This follows on from the article in our Summer Newsletter “Bank demanding repayment: is it under an implied duty to act reasonably?” In that article, we discussed the decision of Chief Master Marsh in UBS AG v Rose Capital Ventures Ltd [2018] EWHC 3137 (Ch). In that case, Chief Master Marsh held that a loan agreement that gave the mortgagee an “absolute discretion” to require repayment on three months’ notice gave the mortgagee an unfettered and absolute discretion to do just that.
While a carefully drafted contract in favour of a lender may make it easier to pursue contested proceedings, towards (an application for) summary judgment, the discretion available to the court in winding up proceedings may defeat a winding up petition, notwithstanding specific contract terms. The moral of the story is, perhaps, “choose your procedure, and the court, carefully!”
Loan Agreement with “no deductions for set off or counterclaim”
In AMC III Purple B.V. v Amethyst Radiotherapy Limited [2019] EWHC 1503 (Comm). AMC had provided mezzanine finance to Amethyst, Mr Justice Butcher had to consider a claim by AMC under a loan document that contained a clause which stipulated that “The [defendant] will repay the loan in full (together with all other amounts due but unpaid under this Agreement) on the date falling 36 months from the date of this Agreement”; and which went on to stipulate that “all payments to be made by the Borrower under the Finance Documents shall be calculated and be made without (and free and clear of any deduction for) set-off or counterclaim”.
His Lordship held that this clause prevented the customer from resisting the claim by the bank for judgment, by (trying to) set off claims that it had against the bank. He held that the terms of the agreement excluded legal as well as equitable set off, which Amethyst had against AMC.
Winding up proceedings?
Interestingly, however, the position is not necessarily the same if a bank or petitioning creditor, in a similar position to AMC, were to try to pursue winding up proceedings against the customer: to put the customer into liquidation, in effect, to close it down, rather than seeking a judgment for the sums due. In these circumstances, it is well established that a winding up order will not be made:
(a) If the basis of a debt which is genuinely disputed by the company or
(b) Where the company has a genuine and serious cross-claim for an amount which exceeds the petition debt (or which, if successful, would reduce the company’s net indebtedness below the statutory minimum of £750).
If the debt is genuinely disputed, the court should strike out the petition on the basis that the petitioner is not, in fact, a creditor of the company. That is because the petitioner has no legitimate basis upon which to present a petition. If, however, the argument is that there is a genuine and serious cross-claim, the dismissal or striking out of the petition is a matter for the discretion of the court: a discretion that must, of course, be exercised judicially.
An example of this is the decision in R&S Fire and Security Services Ltd v Fire Defence plc [2013] EWHC 4222 (Ch). In that case, Mr Justice Newey struck out a winding up petition that had been served on the company, in respect of sums claimed under a construction contract, and in respect of which no pay-less notices had been served.
In striking out the petition, Mr Justice Newey referred to the Court of Appeal decision in Re Bayoil SA [1999] 1 WLR 147. Bayoil illustrates that “there is a practice that the company should not be wound up where there is a serious and genuine cross-claim save in special circumstances”.
Mr Justice Newey held that the debt on which the petition was made was not itself open to dispute. That was because the defendant had not served a payless notice on the petitioner.
His Lordship, however, went on to recognise a cross-claim by the company, notwithstanding the “pay now, litigate later” provisions in the contract. On the figures presented in evidence, the company had a counterclaim that far exceeded the petition debt. Mr Justice Newey held that the company’s counterclaim possessed sufficient merit that it should not be dismissed out of hand; that it was inappropriate to determine that claim in winding-up proceedings; and, as a matter of discretion, therefore struck out the petition.
Conclusion
If a claim is made, you should carefully consider the terms of the contract, and any counterclaim, before deciding whether and if so how to pursue a claim – or, as a defendant, how to defend (and counterclaim) against a claim.