City Gardens Limited v DOK82 Limited

This is an appeal from a decision of District Judge Matharu dated 25 July 2022 by which she dismissed the Appellant’s petition to wind up the Respondent, recording that the court found the petition debt to be disputed on substantial grounds. She ordered the Appellant to pay the Respondent’s costs and conducted a summary assessment thereof.

The Appellant appeals with permission of the Vice Chancellor, Fancourt J, such permission having been granted on 12 December 2022. The appeal was heard before me on 2 March 2023 following which I reserved judgment.

The Appellant is a company that invests in developments of property around Manchester. The investments were mostly in developments undertaken by De Trafford Estates Ltd, part of a group of companies that includes the Respondent. The Appellant contracted with the Respondent, a company wholly owned by Mr Kane Jackson, for the supply of furniture packs for the purpose of such developments, the payments being refundable if a development did not proceed.

The Appellant’s case is that one such proposed development which did not proceed was the so-called Mary Street Development. The Appellant had paid a substantial sum for furniture packs. The failure to proceed with this development left the Respondent indebted to the Appellant in a significant sum.

By a document dated 17 March 2021, headed “Memorandum of Understanding” and signed on behalf of the Appellant and the Respondent, the parties acknowledged the history in respect of the Mary Street development referred to above, and recorded that:

Various clauses of the document are of note:

The Appellants’ petition was issued on 7 February 2022. It asserts that the Respondent was liable to pay the sum of £119,785 pursuant to the Memorandum of Understanding; that it had failed to do so by the Longstop Date; and that the debt remained outstanding. It contends that the failure to pay was by reason of the Respondent’s inability to pay its debts and hence sought winding up of the company.

In response to the petition, the Respondent filed two statements from Mr Kane Jackson dated 28 March 2022 and 29 April 2022. Based upon those statements, it sought to defend the Petition on four grounds:

The Appellant filed a statement in reply from Mr Sydney Fulda, its solicitor, dated 31 May 2022.

The judgment was handed down ex tempore on 25 July 2022. Having set out the background, the Judge found as follows:

It should be noted that, whilst the Judge did not expressly deal with the assertion at paragraph 5(a) of the skeleton argument of the Respondent that the Memorandum of Understanding was not intended to be legally binding between the parties, it is clear that she treated it as being binding, given the passage at paragraph 10 of the judgment cited above as to the exclusive jurisdiction and proper law clauses of the contract. During the hearing of the appeal, counsel for the Respondent conceded that, in those circumstances, it was not open to him to argue that the Memorandum of Understanding did not amount to a binding contract in English law in the absence of his client having filed a respondent’s notice. That concession was undoubtedly correct and, given the absence of a Respondent’s Notice, the finding of Judge Matharu must stand on this issue.

For the purpose of the appeal, two matters are not in dispute:

The Appellant relies on four identified grounds of appeal, though some are subdivided and the first ground has two parts.

Ground 1A: The Judge erred in law and/or fact in determining that the Petition should be dismissed because the petition debt arose from a contract that is the subject of an exclusive jurisdiction clause in favour of Hong Kong. The Judge should instead have asked herself whether the Petition Debt was disputed on genuine and substantial grounds.

Ground 1B: Further or alternatively the court wrongly took into account the exclusive jurisdiction clause, in determining whether there was a genuine dispute on substantial grounds.

Ground 2: The Judge was wrong as a matter of law and/or fact to conclude:

Ground 3: If the Court had in fact considered whether the petition debt was genuinely disputed on substantial grounds, it ought to have concluded that it was not (alternatively, to the extent that the court did consider this question, it was wrong in fact and/or law to conclude that the petition debt was disputed in good faith on substantial grounds).

Ground 4: The court was in any event wrong as a matter of fact and/or law:

This ground only arises if the contract does not amount to a binding agreement between the parties. In the light of the concession by counsel for the Respondent referred to above, this point does not arise and I do not consider it further.

It is common ground that:

As to the grounds upon which an appeal may be allowed, it is agreed that the test that the court must apply is that contained in CPR 52.21(3):

“The appeal court will allow an appeal where the decision of the lower court was

(a)

wrong; or

(b)

unjust because of a serious procedural or other irregularity in the proceedings in the lower court.”

There is no suggestion of a procedural or other irregularity here; the appeal turns on whether the decision of the lower court was wrong.

The appeal is limited to a review of the decision of the lower court unless the court considers in the circumstances of the individual appeal that it would be in the interests of justice to hold a re-hearing (CPR52.21(b)).

The Appellant contends that the decision of the Judge on the jurisdiction issue was “simply wrong.” In support of this proposition, it cites paragraph 7.637 of French on Applications to Wind Up Companies (4^th edition):

“The fact that a creditor petitioner and the company sought to be wound up have agreed that a court outside England and Wales is to have exclusive jurisdiction to decide disputes about the debt on which the petition is based does not preclude the English court from deciding whether there is a dispute about the debt sufficient to prevent the winding-up petition proceeding.”

The authors of French cite BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997 and Citigate Dewe Rogerson Ltd v Artaban Public Affairs Sprl [2009] EWHC 1689 in support of this proposition.

The Respondent’s starting position on this issue is to invite the court to consider the position where a winding up petition is based on a debt alleged to arise from a contract containing an arbitration clause. In that situation, if the debt is not admitted, the court will dismiss or stay the petition so as to compel the parties to resolve the dispute through arbitration rather than through the court process. The Respondent cites as support for this proposition the judgments of Lord Etherton, then Chancellor of the High Court, sitting in the Court of Appeal, in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) at paragraphs 39 to 41 and the current Master of the Rolls, then Chancellor of the High Court, sitting in the High Court, in Telnic Ltd v Knipp Medien Und Kommunikation GmbH [2020] EWHC 2075 (Ch) at paragraphs 26 and 27.

The Respondent contends that the same principle should apply in the context of an exclusive jurisdiction clause, on the ground that the parties should be required to adhere to their chosen mode of dispute resolution, in this case the jurisdiction of the Hong Kong courts. It cites the judgment of Hon G Lam JA sitting in the Hong Kong Court of Appeal in Guy Kwok-Hung Lam v Tor Asia Credit Master Fund LP [2022] HKCA 1297. Having considered the authorities on how arbitration clauses were to be given effect in a petition for winding up, including Salford Estates v Altomart referred to above, the judge concluded:

“[86] Under the statutes the court has a discretionary power whether to make a winding up or bankruptcy order. The presence of an exclusive jurisdiction agreement between the parties in favour of another forum does not mean that the court is bound to stay or dismiss the petition. But, adopting the same approach as in ordinary actions, such an agreement should ordinarily be given effect unless there are strong reasons to the contrary. It follows that where the debt on which a winding up or bankruptcy petition is based is disputed and the parties are bound by an exclusive jurisdiction clause in favour of another forum precluding the determination of that dispute by the Hong Kong court, the petition should not be allowed to proceed, in the absence of strong reasons, pending the determination of the dispute in the agreed forum. As in the case of ordinary actions, it is neither possible nor desirable to define what may constitute strong reasons. One can conceive of cases where the debtor may be incontestably and massively insolvent quite apart from the disputed petition debt, or it may for other reasons be a menace to commercial society if allowed to continue to trade, or there may be other creditors seeking a winding up whose debts are not subject to any jurisdiction agreement, or the assets may be in jeopardy, or there may be a need to investigate potential wrongdoings, or the effect of a dismissal or stay of the petition would be to deprive the petitioner of a real remedy or would otherwise result in injustice. Under this approach the court retains flexibility to deal with the case as the circumstances require, taking into account other powers of the court that may become relevant, such as the power to allow the petitioner to be substituted by other creditors and the power to appoint a provisional liquidator or interim trustee.”

In response, the Appellant contends that the Respondent’s argument must fall at the first hurdle, since there is binding Court of Appeal authority that the existence of an exclusive jurisdiction clause in favour of the determination of the dispute in a foreign jurisdiction is not only not determinative of whether the domestic companies court should proceed with the determination of whether the petition debt is bona fide disputed on substantial grounds, it is irrelevant to that task. To this end, the Respondent cites the judgment of the Court of Appeal in BST Properties Ltd v Reorg-Apport Penzugyi RT [2001] EWCA Civ 1997. This was an appeal from a decision of Laddie J, in which he dismissed an application by BST seeking to restrain Reorg-Apport Penzugyi from proceeding upon a winding up petition against BST. It is apparent from paragraphs 2 and 15 of the judgment that permission to appeal was granted by Chadwick LJ on the ground that there was an arguable case that petition should be struck out in light of an exclusive jurisdiction clause in the loan agreement upon which the debt was based. Clause 18 of that agreement provided (in its English translation): “The parties shall attempt to settle disputes, occurring in connection with this contract, amicably; in the case their attempt is unsuccessful, they stipulate the exclusive competence of the Metropolitan Court of the Republic of Hungary.” Laddie J found that the debt was not bona fide disputed on substantial grounds and was not persuaded that the petition should be struck out by reason of the existence of the exclusive jurisdiction clause. In determining the permission application, Chadwick LJ agreed with the conclusion on whether the debt was genuinely disputed and refused permission on the issue, as did the Court of Appeal on the substantive hearing. However, he granted permission on the narrow issue of the effect of the exclusive jurisdiction clause and consequently the Court of Appeal had to consider the effect of clause 18. Parker LJ, in a judgment with which Dyson LJ agreed, said at paragraph 31, “whether or not proceedings raising a dispute as to the effect of the loan agreement could be stayed on the basis of clause 18, that does not in my judgment affect the question which was facing the Company namely whether the petition debt is bona fide disputed on substantial grounds.”

Accordingly, even if the court found the judgment of Hon G Lam JA in Lam v Tor Asia to be attractively reasoned from first principles and/or persuasive (which the Appellant disputes in any event), this court is bound by the decision in BST v Reorg-Apport Penzugyi to find not only that the exclusive jurisdiction clause in this contract did not prevent the court from determining the issue under Section 123 of the Insolvency Act 1986 but that it was irrelevant to that exercise.

I should note that it would seem that this authority was not cited before the lower court. It is certainly not referred to in the judgment below.

Turning to the court’s determination that it was not capable of making appropriate findings of Hong Kong law, the Appellant contends, in similar light to its argument about the exclusive jurisdiction clause, that the court wrongly failed to exercise its judgment as to whether the debt was genuinely disputed on substantial grounds.

In response, the Respondent argues that it is for the Hong Kong courts, applying Hong Kong law to determine whether the debt is indeed due and owing. That is a pre-requisite of the presentation of a winding up petition in England because, without such a determination, the English courts cannot know whether the petitioner is truly a creditor at all.

Given the lower court’s findings on the issue of jurisdiction and applicable law, the Appellant argues the judge wrongly did not go on to consider whether in fact the debt was disputed in good faith on substantial grounds. The appeal court should therefore determine this issue.

The Appellant identifies that three grounds to dispute the debt appear to have been raised:

On the issue of compliance with clause 2.4, the Appellant accepts that, within its skeleton argument for the purpose of the hearing before Judge Matharu, the Respondent had asserted that there was no evidence that the Appellant had provided a monthly statement of sums due in accordance with that clause. It should be noted that the Appellant does not concede that such statements have not in fact been provided but accepts that the court should proceed on the basis that the Respondent can raise an arguable case that they have not been.

However, the Appellant queries where this takes the Respondent’s case. The high point of the significance of the alleged failure to provide statements seems to be that asserted at paragraph 10(a) of the Respondent’s skeleton argument for the purpose of the hearing before the lower court, namely that “It is likely that this has led to the further dispute in this matter as to the existence of a possible set off.” The Respondent concedes an arguable cross claim that may be set off against the petition debt of £38,500. But, since that fails to take the petition debt below the relevant threshold of £10,000, the Appellant contends that the set off is irrelevant. If the most that the Respondent can argue is that the Appellant’s alleged failure to provide monthly statements strengthens its case as to the existence of a set off in the amount assorted of £38,500, the failure is irrelevant to the issue before the court.

If on the other hand, the Respondent is seeking to argue that the alleged breach of clause 2.4 raises some other argument by way of defence or a set off in a larger figure, it is for the Respondent to raise that case. It has not done so and hence shows no genuine dispute on substantial grounds.

The Appellant contends that this gap in the Respondent’s case is not bridged by the point made in submissions to Judge Matharu and noted in her judgment as to the lack of clarity on the effect of clause 2.4. At paragraph 18 of the judgment, the point is put thus: “What does ‘setting out all movements’ mean? Was that adhered to? That is something this court cannot consider, it does not have any evidence in this respect. This was an obligation of the Petitioner. Was it complied with? If not, what is the sanction in the courts of Hong Kong? What is the effect of non-compliance, if there has been non-compliance, on the assumed liability sum of the company?” The Appellant replies that these are issues for the Respondent to raise, consistent with its obligation to show that the debt is genuinely disputed on substantial grounds. The only point that the Respondent has raised is that referred to in paragraph 10(a) of the Respondent’s skeleton agreement and dealt with above.

As to the argument that there is ambiguity as to the appropriate treatment of the sum of £80,215 acknowledged to be owed by the Appellant to Mr Jackson, the Appellant contends that the position is entirely clear. The contract starts with the principal sum of £200,000 owed by the Respondent to the Appellant; records the sum of £80,215 as owed by the Appellant to Mr Jackson; and therefore upon execution of the agreement, credit is given for £80,215 against the principal of £200,000, reducing that sum immediately to £119,785.

The Appellant notes that the Respondent has never proffered an alternative interpretation of the contract but has simply said that there is an ambiguity about how the sum of £119,785 is calculated and whether or not it takes account of the sum due from the Appellant to Mr Jackson.

The Respondent, within its skeleton argument, raised four bases upon which the court was entitled to find that the petition was genuinely disputed on substantial grounds:

The Respondent concedes, as I have indicated, that the first of these cannot be maintained in the absence of a Respondent’s Notice. As to the fourth, it concedes that a cross claim of no more than £38,500 would not without more bring the debt down below the relevant threshold, if the Appellant were otherwise able to maintain its case.

However, the Respondent contends that, in the light of these various disputes, Judge Matharu was entitled to dismiss the petition. In the alternative, if the court finds that the District Judge erred in her findings on the issue of the exclusive jurisdiction clause and/or the application of Hong Kong law, the court should remit the case for a further determination of the issue as to whether the debt is genuinely disputed on substantial grounds.

Having considered the judgment of the Court of Appeal in BST Properties Ltd v Reorg-Apport Penzugyi RT, I am satisfied that the Appellant is correct in its argument that the exclusive jurisdiction clause was of no relevance to the determination of the issue before the lower court. That decision is binding authority for the proposition that the Companies Court, in considering the exercise of its power to wind up under section 122 of the Insolvency Act 1986, is itself charged with determining whether the petitioner is genuinely a creditor. For that purpose, it has to determine whether the alleged debt is disputed in good faith on substantial grounds. Even where the alleged debt is based upon a contract which has an exclusive jurisdiction clause in favour of a foreign jurisdiction, the judgment as to the exercise of the winding up power remains that of the domestic court. It follows that the petition should not have been dismissed on the grounds of the existence of the exclusive jurisdiction clause, whether because, on account of the clause, it had no power to hear the petition or because it should (or indeed could) decline in its discretion to hear the petition.

Had I not been bound by Court of Appeal authority, an interesting question might have arisen as to whether the English courts should follow the judgment in Lam v Tor Asia, finding that, by analogy with the position in cases with arbitration clauses, the court should, wherever a debt is not admitted, give effect to an exclusive jurisdiction clause by requiring the issue on the debt to be tried in the foreign jurisdiction before permitting a winding up order to be made. In the event, it is unnecessary for me to consider that question in this appeal, notwithstanding Mr Friedman’s careful analysis of the Hong Kong judgment and his attractive argument that it should not be followed.

Again, the Appellant’s argument is well made. As the passages from Dicey, Morris and Collins make clear, the burden here lies on the Respondent to assert (and show) that Hong Kong law differs from English law. It has not done so, but rather simply argued that the English court cannot know whether there are differences and, if so, what those differences are. But there is nothing in the material before the court to suggest that Hong Kong law differs from English law on the proper interpretation of the contract. The jurisdictions are both common law systems. As one might expect, the Hong Kong courts can be seen to be leaning on English principles of law – see the judgment in Lam v Tor Asia as an example.

It follows that, whether this is properly seen as a case where English law is applied because the Respondent has failed to prove the application of different legal principles or as a case where the presumption of similarity is applied, the court must apply English law to the alleged dispute on the debt.

The result of the errors on the jurisdiction issue and the Hong Kong Law issue is that the judge below did not go on to deal with the matters that were raised in disputing the debt in accordance with English law but rather found that the merits of the dispute were not something that were open to the Companies Court to examine. It would be possible to remit this case to the lower court for a reconsideration of those issues. That would accord with the starting position adopted by CPR 52.21 that an appeal is normally a review rather than a rehearing.

In reality however, I have available all of the material necessary to determine the issue afresh and I have considered that material for the purpose of determining the first two grounds of appeal. If I were to remit the issue as to whether the debt is genuinely disputed on substantial grounds, additional cost and time would be wasted. That would not accord with the overriding objective and accordingly I go on to determine whether, applying English law, the Respondent shows that the petition debt is genuinely disputed on substantial grounds. I deal with the three grounds that the Respondent still advances before turning to how I deal with the discretion to make a winding up order.

As to the failure to comply with the requirements of clause 2.4 of the Memorandum, the Respondent’s opposition in its skeleton argument at first instance only raised the failure to provide such statements as being of relevance to the cross claim. The skeleton argument for the appeal hints, through the use of the word “mandatory,” at an argument that the provision of monthly statements was some form of condition precedent to the Respondent’s liability under the agreement. This hint became express during counsel’s oral submissions on behalf of the Respondent, though even then there was no analysis as to how the term was said to amount to a condition precedent.

If the Respondent intended to advance this case, it was incumbent upon it to raise the issue clearly. I accept that it was open to the Respondent to run this argument on the appeal given that I was rehearing the issue as to the whether the debt was genuinely disputed on substantial grounds.

The caution to be exercised in classifying a term as a condition precedent is well expressed in the judgment of Beatson LJ in Heritage Oil and Gas Ltd v Tullow Uganda Ltd [2014] EWCA Civ 1048 (a case relating to the sale of rights to explore for petroleum), where he starts his analysis of the issue with the following:

“[33] The starting-point of my analysis of this issue is the general appreciation by courts for over half a century that, while classifying a term as a condition precedent or as a condition may provide certainty, it can also have the effect of depriving a party to a contract of a right because of a trivial breach which has little or no prejudicial effect on the other and causes that other little or no loss. It was for that reason that, in the context of international sale and carriage contracts, the courts became more reluctant to classify terms as conditions precedent and conditions. This reluctance led to the identification and growth of the category of ‘intermediate’ terms and to require that clear words be used if a term is to be construed as a condition precedent or a condition.”

The question as to whether a clause amounts to a condition precedent is a question of construction of the contract. The clause does not have to be labelled as a condition precedent to have that effect, but, applying conventional principles of construction, the failure expressly to state that it is a condition precedent will make it difficult to argue that it should operate as such. In AstraZeneca UK Ltd v Albemarle International Corp [2011] EWHC 1574, Flaux J as he then was said:

“[250]…in the absence of an express term, performance of one obligation will only be a condition precedent to another obligation where either the first obligation must for practical reasons clearly be performed before the second obligation can arise or the second obligation is the direct quid pro quo of the first, in the sense that only performance of the first earns entitlement to the second.”

The Respondent has not advanced any clear argument as to why clause 2.4 should be seen as a condition precedent to the Respondent’s liability for the Principal as defined in the agreement, rather than an obligation the breach of which does not debar the Appellant from recovering the debt. The clause is not said to operate as such, either expressly or by necessary implication. If it did so operate it would risk having exactly the kind of draconian consequences that Beatson LJ identified in Heritage Oil and Gas. By way of example, the Respondent would have to meet the obvious problem that, if the condition precedent contended for was simply in the terms of clause 2.4, it would appear that the most minor default, such as a single statement being a day late, would be a bar to recovery of the whole of the Principal. An argument that such a term should be construed as a condition precedent to the Respondent’s liability under the agreement would therefore be met with a compelling argument that it was commercially nonsensical. If instead the supposed condition precedent were in qualified terms (for example that the clause only became a condition precedent to liability if the statements remained outstanding at the time that repayment of the debt was due), it would raise the question as to whether the court should countenance an argument that anything other than a clear express term of the contract is capable of amounting to a condition precedent to liability.

Whatever the reason for not having put the case on the alleged condition precedent previously, the Respondent has failed to set out with any clarity an argument for the construction of clause 2.4 as a condition precedent so as, absent evidence of compliance with that clause, to raise genuine and substantial grounds for disputing the debt.

On the issue of the correct interpretation of the contractual provision relating to the alleged failure to give credit for the sum of £80,215 by virtue of clause 3.2 of the Memorandum of Understanding, again it is notable that the Respondent does not advance any clear case as to how the payment of £80,215 should be treated (as opposed to how it might be treated). It is an obvious point to be made on behalf of the Appellant that the deduction of £80,215 owed by the Appellant to Mr Jackson from the original Principal of £200,000 which was acknowledged to be owed by the Respondent to the Appellant results in a figure of £119,785, exactly the amount of the reduced Principal acknowledged to be due on execution of the agreement. It would be a strange coincidence if this figure were in fact calculated by some other method.

But two further points can be made:

The Respondent has no answer to these obvious points. In my judgment, it is fanciful to consider that the explanation for the reduction in the principal due under the Memorandum of Understanding on its execution is anything other than a reflection of the sum admittedly due from the Appellant to Mr Jackson. In these circumstances, there is no dispute that the Principal of £119,785 is owing.

As to the third issue, the Appellant concedes that the Respondent raises a genuine issue on substantial grounds by way of its prospective cross claim. However, the value of that cross claim (as far as the Respondent puts a value on it) does not come close to reducing the admitted debt to below £10,000. Whilst I note that the Respondent’s case is that the cross claim is no less than £38,500, the truth of the position is that Mr Jackson is only able to verify a cross claim to the tune of that sum. Whilst the Respondent may suggest that it is a minimum, such a suggestion does not give sufficiently substantial grounds to conclude that a cross claim of greater value should be brought into account.

Given that the Respondent does not take issue with the Judge’s decision that it would have been appropriate to waive the technical non compliance with Schedule 10 of the Corporate Insolvency and Governance Act 2020 (a finding with which I agree), such non-compliance is no bar to the appeal being allowed.

It follows that the Appellant shows that a debt well in excess of the relevant threshold is due and owing and it defeats any argument based on genuine grounds for disputing the debt beyond the putative cross claim which does not take the debt below the statutory threshold. It follows that the Respondent has not paid a debt when it fell due. Having not raised any substantial argument in defence of the debt, the natural inference is that the Respondent is unable to do so. No argument has been advanced against the making of a winding up order other than the issues addressed in this appeal. In those circumstances, I am satisfied that the appropriate order is a winding up order.

For the reasons given above, I allow the appeal and set aside the order below, substituting an order for the winding up of the Respondent.