upon the Deputy District Judge. All that the Deputy District Judge had done was to accede to the petitioning creditor’s submission that there was no need for such an adjournment, and further evidence, because the essential preconditions to the making of a winding up order were satisfied, without the need for the court to determine whether the petition debt was indeed disputed.

The company should not now have the benefit of an order dismissing the petition. If the court were to find that the Deputy District Judge had taken a short-cut that was not permissible, then the position should simply be restored to that which had been urged upon the Deputy District Judge by counsel then appearing for the respondent company, namely adjourning the hearing of the petition for further evidence. That was the course which the Deputy District Judge had recorded as having been urged upon him by counsel then appearing for the respondent company towards the end of paragraph 6 of the approved transcript of the Deputy District Judge’s judgment.

In his response, Mr Zelin reiterated that the fundamental error made by the Deputy District Judge had been to find that the petitioner was a contingent creditor. Mr Zelin did not accept that an objection to the making of a winding up order on the basis of the existence of a cross-claim was a matter that was relevant only to the issue of insolvency. He submitted that the matter went to the issue of standing rather than the issue of insolvency. He also submitted that, having sought to secure the making of a winding up order without the need for further evidence, preceded by an adjournment, the petitioning creditor had effectively made an election to proceed on the basis of the evidence then before the court, and it should not be given an opportunity to resile from that stated position. In summary, the petitioning creditor had made its bed, and it must now lie upon it. The court should allow the appeal and simply dismiss the petition here and now.

This is an appeal from a decision of a Deputy District Judge. The appeal should be allowed only if the decision of the lower court was wrong or (as is not asserted to be the case here) where the decision of the lower court was unjust because of a serious procedural or other irregularity in the proceedings in the lower court. What is said here is that the Deputy District Judge fell into error in treating the petitioning and supporting creditors as having the necessary standing to present a winding up petition as creditors when in fact their debts were disputed in good faith and on substantial grounds. The Deputy District Judge had not considered any of the evidence adduced by the respondent company in paragraphs 17 and following of Mr Jordan’s witness statement, which went to the challenge to the petition debt, or to the existence of a counterclaim.

The Deputy District Judge had taken the view that it was sufficient (1) that Mr Jordan had admitted the insolvency of the company; and (2) that the company, through the CVA proposal, had admitted the status of the petitioning and supporting creditors as contingent creditors. I accept Mr Zelin’s submissions that the Deputy District Judge did indeed thereby fall into error.

He fell into error for the following reasons. First, the petition had not been advanced on the footing that the petitioner was a contingent creditor. The petition asserted that the company was indebted to the petitioner in the sum of £266,554-odd, representing the account balance between the two companies, as more particularly described in the trading account attached to the petition.

The petition did not in any way rely upon what Mr Passfield asserted to be the contingent claim, which had been addressed at paragraph 14 of Mr Jordan’s witness statement, and which was cited at paragraph 3 of the transcript of the Deputy District Judge’s judgment.

Secondly, the Deputy District Judge did, as it seems to me, attach far too much weight to the reference to the petitioning and supporting creditors as contingent creditors in the CVA proposal. As Mr Zelin submits, although it does not appear on its face as a draft document, the proposal was described as such in terms in paragraph 26 of Mr Jordan’s witness statement; and the proposal was not signed by Mr Jordan, as it was envisaged that it should be at its conclusion on page 15 of 45 (at page 105 of the appeal bundle). Moreover, when one looks at the way in which the two creditors are described, it is made clear that the amount shown of £1 each was said to represent the total claim that each creditor might have in a terminal insolvency such as liquidation; and, by paragraph 10.12.1, inclusion of the two in the list of creditors did not in any way constitute agreement by the company that the amount so stated was due to either of the two creditors.

For those reasons, I accept Mr Zelin’s submission that the Deputy District Judge fell into error in treating the standing of the petitioning and supporting creditors to present and pursue a petition as established. The status of the petitioning creditor as a contingent creditor was not the basis upon which the winding up petition was founded. I therefore take the view that the Deputy District Judge fell into error as a matter of law.

If his decision to make a winding up order is to be treated as an exercise of discretion, I reject Mr Passfield’s alternative submission that the Deputy District Judge fell into no error in exercising that discretion in making a winding up order. Mr Passfield rightly points out that an exercise of a discretion by the lower court can only be interfered with by the appeal court if the lower court took into account irrelevant matters, if it ignored relevant matters, or if it made a mistake of principle.

Here the relevant mistake was in treating the petitioning and supporting creditors as contingent creditors. Even if that is wrong, it seems to me that the Deputy District Judge fell into error in failing to appreciate that the status of the petitioning and supporting creditors as contingent creditors was one which, because of paragraph 10.12.1 of the proposal, had not been accepted by the company; and, in any event, in failing to have regard to the fact that the contingent claim had been quantified at only £1, which was very different from the amount stated as the debt in the petition, or in the notice of support for the petition by the supporting creditor.

In any event, the Deputy District Judge failed to have regard also to the cross-claim which had been identified by Mr Jordan at paragraph 23 of his witness statement.

What then should the court do? By CPR 52.10(2), the appeal court has the power to affirm, set aside or vary any order or judgment made or given by the lower court and to refer any claim or issue for determination by the lower court. It seems to me that I must allow the appeal and set aside the winding up order. The question is: should I remit the case to the Bristol District Registry, with directions for evidence in answer to Mr Jordan’s witness statement, with a view to the matter coming back before a District Judge to hear the winding up petition on the merits? As I have indicated, Mr Zelin urges me not to adopt that course. He says that the petitioning creditor has adopted the stance that the petition should be disposed of on the evidence as it was before Deputy District Judge Batstone, and it should not be allowed any second bite at the cherry. As Mr Zelin put it, having made its bed, it must lie in it.

It does not seem to me that that is the appropriate course the appeal court should take. Had counsel then appearing for the respondent company been successful in his submissions before the Deputy District Judge, the petition would have been adjourned, with directions for further evidence. That is the course which Mr Passfield indicates that counsel appearing for the company had urged upon the Deputy District Judge: see paragraph 23 of Mr Passfield’s skeleton. Mr Zelin, who did not appear in the lower court, is not in any position to challenge that. In any event, it receives clear support from the terms of paragraph 6 of the approved transcript of the Deputy District Judge’s decision, where he records counsel then appearing for the company as having submitted that there was a significant dispute which should be put off for a half day’s hearing.

It does not seem to me that the respondent company should find itself in any better position in the appeal court than that for which its counsel had contended in the lower court. I therefore reject Mr Zelin’s proposed course of simply setting aside the winding up order without more.

I accede to Mr Passfield’s invitation to remit the matter to the Bristol District Registry, with directions for further evidence, and with a view to a hearing of the issue whether the petition debt is genuinely disputed on substantial grounds.

For those reasons, I will allow the appeal, set aside the winding up order, but remit the petition for hearing in the Bristol District Registry by one of the District Judges exercising insolvency jurisdiction there; and I will hear counsel as to the directions that should be given as to evidence for the purposes of that hearing.