England and Wales: The High Court considers the meaning of a “genuine and substantial dispute” and a “genuine and serious cross-claim” in the context of a disputed winding-up petition debt

In this decision, Insolvency and Companies Court Judge Greenwood provided a thorough summary of what constitutes a “genuine and substantial dispute” or a “genuine and serious cross-claim” in the context of a disputed winding-up petition debt - these two tests forming key bases upon which a winding-up petition may be dismissed. The court also considered a related statutory demand made upon an individual pursuant to a personal guarantee, noting that, in the personal as in the corporate context, the court may similarly grant an application to set aside a statutory demand if:

(a) the debtor appears to have a counterclaim, set-off or cross demand which equals or exceeds the amount of the debt; or

(b) the debt is disputed on grounds which appear to the court to be substantial.

Our article looks at this decision and what it means for those who may wish to present, or find themselves on the receiving end of, a winding-up petition or a statutory demand where the debt in question is potentially in dispute, or the subject of a cross-claim.

What did the High Court decide?

The case arose out of a corporate lending relationship backed by personal guarantees, such that the debtors in question were a company in respect of the winding-up petition, and an individual in respect of two statutory demands served upon him personally based upon the personal guarantees. Also of relevance was a promotion agreement relating to the potential development of certain real estate opportunities. ICC Judge Greenwood reviewed authorities on the meaning of “genuine and substantial” in the context of a disputed petition debt, noting that although the threshold for establishing a genuine and substantial dispute is low, the dispute must have a realistic as opposed to fanciful prospect of success, carrying some degree of conviction (and not merely arguable).

As to the meaning of “a genuine and serious cross-claim” in this context, ICC Judge Greenwood set out the following relevant principles:

• The cross-claim must be genuine or serious, or one of substance.
• The court does not have to decide whether the cross-claim is valid, but should consider the argument sufficiently to form a view that the cross-claim is put forward in good faith and has sufficient substance to justify it being determined by the court in a normal civil action.
• Nevertheless, it is neither practical nor appropriate to conduct a long and elaborate hearing.
• The court must be persuaded that there is substance in the cross-claim, and a cloud of objections contrived to justify factual inquiry will not do. Neither will bare assertions.
• The cross-claim does not have to be one which the debtor company has been unable to litigate, but any delay in prosecuting the cross-claim may, depending on the circumstances, throw doubt on the genuineness of the cross-claim.
• Where there is any doubt about the cross-claim, the court should proceed cautiously. Winding-up is a draconian order, and there is little prospect of the company reviving itself.

The alleged dispute was based upon terms that the debtors suggested should be implied into the corporate lending relationship. The effect of the terms which should, allegedly, be implied, would be that the petition debt would not yet be due and owing (and therefore there could also be no liability of the individual under the personal guarantee). Judge Greenwood dismissed the argument advanced in respect of the proposed implied terms as “completely hopeless”, commenting:

“Ultimately, put simply, the contracts worked perfectly sensibly without the implied term/s: … The complaint concerned the effect of terms which were negotiated and expressly agreed, and which were included in detailed written contracts drafted by and with the advice of lawyers; not only were the suggested terms unnecessary and impractical, but they would have contradicted express terms, and produced a commercially absurd outcome”.

The debtors also sought to argue an alleged counterclaim based upon unlawful means conspiracy relating to an alleged attempt by the purported conspirators to extricate themselves from the promotion agreement – essentially on the basis that, had the relevant parties complied with obligations under the promotion agreement, planning permission in relation to the land in question would have been forthcoming, significantly enhancing the value of the land, and thereby allowing the debtor company to repay the relevant loans. This was also dismissed by ICC Judge Greenwood, who commented:

“It is correct that parties may not be expected to advance or know their whole case at the stage of an application to set aside a statutory demand, or in respect of a petition - particularly perhaps where the case is one in conspiracy, the features of which would tend by their nature to be kept secret - but nonetheless, they are expected to have some evidential support for the assertions they make, particularly necessary where those assertions are strongly contradicted by inherent likelihood. In this case, there was no evidence of the Petitioner having done anything at all concerning the alleged conspiracy.

Given the absence of any evidential support for the alleged conspiracy, combined with, and assessed in light of the contextual factors which I have described, and which taken together I consider comprise powerful reasons for scepticism, in my view, the conspiracy allegation was not one of real or genuine substance, carrying any real conviction: it was a bare assertion.”

The judge therefore dismissed the individual’s applications to set aside the statutory demands, and made a winding-up order against the company.

Why does this matter?

Whilst this decision does not create any new law, it serves as a salient reminder of the principles the courts will apply when considering contested winding-up petitions and statutory demands. Creditors who wish to present a winding-up petition or a statutory demand should consider whether the debt in question could be susceptible to a challenge, most commonly on the basis of the debt being subject to “genuine and substantial dispute” or a “genuine and serious cross-claim” such that winding-up is not the appropriate procedure in respect of the debt. Similarly, a company or individual who is presented with a winding-up petition or a statutory demand would be well advised to consider the guidance set out by the court in this judgment before challenging them on one of these bases.

How Eversheds Sutherland can assist

Should you require advice on presenting, or responding to, a statutory demand or a winding-up petition, or upon restructuring or insolvency matters more generally (both corporate and personal), Eversheds Sutherland can leverage its market-leading strength and depth of experience in this area to assist. For more information or guidance, please get in touch with your usual Eversheds Sutherland contact, or one of the individuals below.