Case Study: Winding-up Petition Defeated by Genuine Counterclaim

On 8th March 2023, the High Court of England and Wales dismissed a winding-up petition in Moorwand v K Wearables [2023] EWHC 410 (Ch), against a company, citing a genuine dispute on substantial grounds of an unpaid debt of £500,000. The case highlights the legal principles surrounding disputed debts in winding-up proceedings and the role of the court in determining whether a debt is genuinely disputed on substantial grounds.

Need a second opinion on your insolvency litigation? Our specialist solicitors & barristers can help by assessing your case prospects and whether a winding-up petition is the right tool. We have highly experienced dual-qualified lawyers, so if our view is your case has limited merit or high risk we can advise you of the best strategy in our first meeting.

Unpaid Debt of £0.5m Leads to Winding-Up Petition

The petitioner was a creditor that claimed the company owed an unpaid debt of £500,000. The company contended that the debt was disputed, arguing that it had raised objections to the invoice and disputed the amount of the debt. The company claimed that the winding-up petition was an attempt by the petitioner to apply undue pressure on the debtor to pay the debt.

Disputed Debts in Winding-Up Proceedings:

In winding-up proceedings, a disputed debt is a debt that is not admitted by the debtor company. A creditor must prove that the debt is undisputed or, if disputed, that the debtor company has no reasonable grounds for disputing the debt. The court will only grant a winding-up order if it is satisfied that the debt is undisputed or that there are no reasonable grounds for disputing the debt.

Legal Principles for UK Winding-Up Proceedings

In winding-up proceedings, a creditor must demonstrate that the debt is undisputed or that the debtor is unable to pay the debt. A debt is undisputed if it is clear and unambiguous that the debtor owes the debt and there is no genuine dispute as to the existence or amount of the debt. However, if the debtor shows that the debt is genuinely disputed on substantial grounds, the court will not wind up the company.

The burden of proof that the debt is genuinely disputed on substantial grounds lies on the debtor. The debtor must provide evidence that there is a bona fide dispute as to the existence or amount of the debt, and that the dispute is not frivolous or vexatious.

The court must also consider whether the winding-up petition is being used as a means of applying undue pressure on the debtor to pay the debt. If the court finds that the winding-up petition is being used oppressively or unfairly, it may dismiss the petition even if the debt is undisputed.

What did the Company Insolvency Court decide?

In this case, the court found that the debt was genuinely disputed on substantial grounds. The company had presented evidence of objections raised to the invoice, and the petitioner had failed to respond or provide evidence to support the amount of the debt.

The court found that the dispute was not frivolous or vexatious, and that the debtor had a bona fide dispute as to the existence and amount of the debt. The court also considered whether the winding-up petition was being used as a means of applying undue pressure on the debtor to pay the debt. The court found that the petitioner had made threats to issue the winding-up petition if payment was not made and had not engaged with the debtor’s objections or attempted to resolve the dispute.

The court dismissed the winding-up petition, and the petitioner was ordered to pay the debtor’s costs. The court’s decision serves as a reminder that a winding-up petition is not a means of enforcing payment of a disputed debt, and creditors must exercise caution and ensure that they do not apply undue pressure on debtors.

Key Petition Legal Points:

• Creditors must demonstrate that the debt is undisputed or that the debtor is unable to pay the debt in winding-up proceedings.
• If the debtor shows that the debt is genuinely disputed on substantial grounds, the court will not wind up the company.
• The burden of proof that the debt is genuinely disputed on substantial grounds lies on the debtor.
• The debtor must provide evidence that there is a bona fide dispute as to the existence or amount of the debt, and that the dispute is not frivolous or vexatious.
• The court must consider whether the winding-up petition is being used oppressively or unfairly, and if it is, it may dismiss the petition even if the debt is undisputed.

A winding-up petition is not a means of enforcing payment of a disputed debt, and creditors must exercise caution and ensure that they do not apply undue pressure on debtors.

Additional Winding-up Legal Points:

There are other legal points to consider in winding-up proceedings, including:

• A creditor must have a sufficient interest in winding up the debtor company to petition the court for winding-up. This means that the creditor must have a debt or claim against the debtor company that is recognised by law.
• The winding-up petition must be served on the debtor company, and the company has the right to challenge the petition by filing an application to set aside or dismiss the petition.
• The court will only wind up a company if it is satisfied that the debtor company is unable to pay its debts as they fall due or if it is just and equitable to wind up the company.
• The court may appoint a liquidator to wind up the company’s affairs and distribute its assets to creditors. The liquidator has the power to investigate the company’s affairs, recover assets, and pursue claims on behalf of the company.

The Role of the Court in Determining Disputed Debts:

In determining whether a debt is disputed, the court will consider whether the debtor company has a genuine and substantial ground for disputing the debt. The court will not allow winding-up proceedings to be used as a means of enforcing payment of a disputed debt. The court must consider whether the winding-up petition is being used oppressively or unfairly, and if it is, it may dismiss the petition even if the debt is undisputed.

Abusive Petitions: Undue Pressure

The case of Moorwand v K Wearables highlights the potential for winding-up petitions to be used as a means of applying undue pressure on debtors to pay disputed debts. Creditors must exercise caution when pursuing winding-up petitions and ensure that they do not apply undue pressure on debtors to pay disputed debts. The court will only grant a winding-up order if it is satisfied that the debt is undisputed or that there are no reasonable grounds for disputing the debt.

Case Implications:

The case of Moorwand v K Wearables has important implications for businesses involved in winding-up proceedings. Creditors must ensure that they do not apply undue pressure on debtors to pay disputed debts. Debtors must have a genuine and substantial ground for disputing a debt. Both parties must present their cases with sufficient evidence to ensure a fair and just outcome in winding-up proceedings.

The case highlights the importance of presenting sufficient evidence to prove that a debt is undisputed. A creditor must be able to demonstrate that the debt is owed and that there are no reasonable grounds for disputing the debt. A debtor company must be able to present evidence to support its claim that the debt is disputed and that it has a genuine and substantial ground for disputing the debt.

The case also underscores the importance of conducting due diligence when pursuing winding-up proceedings. Creditors must ensure that they have a valid claim for the debt and that there are no reasonable grounds for disputing the debt. Debtors must ensure that they have a valid defence to the debt and that they can present sufficient evidence to support their claim.

As a law firm specializing in commercial litigation, we understand the complexities and challenges that arise in winding-up proceedings. Our experienced team of lawyers can help guide businesses through these proceedings and ensure that their interests are protected. We work closely with our clients to understand their needs and objectives and develop effective strategies to achieve their goals.

Conclusion:

The case Moorwand v K Wearables highlights the importance of understanding the legal principles surrounding disputed debts in winding-up proceedings and the role of the court in determining whether a debt is genuinely disputed on substantial grounds. Creditors must exercise caution when pursuing winding-up petitions and ensure that they do not apply undue pressure on debtors to pay disputed debts. The case also highlights the potential consequences for creditors who pursue winding-up petitions without a genuine and undisputed debt.

Need Help Opposing a Winding Up Petition?

Our specialist winding-up petition lawyers are experts in defending winding-up petitions. We can advise you as to the specific merits and demerits of your case and can assist you in opposing winding up petitions and negotiating with creditors. If your company has been issued a winding-up petition or statutory demand, you may be able to challenge that petition on the following grounds:

That the debt alleged in the statutory demand or petition to be owing is genuinely disputed on substantial grounds by your company; Your company has a genuine right of set-off against the creditor that exceeds the amount claimed in the statutory demand; or In certain other limited circumstances (for example such as jurisdiction, technical or procedural error or delay).

To oppose a winding-up petition, you will initially need to file a witness statement in opposition with the Court within five business days before the date when the petition will be heard by the Court (rule 7.16 of the Insolvency (England and Wales) Rules 2016). A copy of that witness statement will need to be provided to the petitioning creditor at least five business days before the hearing.

Your company is entitled to appear at the petition hearing so as to oppose the making of a winding-up order. It is a routine matter for companies to instruct solicitors and/or barristers to appear on their behalf at the hearing.