Winding Up Petitions definitely have their place. Clearly nobody wants to have to issue one, and nobody wants to face one, but they are appropriate for creditors who have not been paid by corporate debtors when there is no real reason for withholding payment other than their not having access to enough money to go around. With an uncommunicative and unrepentant debtor, a petition may be the only way to achieve any kind of recovery, albeit the expectation must then be that (unless the debtor surprises you by making immediate payment in the face of such genuine commercial pressure, in which case you should hopefully be able to withdraw it) it will lead to some sort of insolvency procedure, whether because the court makes a winding up order or because your action prompts the debtor company to take steps to appoint an administrator, voluntary liquidator or CVA supervisor. In any event, the petitioning creditor will then have to stand in line with every other unsecured creditor, and behind any secured creditors (although the costs of the petition itself will rank quite highly) and hope that the insolvency practitioner can – using their extensive legal and persuasive powers – get enough money in to pay them a reasonable dividend. In appropriate cases, claims may be pursued by the insolvency practitioner against the (former) directors or other third parties. Sometimes, therefore, if someone does not bite the bullet and issue a winding up petition, directors and other parties who have profited at the expense of the ordinary creditor, may ‘get away with it’.
But what if they are used inappropriately? My blog post of 30 December 2013 warns creditors of the risks of doing so, drawing on a recent case where things had gone badly wrong for the creditor. However, it seems there are also risks for the debtor in the same circumstances, ie where the creditor should not have petitioned. You might think the debtor would be sitting pretty after a finding that a creditor had abused the court’s process by issuing a petition against them. Not so, according to another recent decision, if the debtor lowers himself to the creditor’s level by acting unreasonably in the course of getting the petition dismissed.
The unfortunate and currently unreported case to which I refer was decided by Henderson J in the Chancery Division on 26 February. In this case (Lakehouse Contracts Ltd v UPR Services Ltd), the applicant building contractor faced a wrongfully issued winding up petition for a disputed portion of a scaffolding invoice, but because of the way they went about things failed to recover all of its costs from the offending supplier.
The case followed a recent, helpful ruling in the Court of Appeal (Tallington Lakes v Ancasta International Boat Sales  EWCA Civ 1712) which had confirmed that issuing a winding up petition on a debt known to be genuinely disputed on substantial grounds was an abuse of process, such that normally the alleged debtor would be entitled to the dismissal of the petition and all of their costs, on the indemnity basis. Unfortunately for Lakehouse, however, the wrongful petitioning creditor was not without some guile in the way they went about climbing down from their petition stance.
To begin with, they sensibly undertook not to advertise the petition without giving 14 days prior notice of their intention to do so, thereby arguably depriving the alleged debtor company of the moral highground had they wished to apply for an injunction to restrain advertisement. Next, they offered to mediate the dispute before the costs of the petition proceedings exceeded the petition debt (just £24,000). Understandably perhaps the alleged debtor company refused; from its perspective they had done enough to establish a dispute under the relevant construction legislation and they should not have been forced to deal with that dispute with a sword of Damocles over their heads, affecting their business in the meantime.
The petitioning creditor then suggested that the parties agree directions for an application to strike out the petition whilst their undertaking not to advertise remained in force. At this stage Lakehouse refused to agree to mediation on any terms which did not include the petition being struck out on the basis the petitioning creditor pay their costs. Eventually the parties agreed that instead, at the return hearing of the petition it would be struck out on the basis the parties would submit the dispute to mediation, without the petition hanging overhead. However, the debtor still refused to allow the costs of the petition proceedings to go to mediation as well and sought an order for their costs of the petition.
The court found that the Lakeside should have their costs up to the point where they initially refused to mediate the underlying dispute, and made no order as to costs for everything which followed that date.
The moral of the story? For me, it is that even though creditors should only issue winding up petitions in appropriate cases, if you find yourself faced with a petition, no matter how strong you may consider your moral high ground, you cannot necessarily expect the courts to stand behind you if you go too far in your righteous indignation. At the end of the day, there is still a dispute to be settled, regardless of the wrongful petition, and in this case it was the petition which brought about the agreement to mediate that dispute. The alleged debtor could always have suggested mediation themselves before things got that far. Whilst some may consider the debtor company here did not receive justice, it seems they could have disposed of the petition by agreement, at lower cost, whilst still reserving their position as to the recoverability of costs. On one view, therefore, they might be regarded as having lost sight of what should have been the key priority for the debtor company – to get rid of the petition as soon as possible and at the minimum of unnecessary cost.
In summary therefore, whether you are a creditor or a debtor (or both), avoid winding up proceedings if you possibly can. If you are owed money, do all you reasonably can to engage with the debtor and to find out more about their financial position and any dispute and consider your options carefully before you kick anything off you may regret later. On the flipside, if someone is telling your company that it owes them money and you don’t agree, don’t stop at telling them you dispute it and why; if they don’t accept your explanation, be seen to be taking an active role in resolving any dispute between you by all appropriate means before things get out of hand. If you do still find yourself involved in such proceedings, take prompt and appropriate legal and/or insolvency practitioner advice with a view to getting the petition dealt with as expeditiously as possible, even if that means the resolution of the costs element has to be left for another day. If you allow yourself to be manoeuvred into looking unreasonable in the way you go about resolving the situation, you could lose your prospect of having your costs paid and as a result wind up carrying precisely the sort of exposure you have been trying to avoid.