The decision handed down in Re A Company [2024] EWHC 2656 (Ch) has provided new insight on what constitutes "genuine and serious" cross-claim for the purposes of securing an injunction to restrain presentation of a winding up petition.
Background
The applicant, a UK property developer (the Debtor), was threatened with a winding-up petition by its sister company (the Creditor) on the basis that it had failed to pay a debt of £7 million (the Debt). The Debtor sought an injunction to prevent the Creditor from presenting a winding up petition.
The Debtor did not dispute that the debt was payable but sought the injunction on the basis that it had a substantial cross-claim against the Creditor of equal or greater value. The alleged cross-claim related to fire safety remediation works carried out on residential tower blocks constructed by the sister company. The Debtor alleged that it has claims against the Creditor under both the Defective Premises Act 1972 (the 1972 Act) and the Civil Liability (Contribution) Act 1978.
Restraining a winding up petition on the grounds of a cross-claim
The Judge reviewed the test for granting an injunction to prevent the filing of a winding up petition on the grounds of a cross-claim, as set out in the decision in LDX International Group LLP, Re [2018] EWHC 275 (Ch), [2018] 2 WLUK 466. That decision made clear that the court may restrain a winding up petition where it is satisfied that there is a "genuine and serious" cross-claim (or "one of substance", the two phrases being taken to mean the same thing) of sufficient value to reduce the debt to less than £750.
The Creditor raised three arguments as to why this threshold was not met:
- The alleged cross-claim was too ambiguous in its terms to be properly pleaded, and thus it could not be considered "serious and genuine". The Creditor characterised the cross-claim as having "been explained in the vaguest terms" and "contingent and highly speculative".
- Any deficiencies in the cladding systems were not due to defective workmanship but rather stemmed from the design of the cladding. The developer had not alleged that the sister company was responsible for the design issues, and therefore the claim had no merit. The Creditor noted in that the Debtor had not exhibited any of the relevant contracts, or referred to any particular contractual obligations owed by the Creditor in support of its alleged cross-claim.
- Further, even if there was a genuine and serious cross-claim, its value did not exceed the £7 million debt owed to them.
The Creditor also argued that the court should draw adverse inferences from the fact that the cross-claim "was not litigated or even asserted until after the [Creditor's] liquidators demanded payment of the Debt".
The Judgment
ICC Judge Burton granted the injunction sought. Finding that the Debtor had a credible and substantial cross-claim against Creditor worth at least £44 million. In doing so, he held that the fact that the cross-claim had not yet been fully detailed or, in particular, evidenced did not prevent it from being "genuine and serious".
The Judge accepted that the case was lacking in detail or evidence. He commented that he had "found the absence of documentary evidence in this matter particularly challenging" and acknowledged that "the [Debtor's] evidence is "thin" at best". However, he reiterated that this is a "low threshold test", and that "if there is any doubt about the cross-claim, the court should proceed cautiously".
The judge concluded that requiring that the party seeking such an injunction on the basis of a cross-claim should be able to "formally plead its asserted cross-claim" would "put an unnecessary and hitherto unrequired gloss on the relevant test". The cross-claim did not need to be detailed enough to be properly pleaded at the current stage, as long as it could be at some point.
Nor, did the judge accept that the applicant is required "to anticipate and conclusively dismiss any grounds that could be raised by way of defence" to the alleged cross-claim – it is for the respondent to such an application to show that "its defence... is so clear that this court cannot consider the Applicant's cross-claim to be genuine or serious". In this regard, the judge noted that the Creditor had also elected not to exhibit any of the relevant contractual documents and correspondence, despite the fact that these should also have been available to the Creditor as much as the Debtor.
Taking everything into consideration, the Judge was satisfied that the Debtor had "met the minimum evidential threshold to determine that the Debt is subject to a genuine and substantial dispute". Further, although the claim was unquantified, the Judge considered that the available evidence indicated that there was a substantial chance that the cross-claim's value exceeded that of the Debt.
Key Takeaways
This ruling is particularly significant for a number of reasons.
- It indicates that the legal basis for a cross-claim need not be fully developed at the injunction stage, provided that it will be possible to fully articulate and plead the claim in due course.
- The fact that the alleged cross-claim could have been raised earlier and wasn't, whilst unsatisfactory, does not prevent the granting of the injunction.
- There is new clarification on the threshold for what constitutes a "genuine and substantial" cross-claim in the context of an injunction to restrain a winding-up petition. It seems a cross-claim does not need to be fully detailed or evidenced, or capable of being immediately pleaded, to meet this threshold.
- The ruling makes clear that the burden of proof is on the respondent to demonstrate that the cross-claim cannot be regarded as genuine or serious. This is significant because it would now appear that once a minimum evidential threshold is crossed, the respondent must clearly show why the cross-claim should not be taken seriously if they wish to be able to continue with the petition.
Taken as a whole, the the ruling should provide a helpful reminder to creditors to be cautious in considering the possibility of cross-claims when pursuing winding-up petitions. As Judge Burton noted:
"threatening to present a winding up petition… 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… brings a greater degree of risk".