CC Judge Burton’s judgment in Re A Company [2024] EWHC 2656 (Ch) deals with an issue that is commonplace in winding up proceedings, namely whether a company resisting winding up has a genuine and serious cross-claim that equals or exceeds the petition debt; but it is of interest because of what the judge says about how far the company has to go to satisfy the court that it does.
In this case the debt relied on by the prospective petitioner amounted to some £7 million. The debt was not disputed (at least for the purposes of the hearing), but an injunction was sought on the basis that the applicant company claimed to have a cross-claim of at least £44 million arising out of work carried out by the respondent on four apartment blocks, all of which were clad in materials which rendered them ineligible for external wall system certification, leaving the company exposed to potential claims from the current owners of the apartments under the Defective Premises Act 1972. (The company also relied on the Civil Liability (Contribution) Act 1978.)
The respondent’s resisted the company’s application on the basis of the vague terms in which the cross-claim was put: it submitted that the cross-claim was contingent and speculative and, to the extent that any claim existed at all, its value was significantly less than the petition debt. The respondent also asked the court to draw adverse inferences from the fact that the cross-claim had not been litigated or even asserted until after the respondent (thought its liquidators) had demanded payment of the debt. The respondent complained in addition that the witness statement relied on by the applicant did not exhibit the relevant contracts or refer to the contractual obligations alleged to have been owed by the respondent. It also stated that, as the deficiencies in the cladding systems had arisen from its own design, the applicant could not establish that the respondent owed a it duty under the Defective Premises Act unless it could show that the respondent had been responsible for the design of the element of the cladding system that was alleged to be deficient.
In spite of those criticisms the judge held that the respondent’s reliance on the absence of sufficient detail to enable the applicant formally to plead its asserted cross-claim put an unnecessary and hitherto unrequired gloss on the test to be applied for an application of the kind before her:
“Clearly, to be serious, a cross-claim must be capable, at some stage, of being pleaded. But I consider that there is scope for this court to determine an asserted cross-claim to be genuine and serious even in circumstances where all of the information one would usually require for it to be properly pleaded, is not before this court.”
She took the view that the applicant’s right to pursue a claim against the respondent was sufficiently clear: it was not disputed that the respondent had done work at each of the sites; and it was not expressly denied or disputed that the dwellings at the sites, when completed with cladding, were not fit for habitation. The Defective Premises Act established the duty that was owed, in those circumstances, and, following URS Corporation Ltd v BDW Trading Ltd, gave rise to a potential claim against the respondent as a party taking on the work it had. That did not mean that the claim would succeed, nor that it could not be defended.
“However,” the judge said, “I do not consider that in order to persuade the court that it has a genuine and serious cross-claim, it is necessary for the Applicant to anticipate and conclusively dismiss any grounds that could be raised by way of defence. The Applicant’s evidence states that the Respondent was responsible for all of the work at each of the sites and, in relation to Site T, for the design work. The burden then shifts to the Respondent to show that in fact its defence to such a claim is so clear that this court cannot consider the Applicant’s cross-claim to be genuine or serious. Despite apparently having access to all (or most) of the relevant contractual documents and correspondence (again this is not disputed in the Respondent’s evidence) the Respondent chose not to exhibit any of them or to state that it has searched for or considered such documentation. It has chosen instead to rely solely upon the asserted shortcomings in the Applicant’s evidence and the notable delay in raising and then clarifying the basis of the claim.”
She went on:
“Threatening to present a winding-up petition in respect of a debt, rather than pursuing the matter by Part 7 proceedings, always carries a degree of risk. Doing so when a cross-claim has been raised, in a manner which merely suggests, but fails to substantiate a defence to such a cross-claim, despite access to the relevant documentation, brings a greater degree of risk.”
She also expressed the view that the insolvency court was not a suitable forum for determining the quantum of construction debts.
The judge makes clear in her judgment that she struggled to reach the conclusion she did in the light of the absence of documentary evidence and the state of the applicant’s evidence, which she described as “thin.” She appears to have given the applicant company the benefit of the doubt, invoking in support a passage from the judgment of David Richards J, as he then was, in Tallington Lakes Limited v Ancasta International Boat Sales Limited and Ward LJ’s dictum in Re Bayoil, that if there is any doubt about a cross-claim, the court should proceed cautiously, given the Draconian nature of winding up proceedings. Other applicants may not be so lucky.