Substitution first, standing later- a decision of Chief ICC Judge Briggs regarding supporting creditors and substituting as petitioner
In an ex tempore judgment in Liberty Commodities Ltd v Citibank NA London & Ors [2023] EWHC 2020 (Ch) Chief ICC Briggs, in what is believed to be the first reasoned judgment on the point from an English court, endorsed the long established practice of allowing a creditor to be substituted as petitioner in a winding up petition first and hearing argument about the creditor’s standing thereafter. The judgment followed argument as to whether what the judge called “substitution first, standing later” or “standing first, substitution later” was the correct approach.
Consistent with the class nature of winding up proceedings, r 7.17 Insolvency (England and Wales) Rules 2016 provides that, where the petitioner is found not to have been entitled to present the petition, fails to give notice of the petition in accordance with rule 7.10, consents to withdraw the petition, or to allow it to be dismissed, consents to an adjournment, or fails to appear in support of the petition when it is called on in court on the day fixed for the hearing, or appears but does not apply for a winding up order, the court may, on such terms as it thinks just, substitute as petitioner a creditor or contributory who in its opinion would have a right to present a petition and who wishes to prosecute it.
Faced with an application for substitution in circumstances in which terms had been agreed between the petitioner and the relevant company (the judgment deals with a number of connected petitions), counsel for the company resisted an application for substitution, arguing that, whilst “substitution first, standing later” had been the usual practice of the winding up court, as a matter of principle the court should not make an order for substitution before determining whether a party had standing to prosecute the petition. He submitted that that flowed from the wording of r 7.17(2), which posited the need for the court to have formed the opinion that the creditor seeking substitution had the right to present a petition before ordering substitution. He also relied on case law decided by the Privy Council and in Australia and other jurisdictions. In Perak Pioneer Limited v Petroliam Nasional BHD and Ors the question for the Privy Council was about the timing of an assignment of the debt, but the board emphasised “the discretionary jurisdiction to order substitution” which “would clearly not be exercised in favour of a would-be petitioner who would not be able successfully to invoke the jurisdiction to make a winding up order.” He also cited Tokich Holdings Pty Ltd v Sheraton Constructions (NSW) Pty Ltd (Australia), Gerova Financial Group Limited (Bermuda) and leading textbooks on the subject drawing on those and related authority.
Ultimately, however, with some support from the judgment of Vaughan Williams J in the 1894 case of Re Invicta Works Ltd, ICC Judge Briggs rejected the argument, confirming that, in his view, the established practice was the correct one for this jurisdiction. He said:
“The settled practice is accurately explained, in my view, by the authors of Practice and Procedure of the Companies Court (1997), General Editors Alan Boyle QC and Philip Marshall (9.68):
‘In the vast majority of cases, a supporting creditor or contributory will make his application for an order for substitution orally in open court on the hearing or adjourned hearing of the petition when it becomes clear that the present petitioner does not appear or is not pursuing his petition, has failed to advertise the petition or seeks an adjournment. No formal application need be issued. Where more than one supporting creditor appears and seeks substitution, the court will usually substitute as petitioner the creditor claiming the largest undisputed debt. Where there is only one supporting creditor and the petitioner does not pursue the petition, the court will not refuse substitution merely because the company contends that the alleged debt of the applicant for substitution is disputed: in such cases, the court will usually order substitution and give directions for the filing of evidence.’”
He also approved the statement of the law in Westlaw (Practical Law UK Practice Note 0-618-3418) to similar effect.
The judgment is plainly common sense. The long-standing practice of ordering substitution first and arguing about standing or the petition debt afterwards keeps the petition alive, with a creditor (or would-be creditor) in the driving seat. It also reflects the fact that a creditor entitled to be substituted would otherwise have to, and be entitled to, issue its own petition without scrutiny of its standing: argument about its standing would follow presentation except in cases where the company successfully applied for an injunction to restrain presentation. Analogies with other legal systems with their own procedural rules, is not appropriate.